To a cryptocurrency beginner, the task of understanding the ins and outs can prove daunting. This may not even be the first, second, or third time you’re trying to understand what exactly cryptocurrency is.
Don’t worry if that’s the case – you’re not alone. Cryptocurrencies have proved to be a HUGE learning curve for most of the world. Some, such as Bitcoin, have been active far longer than anyone thought they would be. The longevity of these digital currencies types was not pegged to be anything more than a passing phase, but now it is being seen as something of a wave of the future.
And Bitcoin isn’t the only cryptocurrency to prove that it’s here to stay. Currencies like Ethereum and Litecoin are two of the other industry heavyweights and may even overtake Bitcoin in due time.
Our beginner’s guide to cryptocurrencies will help you to understand everything you need to know about this financial phenomenon. We explain what cryptocurrency is, how it works, and what you can use it for. We also detail some pros and cons of using these currencies and take a look into the future of cryptocurrencies such as Bitcoin.
What Is Cryptocurrency?
Simply put, cryptocurrency is a digital and intangible type of currency. It’s a bit like a reservoir of digital cash, which uses cryptography (a specific series of codes) to secure transactions. Transactions made with cryptocurrency are unlike that of banks or credit cards because there is no central authority to validate transactions that are made.
For instance, when you deposit a check to your bank, it typically takes two or three business days to clear and make it into your account. It can be inconvenient to wait, but with cryptocurrency, transactions of those types are processed almost immediately.
This allows you to have total control over your money, so you can make payments, deposits, and send money nearly immediately and without the waiting period that is typically seen as a normal part of financial transactions.
Think of this box as your money that resides in credit or savings.
In an ideal world, you would have total control and knowledge of the speed in which that money makes it to your desired destination, like a bill payment, a check deposit, or money you are sending to someone electronically.
This box is that destination.
A typical bank or credit transaction looks something like this (on a broad level).
In this model, you can see that the efficiency of your money’s journey is somewhat impeded by the ‘middle man.’ Although there are good reasons for that central authority to exist, it does tend to slow things down a bit.
In the cryptocurrency model, however, the safety precautions that are normally performed by the central authority are built into your digital ‘wallet,’ so it looks more like this.
Now, of course, these are very broad explanations of the complex processes in both situations, but they are sufficient enough to help you begin to understand why cryptocurrencies such as Bitcoin are popular.
What’s the Appeal of Cryptocurrencies?
Using Bitcoin as an example, it is a type of currency that is completely digital, and its transactions are recorded and secured via cryptography. It is attractive to its users because the transactions are fast and not regulated or monitored by any government.
As we’ll detail later on, it is not without its faults. In the big picture of currency, cryptocurrencies are in their infancy, and though the designs of Bitcoin and other cryptocurrencies seem to be leaps and bounds ahead of the past attempts at creating a viable digital currency, it’s impossible to say for sure whether all of its kinks have been worked out.
How Do Cryptocurrencies Work?
For most, the confusion surrounding cryptocurrencies lies in how they work.
The key to understanding how Bitcoin and other digital currencies work is understanding what a blockchain is.
Blockchain, a word you have probably never heard before, is incredibly important when talking about cryptocurrency. It is essentially a ledger that records all of the transactions made with cryptocurrency. Blockchain is what keeps things like Bitcoin constantly moving and powers the transaction ability from user to user.
What Are Ledgers?
To best understand a blockchain, you need to know how a standard bank ledger works. It is technically defined as a written history of a collection of transactions.
Think of the operational models we used earlier.
The green box is representative of the $100 you owe your friend Susan and are attempting to transfer to her; the grey box is Susan’s account. The orange box is your bank, which will record the transaction in their system, approve or deny the transfer based on your available funds, and charge any relevant fees.
The transaction from your account to hers will be recorded in the bank’s ledger.
What Is a Blockchain?
A blockchain, unlike a bank ledger, is public to anyone who uses their cryptocurrency of choice. It is also maintained and controlled by each individual user, instead of a central authority.
