Last Updated on May 9, 2023
A friend introduced me to Bitcoin in 2016. Certainly, most people who are aware of cryptocurrency got to know about it through a friend. I really did not understand what Bitcoin was at the time. He said: “People invest in Bitcoin using US Dollars and when it is high you can convert the Bitcoin to US Dollars and make a profit.” It all sounded like a very big gamble to me and kind of like a Ponzi scheme. I kept on asking him if there was no way to make use of Bitcoin to pay for services without the need to convert it to US Dollars. His answer was not convincing at all.
I am sure most of you would have had a very similar experience when introduced to cryptocurrency. In a broad scheme of things, Cryptocurrency is a very fascinating concept. However, I have always wondered when would the time come for it to not always be compared to fiat currencies. It seems as if anyone I discuss cryptocurrency with is always telling me the US dollar equivalent and I really do not think it would have that much effect with such comparisons.
What is Cryptocurrency?
Simply put, Cryptocurrency is a digital currency that is used to carry out transactions on the blockchain.
What is a blockchain?
A blockchain is a ledger that records all transactions in a decentralized network.
What is a decentralized network?
A decentralized network is a group of multiple servers, computers, machines, or devices acting as the main system.
What is a centralized network?
Well, a centralized network is a group of multiple servers, computers, machines, or devices relying on the main system.
What is the major difference between a centralized and decentralized network?
The centralized network has only 1 main system and if you cut off the system, the entire network is down whereas for the decentralized network, each of the servers, computers, machines, or devices is the main system, and cutting off 1 of the system would not bring the network down. To bring down a decentralized network, you would need to cut off all the machines. This is not entirely impossible but it can be very difficult to achieve.
How does this relate to the real world?
Let’s first take a look at the US dollar. The US dollar is majorly controlled by the Federal Reserve and the US dollar is a fiat currency. If the Federal Reserve is attacked and all its machines destroyed. The US dollar loses all of its value. All the banks, businesses relying on the US dollar, hedge funds, and the government would break down.
As you can see, the only system that was attacked was the US Federal Reserve and the entire US dollar crumbled. This can be extended to companies as well. If the main executive of a company or the main system of a company is attacked, in most cases, the entire company falls apart.
What does fiat actually mean?
I am certain you hear a lot about fiat and may not even know what it means. Trust me, I used fiat a lot in my discussions without even knowing the true meaning for a while. So you might not be alone.
Fiat simply means something that does not have value in and of itself.
Now, Fiat Currency actually has no value in and of itself. It is just printed paper or numbers on the screen. However, it has government backing from its nation which inherently gives it value. The US dollar is strong today because the government is strong. That is a simple takeaway. The Nigerian Naira is weak because the economy and government are weak.
As such, fiat currency is directly dependent on its government and policies (especially economic policies).
Is Cryptocurrency not also Fiat?
In a way, cryptocurrency is also fiat, since bitcoin (for example) does not have value in and of itself. However, the major difference is cryptocurrency is not directly dependent on government backing and policies. It is actually dependent on the market which is basically everyone in the world.
Why is there Crypto in Cryptocurrency?
In layman’s terms, it is because the currency is digitally encrypted using both simple and advanced cryptography.
What is a Cryptocurrency White Paper?
I am pretty sure if you have dabbled in the cryptocurrency/blockchain space you might have come across a document called a White Paper. A Cryptocurrency White Paper is simply a document that details the technical and financial properties of a cryptocurrency. It is also a legal document showcasing the rules and how issues are to be resolved.
Do I need to read a cryptocurrency white paper?
It would certainly not hurt to read the document. It might give you more information about the cryptocurrency. Having said that it is not compulsory to read the cryptocurrency white paper.
If you intend to mine a cryptocurrency, you definitely need to read the white paper about the cryptocurrency. The technicalities, proof of work, proof of stake, rules, and guidelines on how to mine a cryptocurrency are and always should be in the white paper.
If you intend to invest in a cryptocurrency, it is not compulsory to read the white paper but you definitely should try to do so, you can know its circulation, legalities, the amount released, smart contracts (if any), etc which would give you great insight on how to participate.
Should I trust a cryptocurrency white paper?
No. Please do not fully trust any cryptocurrency white paper you see out there. Remember it could be written by anyone and some might be malicious. View the white paper as a handbook or guide and not as law.
