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Everything You Wanted to Know About Bitcoin & Crypto CurrenciesBy GamblersPick Nov 22, 2020It's never too late to get into trading and investing in crypto currencies. This comprehensive guide will teach you everything you need to know to get started.
Cryptocurrency is causing the biggest shake-up to our financial system in history.
In our ultimate guide to crypto currencies, you'll learn everything there is to know to get started on your journey. This guide will help you whether you're a laborer trading in your spare time or a software engineer hoping to change the world.
So here's every question you wanted to ask about crypto, in its simplest form. Keep reading!
Part 1: Defining Cryptocurrency
In this first section, we'll break down the basics of describing cryptocurrency so you can apply that knowledge when learning about how to get started and get involved.
What Is Cryptocurrency?
Cryptocurrency is a type of digital currency. It isn't the same as digital money you would associate with your online banking, which uses traditional fiat money (e.g., the dollar) as its underlying currency.
We can break down the term cryptocurrency to understand how it differs from the money we know otherwise. Crypto refers to the digital technology used to make it (cryptography), and currency refers to it being a money system.
To explain in greater detail, we'll be using examples of situations you'll be familiar with in everyday life. No doubt you've read many confusing articles already, so we'll try to keep it simple!
What Exactly Is Cryptography?
Cryptography is turning something with meaning into an unintelligible code. It is best known for its computing role, but it dates back to ancient Egypt and hieroglyphics.
Another example in more recent history is the Morse Code, where clicks represent letters of the alphabet.
How Does Cryptography Apply to Cryptocurrency?
Building a currency using cryptography, especially when computers are involved, is an efficient way to validate it as legitimate. Following a stringent set of rules and properties is the most secure way of confirming a unit as genuine.
You'll read many articles about how Bitcoin is nicknamed "digital gold." And there's an excellent reason for that.
Gold has specific properties and is considered a valuable commodity. Many conmen try to pass Fools Gold off as legitimate. Specialists understand the differences between the two and can validate its authenticity.
With cryptocurrency, the specialist is the computer. The properties of the currency exist within the code, so all properties must apply for it to be considered genuine.
But even a computer can be outfooled by a human who spots a loophole.
What Makes Crypto Foolproof?
DLT is a technology that consists of a copy of transactions (ledger) distributed to many sources. DLT creates multiple matching copies, cross-referenced for anomalies.
Even though DLT is a brilliant way of making sure nothing goes wrong, it isn't strictly foolproof. There are massive amounts of work in progress to solve the problems faced in its current forms.
One of the very reasons Bitcoin originated was to create a decentralized network to allow freedom to transact. The idea is to get away from the centralized banks that caused the economy to collapse in 2007.
How Does Decentralized Crypto Work?
Decentralized crypto works by spreading the ledger out as widely as possible to as many computers, otherwise known as nodes, as possible. The more copies of the ledger, the more accurate the information is.
As a result, any modifications have to be approved by the majority of copies.
There's a term you will hear in the community called a 51% spend attack. Suppose the majority of ledgers contain the harmful code caused by the hacker. In that case, their majority vote overrides the legitimate code.
This is why DLT must be spread as widely as possible to minimize this risk. It's also a leading cause of innovation in the space, which we'll discuss in more detail later.
How Does Centralized Crypto Work?
It's very similar to a bank. One majority monitors it, and you are putting your trust in someone to ensure it remains authentic.
Let's go back to the gold scenario and dig deeper.
One day, the accountant who looks after all the mine owners' transactions can't afford to pay his bills. So instead of $1000, he writes $100 and pockets the other $900 for himself. It takes years for anyone to realize that money is gone.
On the flip side, another mine has a different set of transactions, mining coal. This accountant is a well-respected member of the community and prides himself on transparency. He has nothing to hide. His books are fine.
So you can see here, with a centralized system, it all depends on who is looking after your assets. If you are the kind of person that will lose or spend banknotes, chances are you'll put them in a bank to keep them safe (pun intended).
What if One Person Owns 10,000 Copies?
Well, that is a real thing. And it's the source of much controversy in both cryptocurrencies and the real world.
It's more reliable than having one copy but still requires trust on your part that the company holding your assets will look after them.