Similar to writing down your transactions in the back of a checkbook, this blockchain technique makes you and you alone responsible for maintaining a ledger of your account. It also links and connects transactions of other users together chronologically, meaning that transactions cannot be altered after they have been completed because it would have an impact on the surrounding transactions and every transaction that came after the one in question.
This could possibly cause a network collapse.
The blockchain was created to allow Bitcoin to exist in a structure with no central authority to monitor and authorize transactions and to prevent the practice of double-spending.
Double-spending is a fraudulent tactic where a set of coins is spent in more than one transaction. In the simplest performance of double-spending, it is easily quelled by blockchain.
Imagine someone has one Bitcoin that he’d like to spend. But he decides he’d like to get more bang for his buck by spending it twice.
We’ll call the purple circle transaction #1 and the red circle transaction #2. The owner of the Bitcoin makes both transactions with the same Bitcoin, and the transactions are sent to the server.
With the blockchain structure, when the transactions are in the pool of recent transactions, transaction #1 is added to the chain and is validated, and transaction #2 is pulled out of the pool next to be added to the chain. But because the first transaction was validated and sent into the chain, the second one is declined because there is no Bitcoin in the account to back the transaction up.
If both transactions are processed simultaneously, and both sent to different chains, whichever chain continues is the one that was validated and processed.
Satoshi Nakamoto, the anonymous group that created Bitcoin, also created the blockchain structure in 2008. Since that time, the blockchain structure has caught on in other industries as well. Hospitals are now using it to secure and store patient information, art collectors are using it in their transactions and purchases, and even Airbnb is using it.
A Brief History of Cryptocurrency
Because the success of cryptocurrency is very recent history, there is not much to say on the topic, but often people will look to something’s past in order to predict its future. So, in that way, a brief history lesson is beneficial.
Satoshi Nakamoto, an anonymous group of programmers and techies, created Bitcoin in 2009. But it wasn’t the first introduction of cryptocurrency or digital currency the world had seen.
1990s – Trusted Third-Party
In the ‘90s, a number of companies and groups tried to make use of the budding tech obsession within the culture by attempting to create a digital currency. There were a number of attempts that were made, but all of them ultimately failed for lots of different reasons.
The digital currencies of this time used what’s called a Trusted Third-Party model, which meant that the company that owned and created the currency was in charge of verifying and helping to facilitate all transactions made with it.
2008 – Bitcoin Is Birthed
Satoshi Nakamoto found their way around that failed approach and created the ‘peer-to-peer electronic cash system’ to accompany Bitcoin. There is no central authority in this approach, so that means there are also no servers involved.
A year after the paper was posted, Bitcoin entered the arena for public use. Mining, a term that means the production of new Bitcoin, and the beginning of the blockchain began.
2010 – The First Bitcoins Are Sold
The next year, someone sold 10,000 Bitcoin (today worth 100,999,950 USD) for two pizzas. It is the first recorded true transaction in the cryptocurrency’s history because there had never been a monetary value placed on each Bitcoin.
So, in 2010, 10,000 Bitcoin was worth about $20.
2011 – The Market Expands
After the failed attempts of the 1990s, more companies were realizing that the decentralized model was the missing piece. So naturally, competing currencies were introduced. Known as “altcoins” (an abbreviation of “alternative coins”), they tried to improve on Bitcoin’s model.
Today, new cryptocurrencies are popping up everywhere, but Bitcoin remains the most popular.
2013 – A Fall from Greatness?
Shortly after Bitcoin reached $1,000 per one Bitcoin, the price took a sharp downward turn seemingly inexplicably. Those who owned Bitcoin saw their worth fall to around $300 per Bitcoin and did not break even again until 2015.
2014 – Criminal Infiltration
It didn’t take long for criminal organizations to realize that because Bitcoin boasts anonymity and no regulation by governments, it would be the perfect place to conduct their devious deeds.
A Bitcoin exchange known as Mt. Gox, the world’s largest exchange at the time, went offline in January 2014. This hit took almost a million Bitcoin from their proper owners, and investors were in the dust. To this day, it is unclear exactly what happened, just that a lot of money was now completely unaccounted for.