How are Cryptocurrencies Created?
I am pretty sure you would like to know how to create a cryptocurrency. Well, creating a cryptocurrency requires technical skills and a very good understanding of how blockchain works.
How does blockchain work?
Blockchain is simply a ledger or database distributed across various networks (decentralized networks as discussed earlier) that are used to store records. These records are called blocks.
What is a ledger or database?
A ledger or database in this case is simply a collection of records.
Read: What does a Distributed Ledger mean in Blockchain?
What is a record or block?
A record or block is data consisting of the transaction hash of the previous transaction which is encrypted, the timestamp, and details of the transaction.
To create a cryptocurrency, you would definitely need a network to process and verify all transactions which is the blockchain and if you are not a blockchain developer, you would definitely need a blockchain developer.
Read: Blockchain Vs Database: Similarities and Differences
At this point, you have selected your preferred blockchain platform and you now have a blockchain developer (if you are not one). The next step is to select the node on the blockchain platform.
What is a node on the blockchain platform?
A node is a supercomputer that connects to the blockchain platform or network to verify and process transactions.
You can decide to make the node publicly accessible, private, or restricted.
At this point, you have a blockchain developer, you have selected your blockchain network or platform and you have a node connected to the blockchain network. The next step is to select the blockchain architecture.
What is blockchain architecture?
Source: MLSDev
Blockchain architecture is a design structure in which the nodes communicate with the blockchain network. The blockchain architecture can be centralized, decentralized, or distributed (publicly or privately). You can also learn to build your own blockchain architecture.
At this point, you have a blockchain developer, selected your blockchain network, connected your node to the blockchain network, and decided on your blockchain architecture. The next step is to set up the APIs.
What is an Application Programmable Interface (API)?
An API is an interface, code, or script used to connect the node of the network to the client network.
What is a Client Network?
A client network in the simplest of terms is a tool used to receive and display data to humans or machines. An example of a client network is a web browser. We use our smartphones to communicate with various servers in the world via a web browser.
You now have a blockchain developer, and blockchain network, connected your node to the blockchain network, decided on your blockchain architecture, and your APIs are ready. The final step is to set up the UI and UX.
What is a User Interface (UI)?
The user interface is the means by which a user interacts with your server. For Example, a web page is a user interface.
What is a User Experience (UX)?
The user experience is the overall experience of a user interacting with the user interface of your application.
In summary to create your own cryptocurrency, here are the steps:
- Select the Blockchain network or platform for your cryptocurrency
- Find a Blockchain Developer for the selected blockchain
- Select and Set up the Node on the Blockchain network
- Decide on the Blockchain Architecture for the cryptocurrency
- Set up the APIs for the Node and Client Network communication
- Set up the User Interface and User Experience for miners and users to communicate, use, trade, and store the cryptocurrency.
Even though there are a few restrictions and legalities in the cryptocurrency space, it is always best to consider the legalities of creating a new cryptocurrency. If possible, set up an LLC, acquire an adequate license, and register with the appropriate groups.
What is a Cryptocurrency Token?
For some people, all cryptocurrencies are the same. However, that is not the case, there are cryptocurrency coins and cryptocurrency tokens. A cryptocurrency token is a virtual currency that is issued on top of an already existing network. In order words, they do not have their own blockchain.
Is there an example of a cryptocurrency token?
Yes. A perfect example is Ethereum. Ethereum (Ether) is a coin for the Ethereum Blockchain and ERC-20 is a token on the Ethereum Blockchain.
Can multiple tokens be created on a blockchain?
Yes. You can have multiple tokens on a singular blockchain. The Ethereum blockchain does this very well with the use of smart contracts.
What is a smart contract?
A smart contract is a program that self-executes the terms of the agreement between buyer and seller. It is used in the development of tokens, DApps (Decentralized Applications), and DeFi (Decentralized Finance).
What are DApps?
DApps (Decentralized Applications) are like your everyday applications situated in a blockchain through the use of smart contracts. If you develop an app that would likely run on a web, android, or iOS platform on a blockchain it automatically becomes a DApp.
What is DeFi?
DeFi which stands for Decentralized Finance is the running of financial transactions on a decentralized network such as the blockchain. Creating, distributing and trading of tokens can be considered to be DeFi. You can read more on Centralized Vs Decentralized Finance Applications.