You could have ten accountants working for the same mine in the gold mine scenario, each with a ledger copy. But if the fraudulent accountant says, "I'll give you each $50 to keep quiet", everyone changes their versions of the same book to match and read $100.
It's the main argument why many believe a centralized system is broken and corrupt, even if all the foolproof technology exists.
Bitcoin 21 million?
bitcoin blockchain has a stipulation—set forth in its source code - meaning that it have a limited and finite supply of 21 million bitcoins.
What is Bitcoin Cash?
Bitcoin cash cryptocurrency was created in 2017, from a fork of Bitcoin. 1 Bitcoin Cash enable more transactions and payments to be processed. In 2018 yet another fork initiated and split into Bitcoin Cash ABC & Bitcoin Cash SV.
So Is Centralized as Bad as It Sounds?
There are plenty of circumstances when a centralized network is vital. Otherwise, the asset's existence is rendered useless.
There are many utilities when a company or government may want to operate a ledger for their purposes and not for public resale. Legal documents are a great example of this.
A centralized database with many copies of the ledger will ensure that nobody can tamper with land ownership. As another example, sensitive files could be encrypted yet ingrained in the blockchain to avoid any editing or malpractice.
Whether any of this happens, in reality, is relatively unknown. But the possibilities are there should anyone need the technology for their personal use.
Is This How Cryptocurrency Was Born?
Yes! A little history lesson will explain everything you need to understand why cryptocurrencies exist.
We could jump in with the trading information, but you'll end up trading the wrong coins. Learning the history of crypto will ignite a fire inside you, and you'll soon begin to understand how crypto can change the future.
Part 2: History of Cryptocurrency
Throughout the last hundred years, generations have lost trust in the banks. They have sought alternative means of making sure their wealth is kept safe, beyond the traditional banking system.
20th Century Rebellion
Those who lived through the Wall Street Crash and the Great Depression of 1929 kept all their cash hidden in their house. This generation hugely distrusted the banking system, who they felt was gambling with their wealth. Many bought gold jewelry and other assets to make sure they were protected.
Their children, the Boomers and Generation X, grew their wealth from nothing. They were the generation that gamified the bank balance. So they did everything in their means to protect their wealth by buying up houses and renting them out to those less fortunate.
They were the generation that recycled their investments and built empires.
21st Century Rebellion
And then there are the Millenials. Just like their grandparents of the 1920s, they ended up bitter and miserable with good reason.
They're bitter at the banks for preying on the vulnerable, pushing house prices beyond affordability, and leaving renting as the only option. Graduates lucky enough to fund their education only went back to university because there were no jobs available.
And to top it all off, those born in the mid-80s graduated in the years of the Great Recession. This was quite possibly the worst time to try and find a steady job.
As a result, we end up at Bitcoin's birth in January 2009 as a decentralized peer-to-peer form of cash, with no middle-man. It promised to shake up the financial world for the better—the digital anti-bank.
So Who Invented Bitcoin?
It's the world's biggest mystery. Nobody knows.
Created by an unknown source called Satoshi Nakamoto in 2009, Bitcoin was a rebellion against the banks. Many theories surround Nakamoto's identity. And no matter how many conspiracy theories or studies you read, you won't get a straight answer.
The lack of conclusive evidence leads many to believe that Nakamoto's most likely answer represents a group of several like-minded individuals prominent in the cypherpunk space of the 1990s. These visionaries, including Nick Szabo, Hal Finney, and David Chaum, dabbled with digital currency in the 20th century.
And despite Craig Wright's controversial claims, nobody has been confirmed as Satoshi Nakamoto to date.
Why Do Other Virtual Currencies Exist?
There are several reasons. The main one which underlines all other reasons is that it doesn't do everything well. The Bitcoin we know today is very different from the one developed a decade ago.
There has been a universal shift away from cryptocurrency to the term "crypto assets" in more recent years. Cryptocurrency is now a type of crypto asset, along with security tokens and utility tokens. Cryptocurrency still defines an asset used for transacting money.
Even Bitcoin itself is debatable whether it is a currency any more. Its comparisons to gold are so familiar that many see it in the same light, as a store of value, not a transactional currency.
Here are some different use cases and concerns that have given birth to alternative technologies.
1. Tokenized Assets
Ethereum is the second-biggest cryptocurrency to date and with good reason. It's an approach to the blockchain that is different in that it focuses on smart contracts.