2017 – The Platform Expands
The Bitcoin craze continued, and it reached $10,000 per Bitcoin for the first time. This marked a gradual increase, but over the course of the year, things fluctuated a bit more. It peaked at around $16,000 per one Bitcoin, and at the end of 2017 was back to around $10,000.
In January of 2018, the price fell below $10,000 for the first time in a year and now is back to just above that mark.
What Are the Most Popular Cryptocurrencies?
Different currencies are being introduced all the time, but not all are viable, and often the smaller ones go under. There are several that at least APPEAR to be stable, though, and these tend to attract the most attention. Here’s a list of the most popular cryptocurrencies at the time of writing:
Now here’s a brief overview of each currency on this list:
Bitcoin is considered a pioneer of the digital currency world. It has had some extreme ups and downs but seems to be one of the few cryptocurrencies that are here to stay.
Smaller currencies that have tried to mimic Bitcoin’s technology and appeal have gone defunct, so if you want an option that has proven itself over time, this would be the one for you.
You can read more about Bitcoin, and its role in online gambling, in our dedicated guide to this currency.
Based on the same coding as Bitcoin, Litecoin is attractive to users, particularly those who have used Bitcoin before, because the transaction and blockchain speed is four times faster than that of Bitcoin. That means Litecoin is processing a higher number of transactions.
The idea behind Ripple is a little different than the idea behind most cryptocurrencies. Its aim is to convert traditional currency into digital currency, and then be able to convert it back into a foreign traditional currency.
Ripple’s transactions take place within institutions and are vastly different from Bitcoin’s.
Ethereum is currently the second-biggest digital currency in the world, following Bitcoin, by market cap. It was created to be a platform for secure contracts.
Like Bitcoin, it has proved itself to be relatively steady in the volatile world of cryptocurrency, and it has been said that it has the potential and record to bypass Bitcoin and become the world’s largest cryptocurrency.
A fork between the original Bitcoin, Bitcoin Cash was created in late 2017 with the promise of bringing the “peer-to-peer electronic cash” experience that was supposed to be a part of the original Bitcoin operation.
Bitcoin Cash was created to solve the blockchain scalability issue and debate within the Bitcoin community.
Like Bitcoin and most other cryptocurrencies, Cardano is a decentralized system with a public blockchain. Unlike other cryptocurrencies, it is the first blockchain platform to come from scientific philosophy and a research-driven approach.
It’s also constantly attempting to develop better features and setups than any other currency on the market, or that has ever existed.
NEO’s website calls itself a
“non-profit community-based blockchain project that utilizes blockchain technology and digital identity to digitize assets, to automate the management of digital assets using smart contracts, and to realize a ‘smart economy’ with a distributed network.”
Smart economy is their primary focus, and what they put the most energy into keeping up.
NEM is another blockchain platform, but it has been specifically designed and coded with speed and scale as their top priority. They have some of the top transaction speeds in the industry for internal ledgers.
They use the Supernode program to ensure that, although they are looking to develop the platform further, their speed and stability will not be disrupted or compromised as it develops.
Another platform that boasts a fast transaction speed is Stellar. They operate on the same blockchain technology as Bitcoin, but they have improved it, so their transaction speeds are much faster.
Stellar’s aim is to be able to quickly exchange government-supported tender, meaning that if you wanted to exchange USD to British Pound, you’d be able to do it quickly and securely.
Stellar is even used by IBM, the computer manufacturing company, for cross-border payments.
“Machine to Machine” or M2M transactions are what IOTA specializes in. It is a platform that is most unlike any other on this list, partly because of their M2M concentration, and partly because they use a system called ‘tangle’ instead of the blockchain.
Now that you know a little bit about each currency, here are the symbols, current value, and market cap of each (displayed in descending order by market cap)
*Values and market caps are taken from CoinMarketCap, and are accurate as of February 2018
How to Buy and Sell Cryptocurrency
Buying and selling cryptocurrency is meant to have a user-friendly interface, but it doesn’t hurt to have some background knowledge of the different parts of the process before you attempt to buy or sell.