Read: The History and Evolution of DApps and DeFi
Can a cryptocurrency token be stored and traded?
Yes. You can actually store and trade cryptocurrency tokens. It is actually widely recognized as a digital asset. In fact, there is a larger percentage of cryptocurrency tokens than coins. Some of the most popular digital assets are actually tokens such as BNB, ADA, Dogecoin, etc.
Are there any other differences between a cryptocurrency coin and a token?
Most people interchange coins and tokens. However, there are still differences between cryptocurrency coins and tokens. Here are a few differences
- Coins operate on their own blockchain network whereas tokens are on a blockchain network.
- Coins can be mined by confirming transactions whereas tokens cannot be mined but are created and distributed.
- Coins are much more secure, mobile, and closer to traditional finance by typically being used as a form of payment whereas tokens are used for a wide range of applications.
What is Cryptocurrency Trading?
Cryptocurrency trading is the act of buying and selling cryptocurrency via an exchange. It could also be the act of speculating or predicting the movements of the prices of cryptocurrencies.
What is a cryptocurrency exchange?
A cryptocurrency exchange also known as DCE (Digital Currency Exchange) is an institution or business that enables its users to buy and sell cryptocurrencies for other assets whether digital assets or fiat currencies. Binance is the leading cryptocurrency exchange in the world today.
Are cryptocurrency exchanges to be trusted?
No. Always do your due diligence before trading on a cryptocurrency exchange, do not trade first and check later. It is always best to check first and then trade. Read their reviews, terms of service, and privacy policy, and contact their support to be sure they would respond to you in times of need.
Why should you trade cryptocurrency?
Trading cryptocurrency for some people might be a sport. To me, it is somewhat of a gamble. The cryptocurrency market is highly volatile. You can make huge gains and losses. It is not a must for you to trade cryptocurrency. You can simply buy a cryptocurrency and hold it for a long period of time. In this case, it would be more like you are investing in cryptocurrency as opposed to trading cryptocurrency.
One’s ability to determine or predict the market prices of cryptocurrency is a vital skill in trading cryptocurrency. You should only trade cryptocurrency if you are aware of the risks.
It is always best to know that there is a larger percentage of unsuccessful cryptocurrency traders than successful cryptocurrency traders.
Some of the reasons why people trade cryptocurrencies are:
- The ability to move money around as quickly as possible.
- The ability to earn commission fees by trading on behalf of others.
- The ability to go long or short on various digital assets
- The cryptocurrency market is on 24 hours as opposed to the stock market which is on for a certain range of time.
- The ability to take advantage of arbitrages all over the world.
There are still so many other reasons why people trade cryptocurrencies.
What does it mean to go long on a cryptocurrency?
This means buying more of the cryptocurrency with the hopes that it would rise up in price in the near future.
What does it mean to go short on a cryptocurrency?
This means borrowing as much of the cryptocurrency as the current price value as you can with the hopes that it would go down in price value by the time you intend to pay back the cryptocurrency.
What does arbitrage mean in cryptocurrency trading?
This is a process where a trader buys cryptocurrency at an exchange and sells the cryptocurrency at another exchange or at another time in a different part of the world for a higher price.
Why do I say cryptocurrency trading is a gamble?
You do not have control over the outcome of whether the price goes up or down. Yes, you can say the same for stocks but at the very least stocks are regulated and there is a high chance that stocks are adequately audited, the financial transactions are made public and you can study, research, and invest in it with wisdom.
As I mentioned earlier, anyone can create a cryptocurrency. It is less audited. The overall market greatly affects the price of a cryptocurrency. It is also a complete digital asset which means its value can fluctuate easily for positive or negative in microseconds. You can be very rich or completely broke and in debt in a matter of seconds. This is why I say cryptocurrency trading is a gamble.
Read 6 Phrases Every Crypto Investor Should Know
How to Trade Cryptocurrencies
It is very easy in this day and age to trade cryptocurrencies. Here are the steps to trade cryptocurrencies
- Decide on the cryptocurrency exchange to trade
- Create an account on the cryptocurrency exchange
- Deposit your fiat currency which in most cases is US Dollar in exchange for a digital asset.
- Select the cryptocurrency you want to buy or sell.
