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What is Cryptocurrency? A Beginner's Guide

19 minutes
Beginner
Cristian Cochintu
Cristian Cochintu
12 March 2024
Crypto is transforming the financial world as we know it and can deliver financial services for the unbanked population. What is cryptocurrency, and how does it work?

Bitcoin and other new cryptocurrencies are now impossible to ignore. They have evolved from being a joke to viable investments. If your work is even remotely tied to emerging technologies or you simply use the internet daily, you had heard about cryptocurrency before.  

Cryptocurrency will affect the way we live, work, act online, and make financial transactions. It is a brand-new world of trustless systems that is welcoming us all. And it is all driven by cryptocurrency and the technology it brings along – blockchain technology. Are you in?

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What is Cryptocurrency?

Cryptocurrency is a digital payment platform that eliminates the need to carry physical money. It exists only in digital form, and although people mainly use it for online transactions, you can make some physical purchases. Unlike traditional money printed only by the government, several companies sell cryptocurrency.    

Cryptocurrency is commonly referred to as crypto because it uses cryptography, making it almost impossible to counterfeit or double-spend. This makes them invulnerable to government manipulation or interference. Cryptocurrencies are fungible, meaning the value remains the same when bought, sold, or traded.

Owning cryptocurrency does not involve any physical or tangible items. While you can hold traditional currency in a bank or financial institution, you store cryptocurrencies in a digital wallet. Investors are free to use it however they want, store it, or transfer it to another wallet without relying on a third party, as is the case within the traditional banking system. However, while banks ensure money kept in bank accounts against loss, crypto has no recourse in the event of a loss.  

Bitcoin is the world’s first widely accepted form of cryptocurrency. Bitcoin is so popular, there was a time when its name was synonymous with cryptocurrency. But potential investors need to know bitcoins have become very expensive. In 2021, the cost of one Bitcoin was $68,000 and during mid-2023 is trading at around $30.000. But the good news is, you don’t always have to invest in an entire coin, you can buy or trade smaller fractions of it. 

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Understanding Cryptocurrency: The Basics

Cryptocurrencies were designed to function without the need for a central authority. Therefore, cryptocurrency benefits from this fast and invulnerable system. The main benefits that attract inexperienced users and investors to invest in cryptocurrencies are:  

  • Cryptography is used to secure financial data: That’s why many refer to cryptocurrencies as simply “crypto". Cryptography is a technique for securing information and communications, and for that, it uses public key cryptography. In cryptocurrency, the public key can be shared with others to send you cryptocurrency. Investors who buy the digital asset will also possess a private key, which cannot be shared with anyone. The private key is like a password. It protects your crypto assets and is used to sign transactions you initiate to other parties or recover cryptocurrency wallets from damaged devices.  
  • Cryptocurrency transactions are transparent: Every crypto transaction is timestamped and recorded on the blockchain, creating a public chronology or provenance of ownership or custody. This ledger is available to anyone and can be used to verify transactions. Also, the code used in these protocols is open-source and freely available for review and modification.  
  • The cryptocurrency system provides incentives to supporters: Cryptocurrency protocols are designed to ensure that all users act to maintain the system's integrity. Bitcoin miners, for example, must use computer power in order to verify transactions. Newly minted coins are distributed automatically to miners after they verify a block transaction. This is in order to compensate for the hard work that miners put in. This incentivizes miners to verify transactions and continue to work hard.
  • Many people are treating crypto as investment tools: Many people are treating crypto as an investment. For many buyers, the main appeal of crypto is as a form of investment in an innovative digital asset. Some crypto assets appeal to investors based on the ethos of the developers and the use case for the token itself, while other investors may simply be speculating on the price history and volatility of the crypto. While some trade cryptocurrency for short-term speculation, for others, owning cryptos can be viewed as a kind of diversification away from traditional assets, like shares, bonds, or real estate.

How Cryptocurrency Works?

The cryptocurrency market is a decentralized digital currency network, which means that it operates through a system of peer-to-peer transaction checks, rather than a central server. When cryptocurrencies are bought and sold, the transactions are added to the blockchain – a shared digital ledger that records data – through a process called ‘mining’.

What is Blockchain?

Inevitably, a cryptocurrency relies on a distributed network that uses blockchain technology, which is often regarded as a distributed ledger. This network is represented by a wide network of computers, which verifies and keeps track of all cryptocurrency transactions. The transactions in cryptocurrency protocols are combined in blocks and linked together to create a historical record that records everything that has happened on the blockchain.

Depending on the type of blockchain of each cryptocurrency project, new crypto coins can be created as rewards for verifying transactions and adding them to new blocks. Some projects have their coins pre-mined, meaning they are all created all at once.

