What Are Cryptocurrencies: A Beginners Guide

As a lot of requests came in asking me for more information, so I decided to make a separate post about cryptocurrencies. One of the biggest questions is usually: Is it the money of the future or just a short-lived trend? Most people have probably heard about cryptocurrencies at this point, as it is a global phenomenon. And if that is not enough, I mentioned them at least 100 times on this website already.

While it is everywhere in the news and the majority of people are talking about it, even the basic concepts behind cryptocurrencies are still not understood by most people. But do not worry, after this guide you should know what it is, what to do with them, and last but not least you will have a handy link list  – welcome to the beginner’s guide to cryptocurrencies!

What are cryptocurrencies?

Cryptocurrencies are basically alternative currency systems. One very central distinction to regular other currencies is: They are decentralized and not administered by a single bank. So imagine a peer-to-peer network (ever heard about torrents? there you go!), but instead of sharing files it is used for transactions and creating additional monetary units.

How does it work?

Now it is getting a little bit complicated, but I try to do it as simple as possible: So first off, the digital cash system is based on cryptography, hence the name cryptocurrency. First, cryptography is used to secure the transactions and then it will be broadcasted to the network from one peer to the rest. Shortly afterward the transaction is known to everybody.
But now the crucial part begins: confirmation. For validation, miners take the transaction, stamp them as legit and spread it in the network. And why would they do that? What is the reason to do that? Money (of course!). The reward for legitimation of a transaction is the reception of a unit of the cryptocurrency.

What is mining?

As it is a decentralized network and miners are needed to confirm transactions, mining is a central part of the system. In this context mining is the process of using computing power to find a hash.

A hash is the product of a cryptographic hash function or algorithm. More info.

Without going into more detail, the miners have to solve a cryptographic puzzle for which computing power is needed. When solving it, the miner is rewarded with a unit of the currency.

Confused-Gif

Sooo, I hope you are not too confused right now. Here are some additional sources:

What is it for?

So after learning about what cryptocurrencies are and how mining works, you’re probably wondering: What do I use it for?

Simply put, you use cryptocurrencies to make purchases. That’s it. What do you do with the Dollars in your wallet? With the Euros on your bank account? Exactly. In the end, it is only a currency you use to buy things.

For most online investments I recommend such an anonymized payment method.

Characteristics

More interesting is the question why. Why would you use it instead of more traditional currencies? Let’s have a look at the characteristics:

Decentralized

As already mentioned, there is no bank behind the currency. This decentralization lets you send money at any time to any person in the world. There are no limitations of holidays, opening times of banks or any other possible constraints when you think of transferring money.

Fast

Also due to the decentralized structure, transactions via cryptocurrencies are very fast. As soon as the network confirms the transaction, it is done. And this usually takes only a few minutes.

Volatile

There is only a limited amount of coins available and the demand for them is increasing, especially considering the political tensions on the rise around the globe. In this month (May 2017) alone, the value of Bitcoin went from 1 coin being around 1,200$ worth to 2,000$. The price changes on a daily basis making it quite volatile.

Bitcoin/Dollar

Irrevocable

A transaction can not be reversed. At all. There is literally nobody who could do that. Once the transaction is confirmed it is a done deal. Regardless how high the amount was or to whom it was sent to.

So in case you want to make transactions with bitcoin, be sure to double check… twice… so quadruple check, I suppose.

Anonymous

Or rather pseudo anonymous. When making a transaction, the only recipient information you have to give is an address of 30 to 40 characters. No name, no bank information or other things you might be used to when making transactions. And it is not  (necessarily) possible to make any connection to the identity behind those addresses.

So whenever you hear of hackers in the news, robbing stuff and blackmailing people/companies, it is very likely they want the money paid out on such a cryptocurrency address.

Secure

As I mentioned earlier in this post, cryptography is a central part of those currencies. Using strong cryptography and big numbers make those currencies impossible to break. In addition to that, due to the (pseudo) anonymity, cryptocurrencies also protect against data theft. No more need to enter sensitive credit card data.

None to low fees

Did you ever transfer money to international bank accounts? Ever had to pay a fee which not unlikely goes up to 2 digit dollar prices? This is not the case with cryptocurrencies. The fees are either non existing or very low.

Which cryptocurrencies exist?

There are currently hundreds of different cryptocurrencies out there. The first and most famous one is Bitcoin.

Bitcoin

Most of the information I collected here for this blog post is based on Bitcoin. So if you read the blog post until here, you should basically know what Bitcoin is about and how it works.

Ethereum

Probably the second biggest cryptocurrency is named Ethereum. Rising in popularity the concept behind it is quite different to Bitcoin.

A handy guide with more information on blockgeek.com.

There are more cryptocurrencies appearing nearly on a daily basis. I will probably update this blog post at a later time to keep this list useful and up to date with noteworthy currencies, so make sure to subscribe / follow / bookmark!

How do I get cryptocurrencies?

So you are interested in getting cryptocurrencies? There are many places to buy and sell cryptocurrencies. As with all currencies you need to exchange first. To do so you need a bank account to transfer money and / or a credit card.

One of those places where you can exchange Bitcoin and Ethereum is Coinbase. If you use the following link and buy or sell cryptocurrencies worth 100$, both of us will receive 10$ worth of Bitcoins. A win-win!

Coinbase-Banner

But there are many more places where you can buy and sell cryptocurrencies. Which wallets do you use? What are your experiences with cryptocurrencies so far? Let me know in the comments!

I am also planning to write a post about electronic wallets and might cover more alternatives there as well as maybe a handy guide how to actually buy and sell them.

So stay tuned and make sure to follow / subscribe / bookmark!

 

 

 

 

 

 

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