What is cryptocurrency?

Cryptocurrency is essentially a digital currency which is used as an exchange medium. It applies a cryptography technology, which allows users to complete secure transactions. Generating new units is controlled and in most cases limited.

It was created in 2008 by Satoshi Nakamoto, a pseudonym of the anonymous programmer, or a team behind it. The interesting thing about cryptocurrency, and what has made it extremely useful is that it is completely decentralized. This is done using blockchain technology, or a public transaction log that is available for everyone to see. The first cryptocurrency blockchain was Bitcoin, after which many more followed, getting to a point where over 1500 different have been generated. The ones created later are called altcoins, and there is also a third type of cryptocurrency, which is called tokens, or dApps. Here you can find information about all three types, as well as how you can get them and use them.

Bitcoin

As already mentioned, Bitcoin is the first cryptocurrency to exist. The open-source software was released in 2009. New Bitcoins are created through mining, or the process of creating new blocks on a blockchain by grouping transaction together. They can also be traded and exchanged for other cryptocurrencies, or fiat money in general. Miners are using the Proof of Work (PoW) algorithm for verifying the transactions made in the network. This means that the reward of the new block goes to the one who verified it first. While it set the beginning of a whole new use of the blockchain technology, it has its issues. As a very valuable cryptocurrency, it is very vulnerable to scamming and hacking, and some even believe it is a scheme on its own. Another issue that you might meet if you start mining it, is the extremely high energy this process consumes. Nevertheless, Bitcoin is one of the top market coins and has a limited supply of 21 million BTC to ensure the overall stability of the price.

Altcoins

Altcoins are considered to be an alternative version of Bitcoin, hence the name. They are usually created as a fork coming from another network, or some of them can just be created on their own. There is an immense amount of altcoins and the number keeps rising, now having passed 1600. While a number of them are only slightly altered versions of the Bitcoin network, there are some that can be completely different. Some might use algorithms that are different to the Proof of Work, thus making the mining more efficient, or basically the generating of coins way faster. Furthermore, some of the altcoins improve on the Bitcoin anonymity by adding features and enhancements for protection. Some of the most popular examples of altcoins are Ethereum, Litecoin, Ripple, etc. What’s more is that some altcoins are different in the sense that they were not created with the idea of using them as digital payment method. In fact, some of them work as platforms for creating new applications.

Tokens/dApps

Tokens are very different to Bitcoin and even altcoins. Perhaps the main difference is that the tokens do not have a designated blockchain. They are actually based on an already existing chain of another coin. Similarly to Bitcoin and most altcoins, they can be exchanged, but for many different advantages, that don’t necessarily have to be any kind of currency. They are usually created by a template blockchain transaction that is generated using the same applications you can create using some altcoin platform, or so called decentralised applications (dApps). The decentralised apps are built to use smart contract, which essentially will automatically generate a transaction after specific conditions are fulfilled. In order to create and distribute such tokens, you can go through an Initial Coin Offering process (ICO). This is in essence a crowdfunding process, where investors will put in the project any kind of currency for an exchange of the cryptocurrency token they are investing in. They believe in the future success of the project and in the return of profit they will get once it launches.

How can you get cryptocurrency?

Mining

Mining is essentially completing a part of a very complicated mathematical equation, using a great amount of computing power. By doing this miners complete a transaction, thus putting it in the blockchain public ledger. Mining can be done on your own, or you can combine your computing power with that of other miners by joining a mining pool. The way cryptocurrency comes into this is in the shape of a reward. By successfully mining a new block you will receive the mining reward, which is basically cryptocurrency.

To start mining you will need a hardware – graphic cards (GPUs) or machines designed to specifically mine crypto, namely Application-Specific Integrated Circuit (ASICs). You will also need a corresponding software and a place to mine, where the heat and the noise that the process generates will not be a problem.

Exchanges

Exchanges are the places you can buy and sell any cryptocurrency and trade them for any other digital or fiat currency. You can offer credit card payments or many other forms of payment in exchange for digital currencies that can be sent directly to your wallet, or in some cases to other cards that can be used for ATM withdrawals. There are also the decentralised exchanges that enable you to trade in a peer-to-peer manner, thus making it safer and more reliable than using other exchanges.

There are some regulations regarding exchanges and their use in some Western countries, so many of them will only work outside such locations. When looking at them is important to pay attention to such regulations, as well as to other factors, such as the reputation of the exchange and things like fees and payment methods.

What can you do with crypto coins?