Which cryptocurrency should I trade?
There are so many reasons why you can or would want to trade on a particular cryptocurrency such as:
- You see potential in that particular cryptocurrency.
- You need that particular cryptocurrency for your client.
- You want to save the cryptocurrency.
- You want or need to leverage your positions.
Should I own a cryptocurrency?
It is not essential for you to own a cryptocurrency. I actually do not believe owning a cryptocurrency should be the focus. I strongly believe the focus should be on offering goods and services to the world and if there comes a time when all payments are to be done on digital assets, you can simply, accept your payments in digital assets. Do not worry so much about the fear of missing out (FOMO).
If you are not ready to own a cryptocurrency, focus on developing skills to provide services to the world and/or manufacture goods people would be willing to buy.
Is it wise to save in cryptocurrency?
Due to the high volatility of the cryptocurrency markets, I really do not know if it is wise to save in cryptocurrency. As humans, our emotions can sometimes hinder us from logical thinking. If the market is down, it can dampen your mood if all your savings are in cryptocurrency. If the market is up, it can make you feel highly accomplished at a very accelerated pace. I do not think that is a normal way to live for it is so uncertain. If you must save in cryptocurrency, I can only advise you do so using Bitcoin.
What is Cryptocurrency Swapping?
This is somewhat similar to cryptocurrency trading. It is the act of converting your assets directly to another currency to cut losses, reduce transaction fees, build a portfolio, and make payments.
What are transaction fees?
This is a fee charged by the cryptocurrency exchange for trading or swapping cryptocurrency on their exchange. Most cryptocurrency exchanges charge 0% to 2% transaction fees.
Read: What do Gas Fees mean in Blockchain?
What is a Cryptocurrency Wallet?
A cryptocurrency wallet is a program that stores your cryptocurrency’s public and private keys and allows you to access your coins and tokens.
Read: What does a Blockchain Wallet mean?
What are cryptocurrency public and private keys?
A private key is the most crucial piece of information you will ever receive in cryptography. To carry out transactions using your money, a private key, which functions as a passcode, is necessary. Each transaction is signed with it to show that you approved it. Sharing your private key with someone allows them access to your cryptocurrency.
A public key, which is specific to you and your assets, is a long string of random characters like a private key. Since public keys are lengthy, they are condensed into wallet addresses to make it simpler for others to deal with you. While a public key might be compared to an email address or a bank account number, a private key can be thought of as a type of password. They identify you or an account that belongs to you. Sharing your public key won’t jeopardize your cryptocurrency because it can’t be used to access or transfer funds.
Read: Private Key vs Public Key in Cryptocurrency
Your cryptocurrency wallet can be a hot wallet or a cold wallet.
What is a cryptocurrency hot wallet?
Hot wallets are typically web-based wallets, mobile wallets, and desktop wallets. Although all cryptocurrency hot wallets are susceptible to online attacks, web wallets are the least secure of them all. The benefit of hot wallets is that they are easy to use and they never go offline.
What is a cryptocurrency cold wallet?
Cold storage wallets are typically safe. They would typically need to be physically in your possession or accessible, along with any PINs or passwords needed to gain access to the funds. The majority of hardware wallets are cold wallets and are housed on objects that resemble tiny to medium-sized USB sticks.
Read: Hot Wallet vs Cold Wallet in Cryptocurrency
What is Cryptocurrency Mining?
Cryptocurrency mining is the process of generating new coins on its blockchain by verifying new transactions. In most cases, a cryptocurrency miner uses proof of work or proof of stake to verify transactions. Mining is very important because it verifies and secures the blockchain, which allows cryptocurrencies to function as a peer-to-peer (p2p) decentralized network without any need for oversight from a third party.
Who is a cryptocurrency miner?
A miner is someone or a machine that verifies new transactions by adding blocks to the blockchain. For every successful block added to the blockchain, the miner is rewarded with a certain amount of coins of the blockchain. The amount is usually stated in the cryptocurrency white paper.
Read: What is Crypto Mining in Blockchain?
What is proof of stake?
Proof of Stake is a consensus mechanism for cryptocurrencies that allows for the processing of transactions and the creation of new blocks on a blockchain. A consensus mechanism is a way of validating entries in a distributed database while also keeping it safe.
What is proof of work?
