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Cryptocurrency – the basics

Updated: Apr 4, 2023

Cryptocurrencies are digital or virtual currencies that use cryptography for security and operate independently of central banks or government authorities, instead using a decentralized system to record transactions and issue new units which all makes it nearly impossible to counterfeit or double-spend. Read on to find out the basics of cryptocurrencies.

The basics: What is a cryptocurrency?

Even though you may see pictures of crypto coins like the ones above a cryptocurrency does not have any physical form. Instead, it’s a type of digital currency that uses cryptography (encoded communications) to secure and verify transactions and control the creation of new units. It is based on a decentralised technology called blockchain, which is essentially a public digital ledger that records all cryptocurrency transactions in chronological order.

Eh...What does decentralised mean?

The decentralized nature of these currencies means that they are not subject to government or institutional control, making them immune to inflation and manipulation. There is no central bank (like say the Bank of England), instead, transactions are verified and recorded by network participants, ensuring that the integrity of the currency is maintained.

Ok, I get that, but what is a Blockchain?

A blockchain is a type of digital ledger that records transactions in a secure and tamper-proof way. It consists of a network of computers that work together to validate and record transactions in blocks, which are linked together in a chronological chain, hence the name "blockchain."

Each block in the chain contains a unique code called a hash, as well as the hash of the previous block, which makes it virtually impossible to tamper with past transactions. The network participants, or nodes, work together to verify and validate new transactions before they are added to the blockchain.

Because of its decentralized and transparent nature, the blockchain technology is being used in a variety of applications beyond cryptocurrencies, such as supply chain management, voting systems, and identity verification.

In a blockchain, every participant has a copy of the ledger, which means that there is no central authority controlling the network. Instead, transactions are verified by network nodes through cryptography and recorded in blocks that are linked together, forming the blockchain.

I see the word ledger what is that?

A crypto ledger, also known as a blockchain ledger, is a digital ledger that records all transactions of a particular cryptocurrency.

A ledger is basically a record-keeping system that keeps track of all transactions (buys and sells) made within the network. In the case of cryptocurrencies, the ledger is maintained by a distributed network of nodes or computers that work together to validate and record transactions in a secure and tamper-proof way.

Each transaction on the crypto ledger is verified through an encoding process called cryptography, which ensures the integrity and authenticity of the transaction. Once verified, the transaction is recorded on the ledger in a block, which is then linked to the previous block in the chain, creating a chain of blocks or "blockchain".

The crypto ledger is decentralized, meaning that it is not controlled by a single entity or authority. Instead, it is maintained by the network participants, who work together to validate and record transactions.

This makes the crypto ledger highly resistant to fraud and tampering, as each participant in the network has a copy of the ledger and can verify the transactions.

Is this safe to use?

The use of cryptography ensures that transactions are secure and private, as it allows users to send and receive cryptocurrencies without the need for intermediaries such as banks or payment processors. Furthermore, the decentralized nature of cryptocurrencies means that they are not subject to government or institutional control, making them immune to inflation and manipulation.

You may have heard some con names such as the most popular cryptocurrencies like Bitcoin, Ethereum, Ripple, and Litecoin, but there are thousands of other cryptocurrencies in existence. While cryptocurrencies can be used for transactions and as a store of value, they are also often subject to volatility and speculation due to their decentralized nature and lack of regulation.

What is mining?

Crypto mining, is the process of verifying and recording transactions on a blockchain ledger by solving complex mathematical problems using specialized computer hardware.

When a transaction is initiated on a cryptocurrency network, it is verified by a network of computers on the network. These computers compete to solve a mathematical problem that confirms the transaction and adds it to the blockchain ledger.

The first node to solve the problem and validate the transaction is rewarded with a certain amount of cryptocurrency, as an incentive for maintaining the network.

The amount of cryptocurrency a miner can earn through mining depends on the complexity of the problem, the processing power of their hardware, and the number of miners on the network. The process of mining is resource-intensive and can require a significant amount of electricity, making it a costly and energy-intensive process.

So why mine at all, why can’t transactions just be added to the ledger?

Cryptocurrency mining is a necessary process to ensure the security, integrity, and decentralized nature of the cryptocurrency network, basically to make it difficult for any single entity to control the network or manipulate the transaction history. Mining validates transactions by confirming that they are legitimate and have not been altered in any way and as a reward it creates new units of cryptocurrency for miners who successfully validate transactions.

In the case of Bitcoin, for example, the mining process is designed to release a fixed amount of new Bitcoin into circulation at a steady rate. This ensures that the supply of Bitcoin remains limited and predictable, which helps to maintain its value.

Overall, while mining can be a costly and energy-intensive process, but it is a critical component of the cryptocurrency network, providing the security, decentralization, and predictability necessary for the network to function properly.

What about the scams?

Crypto scams are fraudulent schemes or activities in the cryptocurrency market designed to deceive investors and steal their funds. These scams can take many forms, such as fake ICOs (initial coin offerings), Ponzi schemes, fake wallets or exchanges, and phishing attacks.

Here are some tips to help you avoid falling victim to crypto scams:

  • Do your research: Before investing in any cryptocurrency project, make sure to research it thoroughly. Look into the team behind the project, their track record, and the legitimacy of the project. Check if the project has a white paper and if it has been audited by a reputable third party.

  • Be wary of unrealistic promises: If a project or investment opportunity promises high returns with little to no risk, it's likely a scam. Remember, there is no such thing as a risk-free investment, and high returns often come with high risks.

  • Use reputable exchanges and wallets: Use only reputable exchanges and wallets to buy and store your cryptocurrencies. Make sure to check for reviews and security features before choosing an exchange or wallet.

  • Be cautious of unsolicited offers: Be wary of unsolicited emails or messages offering you investment opportunities or free cryptocurrencies. These are often phishing scams designed to steal your personal information and funds.

  • Don't share your private keys: Never share your private keys or seed phrases with anyone and avoid storing them in online services or platforms. This information is used to access your wallet and steal your funds.

  • Stay informed: Stay up to date with the latest news and trends in the cryptocurrency market. This will help you spot potential scams and make informed investment decisions.

Overall, the best way to avoid crypto scams is to be cautious, do your research, and only invest what you can afford to lose. If something seems too good to be true, it probably is.

Why on earth should I get mixed up in this?

As a retail investor, getting involved in cryptocurrencies can provide some potential benefits, but it also comes with risks that you should be aware of.

One potential benefit of investing in cryptocurrencies is the potential for high returns. Cryptocurrencies, such as Bitcoin, have seen significant price increases in the past, which has led to substantial gains for investors. However, it's important to note that cryptocurrencies can also be highly volatile and subject to rapid price fluctuations, so there is also a risk of significant losses.

Another potential benefit of investing in cryptocurrencies is their decentralized and borderless nature. This means that you can invest in cryptocurrencies from anywhere in the world, without the need for intermediaries such as banks or brokers. Additionally, some cryptocurrencies are designed to provide increased privacy and security for users, which can be attractive to some investors.

However, there are also risks associated with investing in cryptocurrencies. These include the volatility of prices, the potential for fraud and scams, and the lack of regulation in some jurisdictions. Additionally, because cryptocurrencies are a relatively new and evolving asset class, there is a lack of historical data and analysis to help inform investment decisions.

Overall, investing in cryptocurrencies can be an attractive option for some retail investors, but it's important to carefully evaluate the potential risks and rewards before getting involved. As with any investment, it's important to do your own research, understand the risks involved, and only invest what you can afford to lose.

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