What is Crypto mining

Some cryptocurrencies depend on the mining process to exist. However, many view crypto mining as simply a way to create new coins, which isn’t always the case. Cryptocurrency mining involves the validation of cryptocurrency transactions on a blockchain network, and then adding them to a distributed blockchain. However, only cryptocurrencies that use the proof-of-work (PoW) consensus mechanism can be mined.

Crypto mining also prevents the double-spending of digital currency on a network. Similarly to physical currencies, cryptocurrency can be spent only once at a time. This means that the digital ledger needs to be updated after every transaction. The main issue with digital currencies is that they are easy to manipulate. That’s why cryptos use a distributed ledger to allow only verified miners to add transactions on the digital ledger. This adds an extra responsibility to miners for securing the network against double-spending.

What is Crypto staking

Staking, like many other concepts in cryptocurrencies, can be either a complex or a simple concept, depending on how many layers of comprehension you want to reach. The main takeaway for many cryptocurrency users is understanding that you can "stake" some of your cryptocurrency holdings to receive rewards over time, provided that the cryptocurrency you possess permits it (current options include Ethereum, Tezos, Cosmos, Solana, Cardano, and others).

Your cryptocurrency generates rewards while being staked because the blockchain uses it. Staking-enabled cryptocurrencies use a "consensus mechanism" called Proof of Stake to guarantee that all transactions are secure and confirmed without the involvement of a bank or payment processor. If you decide to stake your cryptocurrency, it joins that operation.

What is crypto trading

Perhaps the easiest way to access the crypto market is by trading, much as you would trade traditional securities like stocks, commodities, bonds, or ETFs. You can open an account on a crypto exchange (see below) or with a traditional online broker; fund the account by connecting your bank or using a wire transfer of cash (different exchanges have different rules); and begin trading the crypto of your choice.

You can either buy and own coins or just speculate on the price movement via CFDs (contracts for difference) without taking ownership of any underlying coins. When trading derivatives, you can go long (‘buy’) if you think a cryptocurrency will rise in value or go short (‘sell’) if you think it will fall. 
As with traditional forms of investing, it’s best to have a strategy. 

What is a crypto exchange

Cryptocurrency exchanges are platforms for trading cryptocurrency against traditional currencies. When you buy cryptocurrencies on an exchange, you buy the coins themselves. You’ll need to create an exchange account, put up the full value of the asset to open a position, and store the cryptocurrency tokens in your own wallet until you’re ready to sell.  

There are two types of cryptocurrency exchanges – centralized and decentralized. CEXs resemble traditional brokerage platforms. DEXs don’t offer the option to create an account but instead require users to connect their crypto wallet to enable any type of transaction. The security of the wallet is up to its owner.

What is a crypto wallet 

Cryptocurrency is usually stored in crypto wallets. These are either physical devices or software that securely store your private keys. Some exchanges offer wallet services that make it simple to store your cryptocurrency directly on the platform. However, not all cryptocurrency exchanges or brokerages provide wallet services.  

The main two types of cryptocurrency wallets can be defined as "hot wallets" or "cold wallets". A hot wallet is an online software that protects the private keys of your digital assets. The cold wallet is often called a hardware wallet and uses offline electronic devices to secure your private keys. Unlike hot wallets, cold wallets are more likely to charge fees. You do not need a wallet if you are trading cryptocurrencies via a CFD account, only when you are buying them.  

 

What are the types of Cryptocurrency?

Although some people use the terms crypto, coins, and tokens interchangeably, they are not the same things. To understand more about cryptocurrency, it’s important to understand how these terms differ from one another.

Cryptocurrencies generally fall into one of two categories:

Coins

Can include Bitcoin and altcoins (all cryptocurrencies other than Bitcoin) that run on their own blockchain and can be mined

Tokens

Programmable assets that live within the blockchain (using smart contracts) of a given platform

What Are Crypto Coins?

Crypto coins are strings of computer code that can represent an asset, concept, or project — whether tangible, virtual, or digital — intended for various uses and with varying valuations. Originally, these coins were meant to function as a type of currency. Because they are built on blockchain tech, some cryptos can offer solutions to long-standing problems in almost every sector of our economy.

Here’s a quick rundown of some of the most popular coins.  

  • Altcoins: The first alternatives to the original crypto—later termed altcoins —didn’t appear on the scene until 2011, with the likes of Litecoin (LTC) and Ripple (XRP). It wasn’t until Ethereum (ETH) launched that altcoin gained popularity.
  • Stablecoins: cryptocurrency with a value pegged to another asset’s price. If functioning correctly, a stablecoin pegged to the U.S. dollar should always be valued at $1. Tether (USDT), which is pegged to the U.S. dollar, is probably the most recognizable stablecoin
  • Meme coins: crypto that gained popularity and traction through memes and social media. The term is also used somewhat jokingly for coins that blow up on social media. The original meme coin that started it all is Dogecoin (DOGE). 

What Are Crypto Tokens?