Now that we’ve established what cryptocurrency is and what the main coin types are, we can explore the possibilities they offer. There are many things you can do with cryptocurrency and here we will explain in detail the main ones.

Mining

Mining can be very profitable, especially when you have joined a pool, as the likelihood of solving a block increases with the increased computing power. In this case you will be sharing the coins you won with the rest of the miners that contributed to the solving. However, if you decide to mine solo it might take you even years to profit, so technically the shared, but much more frequent reward, can turn out to bring you a lot more profits.

Mining is becoming much harder and rewards decrease substantially with time, as for example is the case with Bitcoin. Initially the reward for creating a block on the Bitcoin blockchain was 50 BTC. Ever since, it has been halving every 210 000 blocks, making it decrease to 12.5 currently. This is done because of the limited amount of Bitcoins that can exist, which as we mentioned is 21 million. The lower prices of Bitcoin will lead to the increase of its value, making mining very competitive.

Mining, however, has its limitations. First of all, in order to start doing it, you will need to make some pretty big investments for the specific equipment it requires. You will also have to pay significant electricity bills, as all this computing power is using immense amounts of electric power. You should also be wary of the location you are planning to mine in, as some countries have strict regulations regarding crypto.

Investing

If you are looking to make big profit using crypto, then investing might be your option. It involves however high-risk investments, due to the fluctuating nature of the coins’ prices. For your investment endeavours you will need to purchase a cryptocurrency. Bitcoin is still one of the market leaders, however, there are many other coins to choose from, so make sure you inform yourself on the benefits all of them might offer you. You can purchase some of the main ones very easily through an exchange and some of them might be a bit harder to acquire.

After purchasing the coins you wanted, you now need to choose a wallet to store them. Cryptocurrency wallets are just like your normal one, but are also a very secure and private way of storing any coins. You can use the wallet services that most big-time exchanges provide, however, it is best to take your coins to a safer offline wallet on your computer or hard drive. Then all you have to do is to carefully monitor the market value of the currencies you’ve purchased and to follow any news regarding them.

Another thing to consider with investing into cryptocurrency is the tax regulation your location might have. In some countries cryptocurrency might be taxed as a currency and in some, like the USA, it can be taxed as property.

Trading

Trading can be done alongside investing but they are very different activities. While investing is centred on long term trends, crypto traders are aiming at more short term profit. You can still use the exchanges to purchase some coins - the main ones are to bring you the most profit and are the easiest to access. Then again, similar to investing, you will also need a wallet to store them in.

With trading, the most important thing to do is carefully monitor the market. Prices will be changing constantly and will depend on a variety of factors. Since cryptocurrency is becoming more and more popular with time, things such as the media and the involvement of the government can have a huge impact on the volatility of many coins. And equally important are the other main factors such as the price of dollars and even judicial regulations over the coins.

Then all you will need to worry about is estimating what is the best moment to exit the trade. This moment again depends on a few factors. It’s up to you to decide when you’ve reached your maximum amount of loss, or when you have hit a certain gain target. Over time you will learn to judge these factors better.

Storing cryptocurrency

Since crypto coins are digital and you cannot store them in your physical wallet, you will need to decide on a good cryptocurrency wallet. There you won’t be storing actual coin units, rather than a private key used for transactions.

There are several types of wallets that you can choose from and all of them offer different pros and cons. There are paper wallets that are basically paper documents containing the public address and the private key for receiving and storing Bitcoins for example. They are very hacker proof but you need to be careful with protecting the piece of paper. You can also get a mobile wallet, which is essentially an app that stores your private keys that you can manage from your phone. They however are not very immune to hacker attacks, similar to the web wallets, where your private keys are stored in a company operated server. There are also more secure options as desktop and hardware wallets for those prioritising privacy and security.

Legality

Cryptocurrencies are quickly gaining popularity, and are being recognised as a valid payment method for many services and goods. This is causing confusion among governments and policy makers, as they don’t exist in a physical form in the world. Furthermore, given their decentralised nature, there is not a single institution or any entity controlling them. What is more, the whole concept of digital currency does not exactly fit with the current law principles, making it difficult to establish the regulation lines. Many countries, worried by the tendency for crypto to be used for illegal trading, frauds and money laundering, have imposed strict regulations regarding the use of coins. Some countries have even completely banned mining and trading crypto.

Nevertheless, with the rising popularity of cryptocurrencies, the technology behind it keeps advancing, with developers aiming to provide the most secure user experience.