Do you know what a blockchain is? Have you wondered how it works and how it relates to cryptocurrency? Explaining this is the principal aim of this beginner’s guide.
Over the years, the world has experienced the introduction of several technologies. One that seems to be taking the financial industry by storm is the blockchain technology.
Almost everyone who uses the internet has heard about blockchain and cryptocurrencies. If you cannot easily relate to them, you can easily relate to the Bitcoin (one out of so many cryptocurrencies). The crypto world is vast. There are lots of things to learn for one to fully comprehend the innovation of blockchain and cryptocurrencies.
In this guide, cryptocurrency and the blockchain technology will be explained so that anyone can understand.
What is Cryptocurrency?
A lot of people find it hard to understand what cryptocurrency is all about meanwhile it is not so complex. The first word “crypto” means the computerized decoding or encoding of information. The second word “currency” means money (an acceptable means of exchange).
From that, a cryptocurrency is a currency system that exists digitally. It is different from the normal currency you know as it has no physical form. These cryptocurrencies work as a means of exchange and they have no central regulating body. They are decentralized currencies and cryptography is used to determine their ownership and originality.
Since cryptocurrencies are not regulated by any authority, their values are determined by their demand and supply.
What is Blockchain in simple words?
Blockchain is just a technology that holds cryptocurrencies. It is like a large database of these cryptocurrencies and it is the “chain” while the cryptocurrencies are the “blocks”. We say that a cryptocurrency is a decentralized digital currency, that decentralized system is what is called the blockchain.
Cryptocurrency transactions are recorded and carried out on a blockchain. It allows easy transfer of information from one block to another and it is automated. Each block in a blockchain holds unique data that cannot be modified. Cryptography is used to link these blocks (the cryptocurrencies) together to form a blockchain.
What is the first cryptocurrency?
The Bitcoin is recognized as the first-ever cryptocurrency and Satoshi Nakamoto (a pseudonymous figure) is known as the Bitcoin developer. It was created in 2009 and there are millions of Bitcoins available today.
Bitcoin is not just the first cryptocurrency, it is also the most popular and the Bitcoin blockchain is the largest in the crypto world. Though the price fluctuates, the Bitcoin has managed to stay at the top of the crypto market share. The highest price the Bitcoin has attained was about $20,000 in 2017.
What are the Popular Cryptocurrencies?
There are so many cryptocurrencies available but, some are very much popular than the others. The most popular cryptocurrencies are the Bitcoin and Ethereum. Bitcoin (BTC) comes out on top as it is the most popular cryptocurrency. It is also the most expensive one.
Ethereum (ETH) -the second most popular cryptocurrency – uses the Ether as currency. It is just like a modified version of the Bitcoin as it uses a similar blockchain. It works not just as a cryptocurrency but also as a decentralized system.
Other popular cryptocurrencies available include Ripple (XRP), Bitcoin Cash (BCH) and Litecoin (LTC).
The Bitcoin was the first cryptocurrency created in 2009. As the Bitcoin gained value over time, cryptocurrency exchanges like MT.GOX was founded. However MT.GOX got hacked sometime in 2014 and about 850,000 Bitcoin were stolen. This is the biggest cryptocurrency theft to date.
Ethereum which came after the Bitcoin was launched in 2015. When new currencies like this are launched, ICOs are carried out to make people aware of them. The ICO for Ethereum took place in 2015 as well and ERC-20 tokens were released. Since then, so many other cryptocurrencies have been created by different blockchain developers.
What is cryptocurrency mining?
Cryptocurrency mining involves verifying cryptocurrency transactions and adding them to a blockchain. The process also releases new cryptocurrencies called “block rewards”. One importance of mining cryptocurrencies is that it makes the blockchain secure as transactions are verified. With crypto mining, illegitimate attempts to spend cryptocurrencies that have already been spent are blocked.
Mining cryptocurrencies is no easy work; it involves the use of specially designed computers to solve complex mathematical problems. These complex mathematical problems are referred to as proof of work and just one computer out of thirteen trillion stands a chance of solving one of them.
Benefits of cryptocurrency over cash (FIAT currencies)
Cryptocurrencies like the Bitcoin have several benefits over fiat currencies, one of them is value. A Bitcoin is by far more valuable than 1 US Dollar and 1 Euro put together. It is difficult for them to devalue as the value of cryptocurrencies increases as more people use them. It is not affected by the economy in any way.
Cryptocurrency transactions attract lower fees compared to fiat currencies. This means that businesses who accept payment using cryptocurrencies will make more profit and customers will pay less. Another benefit of a cryptocurrency over fiat currency is security; crypto wallets are more secure than credit cards.
Where can I buy cryptocurrencies?
Currently, it is very easy to purchase cryptocurrencies as they can be purchased using fiat currencies. There are different websites online where cryptocurrencies can be bought and you pay using your credit card or wire transfer. The most popular today is Coinbase.com but there are others like CEX.io, Bitstamp, and Coinmama.
You can also buy cryptocurrencies directly from a person who has them and is willing to sell. This is called peer to peer service and you can use sites like BitQuick and LocalBitcoin. A cryptocurrency like Bitcoin can also be bought using another cryptocurrency e.g Ethereum. A crypto wallet is needed to purchase cryptocurrencies.
How do you store cryptocurrencies?
Cryptocurrencies are stored using wallets called crypto wallets. In real terms, you cannot store cryptocurrencies since they have a digital form, you just need private keys. When you create a crypto wallet, you get a crypto address and private keys needed to access it.
There are different types of crypto wallet but the most used are web and hardware wallets. Popular web wallets you can use to store your cryptocurrencies include Coinbase, Blockchain, and Lumi wallets. You can go for hardware wallets like Keepkey, Trezor and Ledger Nano S. Other types of crypto wallets include paper wallets, desktop wallets, and mobile wallets.