Cryptocurrency exchanges are where most buying and trading takes place.
Coinbase is said to be one of the best exchanges because of how it measures up to the others on things like liquidity, fees, limits for withdrawals and purchases, security, and user-friendliness, to name only a few.
When you purchase cryptocurrency, it is kept in your online wallet that is built into the exchange.
But there have been hacks that have targeted the wallets kept on exchanges, so you also have the option of using something like myetherwallet.com, which is essentially a third-party site to keep your currency in. Or you can purchase a hardware wallet such as KeepKey, which costs around 100 USD.
If you opt to keep your currency somewhere else, transfer a super-tiny amount first to ensure everything runs smoothly before transferring the lot.
For a more in-depth look at how to buy, sell, and mine cryptocurrency, check out our full-length article dedicated to the subject.
Unlike government-regulated currencies, cryptocurrency isn’t backed by the gold reserve. So, what determines its value?
Here are a few of the main drivers behind what determines the price and value of cryptocurrency:
Supply and Demand
Supply and Demand
Generally speaking, there is only so many of each currency to go around. So, the less supply that is available for hopeful purchasers, the more each individual currency is worth.
The price of the programmer’s and developer’s time is also a factor, meaning that if a currency’s blockchain is more secure and therefore more difficult to infiltrate or tamper with, the more valuable the currency is.
This isn’t to say that the most expensive currencies have the best and most secure blockchains, but it is an important factor in determining the value overall.
There is a reason that different currency creators are looking for an edge to set theirs apart, and that is market dilution or saturation. The more currencies there are of the same type on the ‘market,’ the less each is valued at. This plays into supply and demand as well.
What Are Cryptocurrencies Used For?
With a world of digital peer-to-peer transactions at your fingertips, what can you actually use cryptocurrencies for? Here are some suggestions:
Investing and Trading
Let’s take a look at these in more detail.
Investing and Trading
One of the primary uses of cryptocurrency is as an investment and trading tool. As we mentioned earlier, the price/value of most cryptocurrencies is volatile and subject to regular fluctuations. This creates the opportunity to profit by buying and selling these currencies at the right time.
Of course, as with any other financial instrument, the difficulty is in knowing when to buy and when to sell. Investing and trading in cryptocurrencies can definitely be profitable, but it shouldn’t be considered an EASY way to make money.
For more information on this subject, please see the following article in our cryptocurrency guide:
A particularly popular use of cryptocurrency is online gambling. There are several reasons why cryptocurrencies are well suited for gambling online, including the fact that it’s possible to make anonymous transactions.
We explain more about the use of cryptocurrencies in online gambling in the following article:
Starting in 2014, Overstock.com began accepting Bitcoin, Ethereum, Litecoin, Dash, and Monero.
The site has virtually everything anyone could ever want or need, ranging from furniture items to jewelry and clothing.
Simply add your items to your cart and click ‘check out,’ and you are brought to the secure checkout page. After you’ve put your billing and shipping information in, scroll down to the payment information section.
Under the PayPal option, you’ll see an option to use Bitcoin or the other currencies that they accept.
Reeds Jewelers, Inc. is another site where they accept payment in Bitcoin, but that is the only cryptocurrency they accept at this time.
They have a checkout setup similar to that of Overstock.com and have an option for payment in Bitcoin in the payment information section.
Expedia began accepting Bitcoin payment for hotel bookings in 2014 and uses Coinbase as their partner and link to the digital currency world.
At the moment, they are only accepting Bitcoin, and you can only use it for hotel bookings, but they have said that they are hoping to expand into airfare soon.
If you don’t want to wait, though, CheapAir is accepting Bitcoin as payment for booking flights on their website.
They claim to be the first travel agency in the world to accept Bitcoin as payment for flights, and they began in 2013.
If you are near the Manhattan area and are looking for a place to spend your Bitcoin, why not spend it on a non-invasive plastic surgery procedure?
bodySCULPT is the first establishment of its kind in New York City to accept Bitcoin in exchange for a service.
