Let’s be honest: Everyone’s heard of cryptocurrency, but no one understands it.
Granted, it can seem overwhelming in the beginning. Between the endless techy jargon and graphs, it can be challenging to know where to start. As more people look for ways to make money online, crypto’s popularity has only seen an upward trend, which explains why it’s one of the hottest topics to make conversation with. Knowing keywords like “Blockchain” and “Bitcoin” will get you a few impressed faces at the dinner table, but if you’re going to make any progress in the field at all, you at least need to know the basics.
Luckily for you, we went ahead and did all the hard work. In this article, we’ll be going over everything you need to know about cryptocurrency, from basic definitions to answering the most frequently asked questions.
What is cryptocurrency?
Answer: Ah, the million-dollar question. Simply put, cryptocurrency is a digital currency that uses cryptography to verify and secure transactions. They are decentralised in nature and operate on an open network called “blockchain” that acts as a public database for financial transactions. (more on this later)
Like regular money, crypto can be exchanged for goods and services online. However, one of the most significant differences between crypto and traditional currency is that companies, not central banks, issue crypto. Using the currency the company issues, you’ll be able to purchase goods and services from them.
As of November 2021, Statista reports that there are approximately 7,557 cryptocurrencies worldwide. With how frequently new cryptocurrencies are popping up, this number is only expected to go up.
What is blockchain? How does it work?
Blockchain is a public digital ledger of transactions maintained by a network of computers around the world. Think of it as a database, except it stores data in blocks which are then chained together.
Here’s an overview of how blockchain stores data:
When new data comes in, it’s entered into a new block. Once the block is filled, it’s chained to the previous block, creating a chronological data chain. Once data enters the system, transactions are permanently recorded and viewable to everyone.
Each transaction receives a unique “hash”** and a timestamp, both of which are added to the end of the ledger. This chain of data is known as the “blockchain”.
**This hash code is one of the safeguards that prevent transactions from being edited. Hash codes aren’t fixed numbers; they’re mathematical formulas that will change when information is edited in any way.
To put this into perspective, here’s what a transaction process would look like:
Step 1: Transaction is entered.
Step 2: Transaction is transmitted to a network of peer-to-peer computers scattered around the world.
Step 3: This network solves equations to confirm the validity of the transaction.
Step 4: Once legitimacy is confirmed, they are clustered together into blocks.
Step 5: These blocks are chained together to create a history of all permanent transactions.
Step 6: The transaction is now complete.
So…is it secure?
Very. Remember how we said how blockchain ran on a decentralised network?
Instead of having a single point of failure, blockchain spreads the risk along various blocks or computers (also known as nodes). These nodes are kept in separate locations, so if one of them is tampered with, all the other nodes could share notes and pinpoint the affected node. This is one of the factors that makes crypto so transparent. Its decentralised nature, coupled with the fact that you can view all transactions by either having a personal node or a blockchain explorer, means that you can track Bitcoin wherever it goes.
What does it mean to mine crypto? Is it like printing money?
Well…yes and no.
Similar to printing money, mining cryptocurrency is how new crypto is entered into circulation. However, it also doubles as a means to confirm new transactions by the network.
To properly understand mining, let’s go back to the transaction process.
As we discussed earlier, blockchain was designed to operate without a central authority regulating its activity. However, this poses the issue of authentication: If there’s no middleman, who ensures transactions are legitimate?
The answer is found in cryptography. Each user has a private key and a public key. When combined, they create a secure digital identity to authenticate the user and unlock the transaction.
Once unlocked, authorisation is required before it can be added to a block in the chain. With public blockchains, this happens when most of the computers in the network “agree” that the transaction is valid. The owners of these computers typically get rewarded for their work through cryptocurrency.
It’s at the authorisation stage where the “mining” occurs. The “mining” itself involves using advanced hardware to process a complex mathematical problem. The first computer to find the solution is awarded with crypto, and the process begins again.
What’s the difference between a crypto coin and a crypto token?
Here’s the rundown:
- Coins run on their own blockchain. (Bitcoin runs on the Bitcoin blockchain, Ether operates on the Ethereum blockchain). They’re typically used to pay transaction fees while building out an application on the same blockchain. On the other hand, tokens are issued on a different blockchain with other tokens that belong to different projects.
- It’s cheaper to produce a token. Since a token lives on an existing blockchain, it’s easier to create a token. In fact, anyone can make one using automated tools or through writing computer codes.
- Coins are primarily used like regular currency. Tokens can be used for other uses cases. They can represent a deed to a house, a smart contract, or in some cases, a token can activate features of an application it was designed for. For example, when users trade with the Binance token, they enjoy a 50% reduction in their fees.
When in doubt, use this rule to distinguish the two: If it has a blockchain, it’s a coin. If it doesn’t, it’s a token.
Is trading cryptocurrency legal?
This answer depends on where you live. In Singapore, it’s legal to own and trade cryptocurrencies as property. However, cryptocurrency has not been accepted as legal tender. Singaporeans can purchase cryptocurrency from Bitcoin ATS, exchanges and certain banks.
Outside of Singapore, many countries like the U.S., Canada, and the U.K. allow the use of Bitcoin, with the most noteworthy example being El Salvador, which has accepted Bitcoin as legal tender.
Should you start investing in crypto now?
This question is difficult to answer because it rests on several factors. How financially stable are you? Can you afford to lose your investment if something goes wrong?
Remember, the main attraction to crypto is its tight supply control. This scarcity causes its value to increase, but demand is just as important. Since most people are investing in cryptocurrency purely to make a profit, a fall in demand could compromise crypto’s current profitable state.
That being said, there’s never been a better time to get into crypto. It isn’t an obscure field anymore – a cursory Google search will provide you with hundreds of articles to get you up to speed. Even major banks like Goldman Sachs and Morgan Stanley are entering the crypto scene.
Here’s our recommendation:
Learn as much as you can about cryptocurrency before taking the plunge (P.S. We strongly recommend you read all of our other articles). Like anything else in life, the best time to start would’ve been seven years ago. The next best time is now.
We hope you’ve enjoyed reading this article! For more related articles, visit UKISS.io/blog.