Your wallet address is your crypto address and it is public, it is needed for you to receive cryptocurrencies. Your private keys, on the other hand, are private, only you should know them.
Is cryptocurrency illegal?
The issue of whether cryptocurrencies are legal or not has been deliberated on for many years. The reason is that they are decentralized and are not controlled by any entity. Is cryptocurrency illegal? The answer to that depends on what you are doing with it.
Cryptocurrencies are legal when used to pay for goods and services so long as the seller accepts it as a payment method. Investing in cryptocurrency which is on the rise today is also legal. Most crypto brokers require investors to verify their identity so any case of fraud can be duly addressed.
The legality of cryptocurrencies also depends on your country as the use of cryptocurrencies is banned in some countries. In some other countries, they are fully legal and can be used for payment as normal currencies.
Can you turn Cryptocurrency to cash (FIAT)?
The answer to that is Yes! Cryptocurrencies can be turned into fiat currencies in many ways. If you sign up with a crypto broker such as coinbase, you can cash out your cryptocurrencies directly to your bank account. The equivalent will be deposited into your bank account once the transaction is confirmed.
You can as well turn your cryptocurrency to cash by selling them directly. A popular website where this can be done is LocalBitcoins. You simply post your selling bid and you will get contacted by interested buyers. There are also crypto exchange websites you can sign up with. You transfer your cryptocurrency from your wallet to theirs and they pay you the equivalent in fiat.
In some countries, there are Bitcoin ATMs where you can directly withdraw your cryptocurrencies in cash.
Are Blockchain transactions traceable?
Blockchain is a “public” ledger on which all cryptocurrency transactions are recorded. Therefore, transactions on the blockchain are traceable. They can be traced from one wallet address to another.
The identity of the wallet owner cannot be known but the wallet address can be traced as it is public. Blockchain holds information about the address of individuals but it does not contain information about the owners of such an address.
However, the identity of those who buy cryptocurrencies from brokers with KYC policies can be known. These brokers request for identity verification before you can purchase or exchange cryptocurrencies on their platform. You can stay off such brokers if you wish to keep your transactions anonymous.
Can Blockchain be hacked?
Blockchain is said to be non-hackable but no technology cannot be hacked so, blockchain can be hacked. However, it would be very difficult for such to happen so the possibility is very low.
Besides, Blockchain can be hacked through a Sybil attack. This involves the hacker carrying out a huge number of illegitimate transactions. This affects the process of validation and might crash the server.
It can also be hacked if the internet service provider network is corrupted with a partition. This can cause a network division such that the blockchain network is split into several different networks. The newer networks can be spent as new coins and the transactions recorded. The records will be erased once the partition is removed.
Can Cryptocurrency be stolen?
Yes! Cryptocurrency can be stolen if it is not well secured. If you have cryptocurrencies in your crypto wallet, someone can steal it if they get your private keys or passwords. Once a third party gets access to your wallet, they can easily transfer everything to theirs. That’s how cryptocurrency can be stolen.
You must keep the private details of your crypto wallet safe. You should not store them on your computer or emails. If your computer or email gets hacked, you stand a chance of losing your coins. Cryptocurrency is also stolen on exchanges if they get hacked. If you have some coins in your crypto wallet and your wallet provider gets hacked, you will lose them.
How many Cryptocurrencies are there?
Currently, there are over 2,000 cryptocurrencies available. New ones are still being created in a blockchain so the number keeps increasing. Out of the 2,000+ cryptocurrencies available, just about 1.5% are widely used. The remaining 98.5% are of low value because they are not widely used.
Of all cryptocurrencies in the lot, Bitcoin an Ethereum leads. In the cryptocurrency share market, Bitcoin and Ethereum take about 40% and 20% of the total market share respectively. You can view the list of cryptocurrencies on Coinmarketcap.
Can I create my own cryptocurrency?
Yes, anyone can create their own cryptocurrency. There are several ways via which this can be done and it requires some blockchain developing skills. Generally, it requires coding as you would need to create a blockchain system. If you do not know how to code, you can hire someone.
The problem is not about creating your cryptocurrency; it is about giving it value. Remember the value of a cryptocurrency is determined by the demand and supply of it. Bitcoin is the most expensive cryptocurrency because it is the most demanded. So, when you create your cryptocurrency, you need others to make use of it before it gets value.
How do I become a Blockchain developer?
To become a blockchain developer, you need to know all you can about the blockchain technology. Blockchains are created using codes and there are several designing protocols involved.
The first thing you should do is to learn how to develop software. Python is an ideal programming language to start as it teaches you the basics. You would also need to learn how cryptocurrency protocols work and understand what cryptography is.
Developing a blockchain requires a lot of experience. If you are beginning from scratch, it would take you years to become a blockchain developer. It would be a lot quicker if you already know about web and software development.
What is the future of Cryptocurrency?
Cryptocurrency has undergone a lot of critics as to what lays for it in the future. The fact that their value fluctuates has made investing in cryptocurrency seem like gambling. You do not know if the value will appreciate or depreciate over time.
Cryptocurrencies will certainly become more widely used in years to come. Currently, lots of businesses accept cryptocurrency as a payment method and millions of people have crypto wallets. It is also possible for cryptocurrencies to replace some existing methods of payment. However, to secure the future of cryptocurrencies, people need to be educated on it.
Blockchain technology has become very popular since its inception. The amount of people using cryptocurrencies every day shows that the blockchain technology is here to stay. Aside from cryptocurrencies, the concept of blockchain has also been implemented in real estate and health sectors. This guide should be helpful to newbies and beginners who are trying to understand what blockchain is all about.
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