Heifer International, a charity that prides themselves on their mission to “work with communities to end world hunger and poverty and to care for the Earth,” is now accepting Bitcoin as a payment option for their donations.
But it’s not the only one! Save the Children and The Water Project are two more that accept Bitcoin, and you can find even more on this site.
These are just a few of the many spending opportunities you will find with cryptocurrency. Right now, the most widely accepted cryptocurrency is Bitcoin, but as currencies such as Ethereum and Litecoin gain popularity and credibility, that is sure to change.
The Pros and Cons of Using Cryptocurrency
Even with all of the information at your fingertips, it can sometimes be difficult to single out the pros and cons of using cryptocurrencies.
Here are some that we feel are universally important to include in both categories.
Nearly immediate transaction and transfer speed
Potential for a large return investment
No foreign currency exchange needed – cryptocurrencies are global, so you don’t need to fuss with foreign transactions
Low transaction fees – sometimes markedly lower than other online payment methods
Volatile; the value fluctuates multiple times a day
Not regulated by government agencies, so if they are stolen or you forget your account password, you may not ever get them back
Potential major security concerns (*see next section)
Can’t be used as readily as cash or credit
In addition to the cons listed previously, another big one is issues of security, both in terms of how safe your information and digital wallet is from hackers and how secure your investment is.
Here are some details on the various security concerns associated with using cryptocurrency.
Not Legal Tender
Bitcoin and other cryptocurrencies are not legal tender, meaning that they are not backed, endorsed, or regulated by a country’s government. This is a problem for two major reasons.
Firstly, because it is not legal tender, companies do not have to accept it. It’s up to the individual businesses if they decide to be accommodating to cryptocurrency users. If for some reason companies stopped accepting it completely, it would become worthless, as would your investment.
Additionally, if a government decides to put a ban on cryptocurrencies or very heavily regulate them, and you are unable to use them freely, your investment may also be rendered useless. And organizations like the FDIC in the United States have no control or stake in ensuring the safety of your deposits when they are in the form of cryptocurrency.
Scams and Fraudulent Platforms
One of the biggest concerns is that there have been platforms created and launched solely for the purpose of shutting down unexpectedly and taking all of your money with it.
Cryptocurrency is untraceable to a degree, and unregulated, meaning that if you choose to put your money into the wrong hands, there is a very high probability that you will never see it again.
Make sure that the platforms you use, exchanges included, have a good reputation and have been around for at least a few months.
Largely the fault of the blockchain technology, transactions you make on platforms like Bitcoin are final and irreversible. Tampering with transactions after they’ve been blocked could lead to an entire platform collapse.
Some exchanges and platforms may be willing to refund your transaction under certain circumstances, but the majority of transactions you make are final.
Rampant Illegal Activity
As you can imagine, the non-regulated, untraceable nature of cryptocurrency makes it a place for criminals to conduct illegal activity.
This includes money laundering and drug dealing and transactions, which are some of the more common illegal activities misusing the platforms. These activities have the potential of impacting the entire platform and anyone who has bought into it because government and law enforcement agencies could shut down or greatly limit the use of exchanges and platforms in order to stop the criminal activity.
High-Profile Hacks and Thefts
There have been several instances of cryptocurrencies being hacked and/or stolen in vast quantities. For example, in January 2018, hackers targeted the Japanese exchange Coincheck and stole over $500 million. So, although blockchain technology is designed to combat thefts and hacking, there always people are figuring out ways to break through the security.
Because cryptocurrency is essentially digital cash and is unregulated and untraceable by most governments, it is a huge target and cash cow for cybercriminals.
Perhaps the most infamous theft or scam in the cryptocurrency world is known the ‘Mt. Gox hack.’
We referred to this incident earlier. Mt. Gox was a Bitcoin exchange based in Japan, and it was launched in 2010. By 2013, it was the largest Bitcoin intermediary in the world, and it was handling over 70% of all transactions made with it.
But in February 2014, the site closed trades, shut down their website, and filed for bankruptcy protection. Two months later, they began liquidation.
