Cryptocurrencies such as Bitcoin and the recent bitcoin value rise continue to be a focus of the tech industry, even if the price isn’t currently comparable to the peak reached in December of 2017. Blockchain aficionados believe that digital money systems are the future of the world, but many everyday consumers still don’t have a solid grasp of how they work. This article is intended as a primer on the basics of cryptocurrency. It is intentionally composed without bias, encouraging readers to decide for themselves whether they are interested in learning more. Without further ado, let’s answer some commonly asked questions about crypto.

 

What Is Cryptocurrency?

A cryptocurrency may be defined as any digital medium that may be used as an exchange mechanism for goods and services. The American dollars in your pocket are valuable because the United States government, lending institutions, and privately-owned stores all accept them as payment for the services and products they provide. Many vendors accept Bitcoin, Ethereum, and other crypto tokens as well, allowing them to be used the same way as a more traditional money system.

 

How Does Cryptocurrency Work?

Most cryptocurrencies run on the power of blockchain technology. The blockchain may be defined as a decentralized public ledger on which every crypto transaction is recorded and validated. Information is stored electronically on “blocks” that kind of work like the SD card you use to store pictures on your phone. When one is full, the system automatically “chains” another block to it such that every transaction is permanently recorded.

 

Are There Any Security Features with Cryptocurrency?

Absolutely. First, all blockchain transactions are verified by volunteer “miners” who use powerful computers to make sure that a new transaction makes sense given the ones before it. For example, if Rob gave Sally 10 BTC and then tried to transfer those same funds to Tom, the second transaction would be denied because the funds aren’t in Rob’s account anymore. Furthermore, multiple miners must verify a transaction before it is accepted as valid, preventing one rogue miner from screwing up the system. Miners are paid in crypto for their services, so there’s always somebody willing to do the legwork.

The blockchain is also transparent, allowing anybody interested to trace an individual token back to its origin point. If someone were to introduce new, unauthorized tokens to the blockchain, they would need to inject them into multiple blocks simultaneously to make sure that they pass miner scrutiny. If any were flagged, they could be deleted and connected to the individual who tried to game the system. For these reasons, blockchain advocates often call the technology “hack-proof.”

 

What Separates One Crypto Token from Another?

Each cryptocurrency runs on its own blockchain, meaning that there is a blockchain for every crypto token. Furthermore, each token’s blockchain operates slightly differently from others. For example, Ethereum utilizes a programmable blockchain that may be modified as desired, allowing developers to put additional coins onto it or even code “smart contracts” that execute themselves once the prescribed conditions are met. The Bitcoin blockchain lacks this functionality.

Another important point of differentiation is the size of the blocks, or how much data can be stored before the system needs to chain a new one. For instance, Bitcoin utilizes relatively small blocks that need to be chained frequently, slowing down payment processing times to around 3-7 transactions per second. In contrast, VISA can process 24,000 transactions per second.

Advocates of Bitcoin as an everyday currency knew that they needed faster payment processing in order to compete, and implemented a “hard fork” on August 1, 2017, that split the Bitcoin blockchain into two separate ones. The original Bitcoin blockchain operates as it always had, while a new token named Bitcoin Cash has larger blocks and faster transaction times while retaining the Bitcoin name. Unfortunately, Bitcoin Cash’s blockchain also offers shortcuts to miners when the system is taxed, potentially leaving its security vulnerable. Time will tell which approach best serves the needs of the crypto community.

Finally, each coin has its own supply that plays a role in its valuation. Bitcoin will only ever have a circulating supply of 21 million BTC (or Bitcoins), ensuring that each individual token maintains a strong value so long as demand remains high. In contrast, an altcoin (any crypto besides Bitcoin) called Ripple has a planned circulating supply of 100,000,000,000 XRP (or Ripples), ensuring that each token has a relatively low value even if demand is high. Investors tend to prefer the former arrangement to maximize their ROI, while lower valuations per token make it easier to facilitate everyday transactions. You’re not going to buy a gallon of milk with something worth $4,000 USD, are you?

 

I’m Interested in Investing in Crypto. How Do I Get Started?

With cryptocurrency still being in its’ infancy and the bitcoin value still rising, you will definitely want to acquire some crypto and need to go through an exchange in order to purchase and hold cryptocurrency. Coinbase.com is often recommended to beginners because it allows you to fund purchases through a bank account and offers an intuitive interface. Its fees are relatively high to provide these conveniences, however, so dedicated investors might want to graduate to something with lower fees such as Gemini as they gain more experience. If you’re interested in speculating in altcoins, you also need to choose an exchange that offers the coins you want.

Next, you need to do your homework. There are many places to research cryptocurrencies, including here at BitcoinValue.com for pricing data and news updates. You might also consider following crypto enthusiasts on social medial platforms like Twitter, though you’ll need to watch out for biased authors who may have an ulterior motive for what they are saying.

Other than that, just treat it like any other investment. Go in with an idea of what ROI you are looking for, and sell as soon as you can realize it regardless of what the so-called experts are saying. There is no guarantee of return, so risk only what you can afford to lose.

 

What Are the Downsides of Crypto?

As noted above, cryptocurrencies do not process as quickly as other payment options. They also do not enjoy universal acceptance, limiting their value as an alternative to fiat currencies like the American dollar. Prices can also fluctuate wildly, as one BTC could be worth $4,000 today but $3,500 or $4,500 tomorrow. This is where the day traders make their profits, but it can only be considered an economic obstacle.

Most cryptocurrency exchanges also lack insurance, meaning that you just lose everything in the event of a hack (CoinBase is the exception to this). This has happened numerous times in the past, most prominently at an exchange called Mt. Gox in 2014. Hackers had slowly siphoned off funds from Mt. Gox investors, totaling $473 million in virtual assets before they were discovered. Mt. Gox tried to make investors whole again, but was ultimately forced to declare bankruptcy in the wake of declining consumer confidence.

More recently, criminals have sought to use the public’s relatively low knowledge base to outright swindle people out of their money. An exchange called BitConnect was revealed to be a Ponzi Scheme in January of 2018, confirming long-heard whispers that something wasn’t quite right about the site. Similarly, some experts buy into a cheap token and then hype it up in the media, selling their holdings at a substantial profit to the suckers who trusted them. For this reason, it is always important to consider bias when reading about crypto investing.

 

Conclusion

There is much more to learn about digital money systems. The information above should prove sufficient to determine whether it is something you are interested in.  As with anything else, always do your own research and homework before investing any of your personal assets.