Cryptocurrency Basics for Beginners (Explained Without the Hype or the Jargon) Review
Meta description: New to cryptocurrency? Here’s a clear beginner’s guide to what cryptocurrency is, how it works, and what risks and considerations to be aware of upfront.
Somewhere, at this very minute, an unsophisticated young adult is opening a forum about cryptocurrency and doing exactly what they did during college – listening to their cousin who knows the ins and outs of trading after a relatively short time spent on it.
There’s a ton of jargon, unpredictable price swinging, and a subculture of boisterous fandom that can turn a curious novice away faster than you can say “blockchain.”
Cryptocurrency Explained: An Honest Beginner’s Guide
Let’s cut through the noise and explain what’s going on with cryptocurrency (how it functions, why people use it, what the risks are) in simple, straightforward language.
Before proceeding, an important disclaimer:
Throughout this article, cryptocurrency is presented for informational purposes only. It is a high-risk investment with the potential for considerable value appreciation or depreciation, and any further research or consultation with financial professionals is recommended before making any decisions.
What Cryptocurrency Is
Cryptocurrency is a form of electronic money that is encrypted and typically decentralized.
This means that, unlike the paper bills and coins in your wallet, the money in your cryptocurrency wallet is transferred from one party to another through a system that cannot easily be tampered with (encryption) and is not managed by one centralized institution (decentralized).
The easiest way to conceptualize how cryptocurrency works is by drawing a parallel to a ledger.
Imagine a physical book that served as a record of your life with you only having access to your own copy. Now imagine that instead of a physical book everyone has a digital copy of that grows and updates itself as transactions are made. While this might sound implausible, this decentralized, encrypted ‘bookkeeping’ method is exactly how a blockchain (a type of digital ledger) functions in a cryptocurrency network.
What Cryptocurrency Is For
Bitcoin cryptocurrency was originally designed to free people from the control of financial institutions and let them send money to one another directly.
There are many types of cryptocurrencies developed with varying intentions.
In any case, cryptocurrency serves a handful of general purposes: to facilitate easier and less restricted payments and money exchanges between individuals and businesses, as well as operate as a digital store-of-value.
Some Key Terms and Definitions
Bitcoin. It’s the OG cryptocurrency, the most recognized name in the industry.
Altcoins. Any crypto currency that isn’t Bitcoin.
Wallet. A wallet is a program or device that allows one to send and receive cryptocurrency (it doesn’t store it).
Private Key. A set of randomly generated characters that serves as a ‘password’ to gain access to one’s cryptocurrencies. These should never be shared with anyone.
Exchange. A website or platform that allows one to trade cryptocurrency for other assets.
Mining. A term used to describe the process of digitally ‘validating’ a transaction by either cryptographically signing it (Bitcoin) or digitally locking it up (altcoins) in order to distribute newly created cryptocurrency to users.
Volatility. One of the chief characteristics that distinguishes cryptocurrency from fiat money – its ability to fluctuate in price sharply on a regular basis.
The Risks and Drawbacks of Cryptocurrency for Beginners
Drastic swings in value (volatility)
Cryptocurrency scams: fake wallets, exchanges, and ‘investment opportunities’ abound
Transactions are mostly irreversible
Crypto is an unregulated currency: its legality varies by country and is subject to change
There is no inherent or built-in guarantee in value of a cryptocurrency
Loss of access means loss of value: cryptocurrencies are not backed by any government or physical asset and a user can permanently lose access to their funds
None of this means that cryptocurrency is bad; they are simply some of the notable risks and drawbacks that should be considered before diving into buying and selling cryptocurrencies.
The Different Types of Cryptocurrency and How They’re Used
As a store of value or speculation: cryptocurrency investors and speculators buy cryptocurrency intending to sell it later at a higher price.
As a means of payment: some people buy goods and services with cryptocurrency because it might have an advantage over traditional payment methods in terms of speed, cost, and convenience.
As part of a larger ecosystem: cryptocurrency can be a component in a decentralized ecosystem, including lending, trading, and other financial services.
As a way of life: there are people who choose to use cryptocurrency exclusively due to its particular advantages (i.e., being able to transact internationally)
A Few Tips for Beginners Considering Cryptocurrency
Use reputable wallet providers that have a proven security and privacy track record in the industry.
Set up two-factor authentication for any exchange or wallet with such an option enabled.
Under no circumstances should you share your private key or wallet password with anyone: legitimate companies will never ask for this information.
Be wary of scams that promise substantial rewards for little risk, as they are almost always illegitimate in some form.
Only invest money that you are prepared to lose: cryptocurrency prices can fluctuate wildly and without warning, so it is crucial that any investment in crypto is treated as a high-risk, high-reward possibility.
Thorough research and consultation with a financial advisor, if available, are essential prior steps before considering any investment.
Common Beginner Misconceptions About Cryptocurrency Explained
Cryptocurrency transactions are completely anonymous
Most blockchain transactions actually take place on completely public ledgers and while sender and receiver information is not revealed, all transactions take place on a transparent digital ledger
Cryptocurrency is a get-rich-quick scheme
While it is possible to make money with cryptocurrency (as it is with any investment), cryptocurrency values can depreciate massively in value or become completely worthless at any given time.
All cryptocurrencies are the same
Cryptocurrencies differ in value, purpose, technology, and legitimacy and due diligence on any given cryptocurrency is necessary before considering any sort of investment.
Why You Should Care About This Guide and What Comes Next
Cryptocurrency allows for interesting financial possibilities in that they are designed to remove the need for trusted third parties in financial dealings. While some cryptocurrencies feature intriguing possibilities and innovation in the sphere of finance, the industry is notoriously rife with scams, fraud, volatility, and other dangers. Gaining at least a basic understanding of what cryptocurrency is, how it functions, and what it is used for can help set aside any misconceptions about it as a novelty or ‘scam currency’ and better understand the potential role in one’s financial planning.
So what are your still lingering questions and concerns about cryptocurrency? Do you have a burning question that you’d like to see addressed next? Let us know in the comments section below!