Like the age-old saying "written in stone," a smart contract allows writing conditions into the code. It ensures that an event will only occur if these criteria match.
Compare this to Bitcoin. You can send Bitcoin to another person, but if you send it directly to their wallet, how can you guarantee they will return it?
With Ethereum, conditional transactions allow you to lend and borrow without a middle-man involved. An exchange such as Binance offers centralized lending. The Ethereum network allows for decentralized finance or DeFi for short.
2. Privacy Concerns
One of the biggest urban myths around Bitcoin is that it is anonymous. And that isn't true. It is straightforward for someone competent enough, or a computer, to analyze usage patterns to determine the source of illicit funds, for example.
To many, this is a great advantage. Still, even to innocent individuals who require privacy, this can be a considerable disadvantage.
For this reason, many innovators of cryptocurrency believe in adding levels of privacy to the ledger, and they do this in different ways. Monero, probably the most well-known privacy coin, uses ring signatures. This links a group of addresses to one transaction, with no clear idea who transacted.
Other coins, such as Dash, use a technique called mixing. Think of this as putting your cash in a bucket of 500 coins, and the recipient pulls a random coin out. The chances of it being the same coin are very slim. Mixing can be taken further and used to exchange currencies anonymously.
3. Security Risks
As we discussed earlier in the article, not all cryptocurrencies are foolproof. Many scientists believe that even the most secure cryptography won't be so secure once quantum computing arrives.
One currency paving the way for this is QRL or Quantum Resistant Ledger. The technology here goes way beyond the beginner level. It's entirely plausible that their technologies will be implemented later by Bitcoin and other currencies.
Still, for now, they are leading the way in protecting the future of cryptocurrency.
4. Non-Blockchain Technology
These are a rare type of crypto asset, but the big one that is mastering alternatives to a blockchain is IOTA.
IOTA works on a distributed ledger concept. But instead of a blockchain, it is a Directed Acyclic Graph (DAG). It's known affectionately as the Tangle. Its name derives from its appearance.
For every transaction, two other users must approve it as valid. In turn, two users must authorize their transactions. This webbed network of transactions means that, just like a spider's web, the more the spider weaves the web, the stronger it becomes.
All units of IOTA existed from day one. There isn't any mining, and the network is entirely free. Free transactions make it excellent for the future smart home, where microtransactions will occur.
And they don't necessarily have to be financial either. It can be a car pulling up to a traffic light to tell the traffic light to change. You can also get paid to walk per meter in real-time via an app on your phone.
Many technologies have the ability to microtransaction to some degree now, but the cost of transacting halts significant progress. Feeless transactions are something IOTA looks to remove from the equation. Another area this would greatly benefit is banking transactions.
IOTA is such a pioneering technology that it has to be controlled by a centralized technology called a coordinator to avoid the network collapsing. The day the coordinator is removed, and the system becomes decentralized, its use cases become endless. Many believe it will pioneer a new wave of crypto technology.
What About Stablecoins?
Stablecoins are a category of cryptocurrency all of their own. In all their guises, they are designed to mirror a FIAT currency.
The most well known of these is Tether (USDT) and DAI. Both coins mirror the US Dollar, making it easier to buy and sell assets without converting into FIAT money. Most investors will only trade back into FIAT money when they need to spend it elsewhere.
Understanding the different types of coins is vital to do your research and understand which is the right choice for you to invest.
Part 3: Where to Find Crypto Currencies
Stop right there.
There's something else we need to cover. You may know which coins you like, but do you understand the importance of having a diverse portfolio?
What Makes a Good Portfolio?
There's no right or wrong answer here. If you are well-versed in trading other assets, you won't need any help with this. Simply find a dynamic that fits your current portfolio.
If you are new to this, it's simple. Don't put all your eggs in one basket, as the saying goes.
Don't just buy half a Bitcoin and leave it. Bitcoin might look like it will be a long-lasting success story, but what happens if the blockchain gets hacked and it becomes worthless? You need a backup investment.
We suggest doing your research on this one. An excellent way to spread risk is to start with three or four different types of coins and stick to the big ones at the start. You can find out their rankings on the ultimate crypto database CoinMarketCap.
