Cryptocurrency basics for absolute beginners
Crypto in the limelight
These days an old topic has become hot again. You are reading this article because you somewhere heard this term maybe from your friends, neighbors, or relatives. To some extent you may or may not have an idea on this topic. If you want to curb your FOMO on this topic then this article is for you.
This article avoids being excessively technical and gets you up to date with the trend. Sure one may look upon Wikipedia for larger descriptions for the stuff mentioned here, but this article saves you the hassle and is free from complex technical jargon.
Cryptocurrencies — A world without boundaries
A cryptocurrency or crypto is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in the form of a computerized database, known as a blockchain. It uses strong cryptography to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership. It does not exist in any physical form, uses decentralization, is neither issued nor controlled by a central authority, unlike banks and governments.
When crypto is minted or created before issuance or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each cryptocurrency works through a blockchain, which serves as a public financial transaction database. The transactions that happen through this technology are visible to all the members of the blockchain.
The Chinese recently came up with a digital Yuan based on blockchain tech and it is amongst the first centralized crypto.
Bitcoin : The Original Gangsta
An invention by Satoshi Nakamoto (the guy is a ghost), Bitcoin ($BTC), came into existence back in 2008 and was released for the masses in 2009. Bitcoin, as all the cryptos out there is a decentralized digital currency, without a central bank or single administrator. It can be sent from one user to another on the peer-to-peer bitcoin network without the need for intermediaries. Transactions are verified by network nodes through cryptography and recorded in a blockchain.
Alt-coins : Other siblings of Bitcoin
Any crypto that is not Bitcoin is called an Altcoin short for alternative cryptocurrency. These tokens have underlying differences from Bitcoin, some aim to process blocks faster to help in faster transactions. Some have the smart contract functionality (very technical stuff), allowing usage on decentralized applications (dApps). The most prominent one is Ethereum ($ETH) came into existence in 2015, created by Vitalik Buterin (this guy exists).
Some other tokens that are very prominent, as per the latest market cap are, Binance Coin ($BNB), Cardano ($ADA), Ripple ($XRP), Dogecoin ($DOGE), Polkadot ($DOT)
Meme Coins : Have you heard about Dog Money?
Meme coins are altcoins that don’t have any technological aspects associated with them. They are purely present for the sake of some random photo or trend off the internet. Listings of such tokens on various exchanges vary from token to token. Only the most prominent ones are listed on centralized exchanges.
The best and most popular among these Meme coins is Dogecoin ($DOGE). It is backed up by some very prominent figures like Elon Musk (self-proclaimed Dogefather) and Snoop Dogg. Dogecoin came into existence back in 2013 as a mockery of cryptocurrency and blockchain. Ironically, it values amongst the top 10 cryptos in terms of market cap. At its highest as of May 2021, it eclipsed the valuation of big corporates such as Ford Motors. Though very unstable, in 2020, it recorded a massive gain of 17000%+. In contrast, bitcoin only had a 900% increase for the same year.
DeFi and Crypto Exchanges — The next version of Finance
DeFi or Decentralised Finance is a collective term for financial products and services that are accessible to anyone who can use cryptos — anyone with an internet connection. With DeFi, the markets are always open and there are no centralized authorities who can block payments or deny you access to anything. Services that were previously slow and at risk of human error are automatic and safer, now that they’re handled by code that anyone can inspect and scrutinize. Markets based on such DeFi products are known as Crypto Exchanges. There are two types of exchanges: centralized and decentralized.
Centralised Exchange : Safe and Verified markets with control
Centralized Exchanges or CEXs are similar to your everyday stock market, managed by some organization that acts as a third party. It is present to monitor the transactions and secures the assets on behalf of the buyer and the seller. One can easily buy or sell cryptos on CEXs. Their deals aren’t tracked on the blockchain. Such exchanges require you to submit your personal information for verification. The more details you provide to these exchanges, the higher your withdrawal quota would be. Verified users of these platforms can contact the support team of the exchange in case of any technical issue. There is a fee for doing transaction which goes to the CEX, it varies from CEX to CEX.