Proof of work is a consensus technique that allows network participants also known as miners to determine which of them are authorized to perform the lucrative chore of confirming new data. It’s profitable because miners are compensated with fresh cryptocurrency for correctly validating new data and not cheating the system.
Read: Proof of Work Vs Proof of Stake in Blockchain
What is Zero Knowledge Proof?
Zero Knowledge Proof (ZKP) is a technique used for ensuring transaction anonymity. It provides a safe way to confirm the information needed to complete a cryptocurrency transaction and verify users’ identities while keeping personal information confidential. ZKPs use simple algorithms and don’t require any interaction between the parties engaged in transactions.
What is Yield Farming?
Yield farming is a method of generating extra cryptocurrency with your existing cryptocurrency. It entails you lending your money to others through smart contracts. You receive fees in the form of cryptocurrency in exchange for your services.
What is cryptocurrency staking?
Cryptocurrency staking is a method of securing a portion of one’s cryptocurrency in order to contribute to a blockchain network. This is beneficial to the network, and it also allows cryptocurrency holders to earn money from coins that are simply sitting in their wallets. Those who choose to participate in crypto staking must promise not to withdraw their cryptocurrencies until the end of the agreed-upon time period. This also aids the network in gaining some advantages.
Read: What does Staking mean in the Crypto Space?
What Relates Cryptocurrency to Web 3.0?
Web 1.0 is a version of the web that got users’ information via a form on a webpage.
Secondly, Web 2.0 is a version of the web that got users’ information via the users’ social media or mailing accounts such as Connect to Facebook, Twitter, Gmail, Yahoomail, Microsoft Office, etc.
Recently, Web 3.0 is a version of the web that gets users’ information via the users’ cryptocurrency wallets such as Connect to MetaMask, Trustwallet, etc. Web 3.0 promises to make use of decentralized infrastructures.
Read: What is Web 3.0?
Cryptocurrencies are a vital part of web 3.0. Users can perform transactions, vote in elections, sign up for accounts, and use applications most especially with the use of cryptocurrency tokens.
What Relates Cryptocurrency to NFTs?
NFTs stands for Non-Fungible Token. It is a document, asset, image, or video unique to a blockchain and cannot be replicated. The buying and selling of all NFTs are done using cryptocurrency coins and tokens. Both NFTs and cryptocurrencies rely on blockchain infrastructure. There is a lot more you can know about NFTs.
Read: Cryptocurrency and NFTs: What’s the Difference?
What Relates Cryptocurrency to the Metaverse?
The metaverse is simply a virtual world facilitated by the use of virtual reality and augmented reality.
The metaverse uses cryptocurrency as the major means of commerce, payments, exchanges, trading, and purchases. It is already integrating cryptocurrency as a digital form of payment for it is a digital asset.
Read: The State of the Metaverse
Advantages of Cryptocurrency
- It is decentralized.
- It is a very fast way of transferring funds.
- It is relatively secure.
- It is private.
- It does not require any third-party backing.
- It has the potential for high rewards.
- It is a much more transparent financial system.
- It is available for trading always.
Disadvantages of Cryptocurrency
- It can be used for illegal transactions.
- It could lead to huge financial losses.
- It can be hacked especially web-based hot wallets.
- It is not environmentally friendly based on the power it consumes.
Read: Is Cryptocurrency Bad for the Environment? - It has no refund or cancellation policy.
- It can take time and effort to understand cryptocurrency.
- It is highly volatile.
- It can be a challenge to scale cryptocurrencies.
- It has little or no regulations.
Sources for Cryptocurrency News
To keep yourself informed, you might need to subscribe to a few cryptocurrency news platforms. Outlined below are 7 crypto news platforms I recommend you follow.
Sources for Real-Time Cryptocurrency Prices
There are a lot of sources out there that display the real-time price value of cryptocurrencies Outlined below are 7 sources I recommend.
Read: Crypto Glossary: A-Z of Common Terms and Phrases
Conclusion
Cryptocurrency is no longer an underground word used by a select few people trying to convince the world of its potential. It has emerged to become a set of assets traded by almost everyone with a smartphone in one way or the other. Therefore, it would be a smart move for you to know all you can about cryptocurrency. You make better decisions with the information at your disposal. You can hold a conversation on cryptocurrency confidently no matter the subject.
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