Then leave it. Do your research, follow the news. But don't keep messing around with it unless you need to. After a month or two, you can see what's working for you and what isn't.
But you'll learn that's not the full story.
Sample Portfolio Distribution
Rebalancing a portfolio is sensible as part of a plan to which you can commit. For example, if you have $700 invested, your portfolio might look like this on day one:
BTC - $200
ETH - $200
BNB - $100
IOTA - $100
BAT - $50
ZEN - $50
Let's say you find that in the first month, your IOTA doubles to $200, but your BTC has dropped to $100.
Transferring $100 from IOTA to BTC means that you are rebalancing your portfolio. That way, you can buy more BTC, so when the price of BTC doubles, you will be in a better position than before.
That's the basics of it. You can also cost average, which means sticking to a set amount invested each month irrelevant of whether it goes up or down in value. That way, you take an average price, and the whole experience becomes less risky.
Now we've covered some different types of assets, and you have a strategy in place. You'll need some crypto!
Getting hold of crypto can look like rocket science. But with today's choices, it's easier than ever to get started. You just have to decide what is the right path for you to take.
There are two main ways, which can be sub-categorized further.
1. Trading and Investing Coins
Investing is the go-to approach for any novice. It's simple enough to understand, and as long as you do your research and start small, you'll have no problems getting stuck.
With the wealth of knowledge you have from earlier in the article, you can choose which path to take.
In nearly every circumstance, you need to sign up for a reliable, trustworthy service that will accept your cash. To do this legally, you need to go through a centralized exchange. You will then have to provide your personal information regarding KYC, AML checks. Checks allow companies to trade legally and abide by laws relevant to your country or state.
Sorry folks. There is one other way, but it is nowhere near as convenient or financially viable.
Crypto ATMs are appearing all over the globe at a rapid rate. These allow you to deposit cash in exchange for Bitcoin, Ethereum, and other coins. All you need is a personal wallet set up with an address you can use.
As we said before, while it's more private to use an ATM, it is near impossible to remain truly anonymous. Plus, the commission rates are so high you will wish you signed up to use your bank account instead.
What Do I Need to Start Trading?
Aside from a bank account and exchange account, you'll need somewhere to store your coins.
Coin storage is known rather appropriately as a wallet. A wallet is locked and comprises of keys that unlock it so you can transact. There are public keys, which is a bit like your home address so people can send you money, and the secret key, which is like your front door key.
Never, ever, share your secret key. We'll explain this in detail below.
There are different types of wallets, depending on your chosen coins. It's best to keep things simple at first and stick with an all-in-one solution. There are three different types of wallets:
- Exchange: As expected, this is keeping your coins on the exchange where you purchased them.
- Hot Wallet: Refers to a wallet that has access to the internet. An exchange is a hot wallet, but so is a mobile app or a web wallet.
- Cold Wallet: Refers to a wallet that has never seen an internet connection.
A cold wallet is the safest solution. In the early days, this would have been a wallet code on a piece of paper generated on a computer that hasn't touched the internet so that no hackers can obtain its information.
How Do I Keep My Crypto Safe?
As more people invest in crypto every day, sadly, more people get your money. They can prey on those who make easy mistakes and leave themselves open to attack.
Today, cold hardware wallets exist made by Ledger and Trezor that rely on enhanced security to make sure your hardware wallet never sees the internet. They give you a phrase to write down on a piece of paper and keep somewhere safe.
Again, never share your secret key with anyone you don't trust. You can have the most secure system in the world, but if someone knows you own crypto, nothing is stopping them from trying anything to hack you.
Whether you choose to keep it in a safety deposit box or memorize it, make sure there is a plan in place should you die. The last thing you want is to have a substantial sum on a wallet only for your grieving loved ones to never receive it.
And remember, the moment you think it's compromised, learn how to reset your key, transfer to a new wallet, and repeat the security process.
2. Earning Coins Without Purchasing
If you've got a wallet set up and a computer, you can start earning. Whether it's mining, bitcoin gambling, or other unique ways to earn money, it's a great way to get involved in the community.
Did you know you can obtain coins without spending any of your precious FIAT money?
When Bitcoin first started, mining Bitcoin on your computer was the only way to get hold of Bitcoin without buying it off somebody. Contrary to what some may think, you don't mine Bitcoin; you mine blocks for the chain.