In most cases, centralized crypto exchanges provide their users with flat pairs at stable prices. These exchanges are widely popular among users, and you can easily find one of these platforms online. Some prominent CEXs include Binance, Coinbase, Kraken, BitThumb and WazirX. The best one to use for any user would be the one that supports the local currency of the user.
For further reading on CEXs 👇
Decentralised Exchange : Next generation of Trade Markets
Decentralized Exchanges or DEXs are bastions of a truly decentralized ecosystem of a ledger-based transactional system. They are not controlled by any company whatsoever. These on the other hand are developed and maintained by merely a group of people. All of the funds in this exchange are stored on the blockchain. These platforms allow peer-to-peer (P2P) trading for which it uses assets, proxy tokens, or an escrow system (a contractual arrangement system), unlike the IOU-based system a CEX uses.
DEXs charge a ‘gas fee’ on transactions which is far higher when compared to CEXs. One should look up to DEXs only when they are confident enough to call themselves intermediate or master level traders. A lot of scams happen on these exchanges. Each day a lot of coins are listed and taken down from these exchanges. There are knockoffs of coins that act as traps for novice users resulting in loss of assets. Also to state, you need crypto to trade on these platforms instead of your local currency. DEXs don’t support your local currency. The most prominent DEXs are UniSwap, PancakeSwap, and SushiSwap.
For more in-depth reading on DeFi 👇
Crypto Wallets — For your digital pockets
There are two types of wallets, hardware wallets and software wallets. Sometimes also called cold wallets these wallets hold cryptos of a specific user. There is no shared wallet so to speak. A user can have multiple wallets or may have only one wallet and transfer that from a wallet provider to another. They store the keys for cryptocurrency transactions. In addition to this, a crypto wallet offers the functionality of encrypting/signing information. This executes a smart contract, a crypto transaction.
Hardware Wallets : Prioritising Security
Looking nearly indifferent from a regular flash drive, these are the most secure wallets that exist on the planet. Each one of them having a unique identification key and complex security checksum. It is nearly impossible to lock pick them. These are mostly used as cold wallets for storing loads of crypto into a safe space. The most used hardware wallets are from Ledger and Trezor.
The only few drawbacks are the limitation on platform compatibility and the variety of cryptos one can store in them. Though they don’t have any max value for crypto storage, the specificity of coins limits them for the daily trader’s use. Also to state, there’s a burden to keep such a valuable item safe at all times and all the logistics of handling it, might become hectic for the masses.
Software Wallets : Prioritising convenience
Software wallets or digital wallets are the most commonly used wallets. They are very convenient in terms of usage and handling. Though not as secure as hardware wallets, they offer various complex encryption algorithms for safeguarding a user’s assets.
There are a lot of digital wallets out there and all of them have various features. Some offer best-in-class security and easy integration while some offer bank transfers and almost all offer a dedicated mobile application for ease of use. It’s a whole combination of features that can be seen throughout the plethora of digital wallet providers, each boasting about some USP or the other. The most well-known of them are MetaMask, Trust Wallet, Coinbase Wallet, and Crypto DeFi Wallet. These wallets are commonly used to access decentralized applications.
For deeper info on wallets, suggested reading 👇
Crypto Mining
Cryptocurrency mining is a term that refers to the process of gathering cryptocurrency as a reward for work that you complete. One gains cryptocurrencies by solving cryptographic equations through the use of computers. This process involves validating data blocks and adding transaction records to a blockchain. They are very performance exhaustive tasks and have high energy requirements.
Down in the series their will be an article covering this topic in depth and how to actually mine coins and generate passive income.
The Future : Decentralised by Nature
In all its essence, the world of cryptocurrency is truly revolutionary. One should not overlook this global phenomenon. Cryptos open a gateway to generate passive income, wherein there are no limits to one’s potential. And if one thinks that’s the limit, then they must understand that the underlying technology of blockchain will be the foundation of next-gen applications in the near future. When decentralisation is achieved in its entirety that will be the day everyone will see our planet with no boundaries.
You may be wondering that this article still hasn't covered many trading related keywords like, hodling and mooning and the analytics of market graphs. It is so because that will be covered in much depth in subsequent articles in the series and we don’t want things to be repetitive.