They then announced that around 850,000 Bitcoin was suspected to have been stolen; the worth at that time for that number of Bitcoin was over $450 million. Since the announcement, 200,000 have been recovered. They were unsure how the Bitcoin was lost in the first place, but now it is said that Bitcoin had been gradually stolen beginning in late 2011.
Always keep in mind that even though blockchain technology is supposed to ensure legitimacy and safety of transactions, it doesn’t mean things like this can’t happen.
Laws and Regulations
One of the biggest draws for some cryptocurrency users is the fact that it isn’t yet regulated by most governments, but there are countries that have made using and trading it illegal, and some that are currently trying to impose regulations in order to curb criminal behavior from taking place within the digital currency world.
The most cited fear is that the entire world will move toward a decentralized banking approach; not far after that are fears of endorsing and enabling illegal activities.
In Russia, Bangladesh, Thailand, Kyrgyzstan, and Ecuador, Bitcoin and other forms of cryptocurrency are banned outright. But in China, private citizens can make transactions with cryptocurrency, but companies and businesses cannot, and mining Bitcoin is also illegal.
If you are planning on buying, mining, or making transactions in Bitcoin or other cryptocurrencies, it’s important that you stay up-to-date about how cryptocurrency stands legally in your country.
Taxation is another issue. In the United States, Bitcoin and cryptocurrency have been declared an ‘asset,’ and you are able to convert Bitcoin to USD in order to claim it on your taxes. But because of the way most cryptocurrencies are set up, it is easy for people to hide their digital currency to evade having to declare it.
A Peek into the Future
In 2018, experts believe that Bitcoin prices will be ten times what they were at the end of 2017. But Bitcoin isn’t the only currency to keep your eye on.
Arjun Kharpal, a tech correspondent for CNBC, says, “Investors appear to be taking a breather from Bitcoin for now and looking at alternative cryptocurrencies.”
In the beginning of 2018, Ripple has seen its value expand ten times what it was at the end of 2017. And Ethereum is projected to behave similarly.
But in a tweet, John McAfee, creator of McAfee Anti-Virus software, encourages people to stick with Bitcoin, calling it the “crypto giant,” and reminding the public that it has the lowest circulating supply of any coin.
Julian Hosp, crypto entrepreneur and co-founder of TenX, had this to say:
“I think we’re going to see Bitcoin hitting the $60,000 mark, but I also think we’re going to see Bitcoin hitting the $5,000 mark. The question is, though, ‘Which one is it going to hit first?’”
As any financial advisor would tell you, don’t put all your eggs in one crypto basket — meaning that diversifying your cryptocurrency investments over a few different platforms is something you should consider doing.
Looking at the industry as a whole, though, most experts are saying that cryptocurrencies will have a long and prosperous future.
Davide Menegaldo, COO at Helperbit, a company that aims to help those donating to humanitarian disaster relief better control where their money ends up through P2P transactions, says:
“I would imagine this scenario: in the future, financial instruments linked to Bitcoin will be finally approved. High finance will invest into the cryptocurrency (more than the 300M expected for the Bitcoin ETF approval). I’m thinking about 5-10 times the current price. Bitcoin will not necessarily be used as a method of payment (it depends also on how the size block/Segregated witness/LN matter will proceed or will not), but primarily it will be used as a store of value. However, there will be much more competition as a payment method because some banks could issue their own cryptocurrency, while the current ones will remain a handful. Ethereum will consolidate as the second most important infrastructure, and 99% of ICO tokens will have any value.”
So, keep a close eye on Ripple and Ethereum, as well, because experts are projecting that they will have successful futures.
If you have some extra money you were considering investing in stocks, why not use some of it to invest in a few different cryptocurrencies?
Of course, no one has a crystal ball, but strides that have been made in previous years, such as companies and businesses allowing cryptocurrency payment options, platforms striving to improve the speed and safety of the original blockchain, and a handful of successful years for Bitcoin, proving that it does have longevity and is capable of lasting, can give us a hint to where this revolutionary currency is headed in the future.