Nowadays, mining comes in different forms and is sub-categorized into many different areas, with some being more profitable than others.
What Are the Different Types of Mining?
The two main ones are Proof of Work (PoW) and Proof of Stake (PoS).
In proof of work, it's similar to the gold analogy, where mining companies are looking for locations to set up a mine. If one finds gold, they can keep some of the gold as a reward. They can also keep transaction fees people pay for the mine.
In proof of stake, everyone works for a mining company. When one discovers gold, a winner gets picked at random. Each hour's labor counts as one ticket. The more significant percentage of the pot you stake, the higher the chances of winning, but it isn't guaranteed.
So as you can see, these are two very different ways of mining blocks on the blockchain.
And coins have a limited supply. Which, like gold, makes it harder to find. This process is known as Block Difficulty.
It can also be affected by the number of miners and the amount of effort taken to find them when more people are trying to find a block, the difficulty increases.
It has been well-documented that the global mining of Bitcoin is incredibly resource-consuming due to its difficulty level. So much so, that mining companies have set up servers on a mass scale in the Arctic Circle to keep the computers cool enough.
In 2019, Bitcoin mining contributed to 0.27% of the world's energy usage, Switzerland's equivalent. It's no surprise that many are starting to favor proof of stake for the sake of the planet.
How Do I Mine?
For proof of work, you will need some computing hardware and software. This will run the relevant blockchain and allow you to mine blocks. With Bitcoin, for example, you would need a large multi-million dollar operation to make it worthwhile.
Therefore, a great way to get started is to find an alternative, lower-cap coin (with lower market share). If it is in its early days, you should be able to mine using just a laptop or a dedicated miner.
If it's proof of stake you're after, this can be done with your existing tech, and you can do this centrally through an exchange like Binance. If you want to stake in a decentralized manner, this is embedded in smart contracts. It can be done with your existing wallet by sending funds to a specific address.
Get Paid by Your Employer in Crypto
More employers than ever are starting to see the benefits of transacting in cryptocurrency. They can reduce costs, increase speed, and see increased staff morale as the assets' long-term value increases over time.
All you need for this is a wallet to accept your funds. It's a good idea to check the regulations where you live. Reviewing the rules makes sure your income is declared correctly. The value can fluctuate rapidly, so it's essential to know how much your assets are worth at all times.
Alternatively, you can, of course, earn crypto in online casinos. This is a great way to earn yourself a small fortune, but as always, only bet what you can afford to lose!
Get Paid to Watch Adverts (Or No Adverts)
If you've used Brave's web browser for its ad-blocking properties, you'll be familiar with its BAT token. BAT is a token run on the Ethereum network. It allows consumers of content, i.e., their browser users, to pay content creators as compensation for ad-blocking software.
It works the other way too. If you allow Brave to show pop-up ads on your browser, they will pay you for the inconvenience in BAT tokens.
Tokenization is excellent because you can decide what to do with your funds. You can decide whether you would instead get paid for adverts' inconvenience and use that money to support those who make a living from adverts that the browser blocks.
It's an easy way to earn a little extra, whichever side you are on. You will need an Uphold account to withdraw your BAT tokens. Still, if that doesn't bother you, you can keep your tokens in the ecosystem and issue them to your favorite content makers.
Does All This Mean I Need to Pay Taxes?
Ah yes, everyone's favorite topic. Taxes!
Of course, you should be following any laws that apply to your own country when sending, receiving, or trading in digital currency. Take time to research laws in your own country, as they can all be very different.
However, if you are investing large sums, we would recommend seeking professional advice. Ideally, this should come from a lawyer or accountant to make sure there are no profound implications.
There are dozens of tools available to guide you through accounting for your investments and filing your taxes. Doing so will allow you to report to your local authorities should it be required for those who are confident enough.
And if you aren't confident, we recommend seeking professional advice — especially if your profits and losses are significant.
How Can I Keep Track of My Finances?
There are three main methods of tracking finances, and much of it depends on your current circumstances. For example, how many coins you are trading in? Do you have any stocks and shares? Are you a business?
1. Exchanges and Wallets
For most people, this will be the simplest way. We recommend starting with one exchange, but move most of your coins to a hardware wallet like the Ledger Nano range is a great place to start.
That way, you are spreading your assets out should anything terrible happen to one. You haven't lost them all.
2. Portfolio Tracker
What if you have a more complex portfolio, whether that's in crypto or involving stocks? A portfolio tracker such as Delta or Blockfolio can be a great way to keep track of all your assets in one place.
Many now show your wallets and exchanges automatically. So you don't need to manually input every single transaction, which can become a nightmare.
3. Accountancy Software
Accountancy software is essentially a portfolio tracker that allows for tax reports to be made.
One of the biggest names, Cointracking, has a wide range of tools, which is excellent for those with small niche coins. However, this can be overwhelming for some with the massive amounts of data, despite being incredibly useful for anyone choosing to day trade.
Accointing is relatively new to space, but they have the interface elements nailed. It's simple to use and easy to read, so as long as you have the more popular coins. It's much easier to navigate.
Koinly and Cryptotrader are two others that work well. Many also integrate with TurboTax if you are already using that to manage your accounts for other investments.
What Is an IPO?
Now you understand there are tax implications to investing in virtual currency. It's worth looking at how you can get in early and finding the right coins to invest.
An IPO is an abbreviation of Initial Product Offering. A cryptocurrency IPO is very similar to an IPO in any other financial institution.
It is a fundraising campaign that allows the creator of a crypto asset to raise capital to enable the project to succeed. They present a whitepaper of their project to the public, along with any other relevant information. The public can then decide if they wish to invest.
Investing involves transacting in a universal cryptocurrency such as ETH. This tradition usually stems from a practical choice since many companies will launch their IPO as a token on Ethereum. They typically do so either as a test run of the final product or to prove that an individual owns those tokens ready for a main-net launch.
What About Other Terminologies Like ICOs and STOs?
These terms are more specific variations of the IPO. In the same way, cryptocurrency is a type of crypto asset.
We would exercise caution with IPOs, however. Even if you manage to avoid a scam, it's easy to pick one that will fail. Therefore it is no different from investing in any other business or asset, such as stocks.
The dreams of making millions investing in an IPO are real, but they are very risky, so make sure you do your research. And remember the mantra: Never invest more than you can afford to lose.
What Is the Future of Cryptocurrencies?
The 2020 Covid recession is the ultimate test for cryptocurrencies to see how society values its place in modern society. We are beginning to see traditional banking establishments experiment with cryptocurrency. Even Paypal has recently got in on the act.
From the bank's side, this will allow them to integrate FIAT currency into the digital landscape. It allows for a smoother transition between different currencies while reducing cost and streamlining transactional data records.
It's a controversial topic, but there are valid arguments, especially in regulatory terms. Having the banks on board makes regulation stricter, which, in the crypto landscape, is generally considered a positive.
History shows that the right balance between law and freedom filters out unwanted parties from engaging in illicit activity.
What is a Crypto hedge fund?
Crypto hedge fund platforms enable crypto investors to invest in a expert-picked mix of cryptocurrencies. The crypto hedge fund enable investors with the option to mirror the market movements of Bitcoin and other popular coins including Ripple, Ethereum, and more.
For Further Reading on Cryptocurrency
Finally, there are plenty of other areas of crypto currencies we haven't fully discussed.
For example, case studies of what happens when things go wrong, such as the infamous Mt. Gox collapse. Or, what it means to "hold through the FUD while not FOMOing over Vitalik's t-shirts, all while getting rekt trying to go to the moon!"
The language used on crypto forums is, in itself, cryptographic at the best of times.
Unless you are already a professional trader, stay away from the margin, futures, and options trading. If you don't know what you're doing, you can quickly lose your entire portfolio with a simple mistake. Leave that one to the pros until you become one!
Now you are well equipped to understand the complex world of cryptocurrencies. You can go forth. You are in an excellent place to succeed in whatever path you decide to choose, whether it's trading, mining, or innovating.
At the time publishing this guide bitcoin prices have reached time high and there's a big increase in bitcoin transaction and bitcoin exchange financial services.
No one can really predict where the bitcoin btc will stand at 2021, however currently this digital asset market cap sits at 199.63 billion.
Keep reading through our articles for more tips and information about bitcoin, Ethereum and other cryptocurrencies.
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