Tokens are usually created and distributed through an initial coin offering (ICO), much like an initial public offering (IPO) for stock.  While crypto coins mimic traditional currencies, crypto tokens are more like assets or even deeds.

They can be represented as:

  • Value tokens. These types of tokens are an object of value, such as a digital assets like art or music in the form of an NFT.
  • Utility tokens. These are tokens that help provide a service. They give users the right to perform actions on a blockchain network or a decentralized application.
  • Security tokens. This type of token represents ownership of an asset. Companies may use security tokens to raise capital by selling equity tokens. Since they represent ownership of a financial security, these assets are regulated by the Securities and Exchange Commission (SEC). They are different from NFTs and value tokens because they are fungible. 

What are the most popular Cryptocurrencies? 

As of early 2023, there were over 20,000 cryptos, many of which are no longer traded, and will never grow a significant market capitalization (cap), a term used to measure the size of a certain crypto and its popularity, because they don’t have a unique selling point. Of all the cryptocurrencies out there, there are probably a few you’ve heard of.

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Bitcoin (BTC) is the clear leader in the crypto sector. To this day, we don’t know its true inventor. All we know is the pseudonym, Satoshi Nakamoto, used to release Bitcoin’s whitepaper and the nickname on BitcoinTalk, the first Bitcoin forum. With a few exceptions, the person running that account completely vanished. The one million Bitcoin mined by Nakamoto remains untouched to this day.  

Bitcoin Price Predictions 2023, 2025, 2030

Ethereum (ETH) is the second cryptocurrency based on its market capitalization after Bitcoin. The Ethereum network is a decentralized computing platform that can run a wide variety of applications due to its smart contract feature. The Ethereum blockchain can be used for everything, from financial tools to games and complex databases. Its future potential is limited only by the imagination of developers. The Ethereum Foundation states that Ethereum is more than just a payment system. It is a marketplace for financial services, apps, and games that won't steal or censor your data. Ethereum was the first network to step into the universe of decentralized finance (DeFi).  

Ethereum Price Prediction 2023, 2025, 2030 

Using the examples of Bitcoin and Ethereum, many other new cryptocurrencies were created, with specific purposes, such as aiding international bank transfers, which used to be slow and expensive.  

Cardano (ADA) is the native coin of the Cardano network, which was built as a competitor to Ethereum. Cardano's primary applications are identity management and traceability. This application can streamline and simplify processes that need data from multiple sources. This application can be used for tracking and auditing the manufacturing process of a product, from its origin to its finished goods, and potentially eliminating counterfeit goods. 

Cardano Price Prediction 2022, 2025, 2030  

Stellar Lumen (XLM), powers the Stellar payment network, which aims to unite the world’s financial infrastructure, connecting banks, payment systems, and individuals with near-instant and secure transfers.  

Stellar Lumen Price Prediction 2023, 2025, 2030 

Dogecoin (DOGE) started as a joke and a copy of Bitcoin. It is commonly referred to as a meme coin but has grown to be among the most valuable cryptocurrencies.  

Dogecoin Price Prediction 2023, 2025, 2030 

Ripple (XRP) is a cryptocurrency created to power the Ripple money transfer network, launched in 2012. The network aims to help traditional bank users to avoid the long wait times associated with bank transfers, especially international transfers of funds. 

Ripple Price Prediction 2023, 2025, 2030 

Litecoin (LTC) is a cryptocurrency created using the same Bitcoin code and shares many of its features, with some improvements. It is considered the first altcoin ever created, and it was a strong competitor to Bitcoin, but it lost some of its popularity as time went by.  

Litecoin Price Prediction 2023, 2025, 2030 

Tron (TRX), or Tronix, is the native currency of the Tron network, created in 2017. The network aims to become a decentralized global platform for digital content creators and consumers. The creators will have the chance to earn from their published content and not rely on social media giants to act as intermediaries.  

Tron Price Prediction 2022, 2025, 2030 

Polkadot (DOT) is the cryptocurrency powering the Polkadot protocol. The network uses multi-chain technology and aims to address the scalability, interoperability, and governance issues of other existing blockchain networks.  

Polkadot Price Prediction 2023, 2025, 2030 

Chainlink (LINK) is the native coin of the Chainlink decentralized oracle network. The protocol is bound to play one important role in implementing real-world blockchain applications. Chainlink uses oracles to translate real-life off-chain data to the network’s smart contracts.  

Chainlink prediction 2022, 2025, 2030 

Other cryptocurrencies worth mentioning and researching for potential future investments are AAVE, NEO, Tezos (XTZ), Monero (XMR), DASH, Compound (COMP), NEO, and Yearn.Finance (YFI). 


How to Invest in Cryptocurrency? 

In the last few years, more investors got interested in the cryptocurrency market, especially during bullish times. However, the cryptocurrency space can be intimidating for those new to cryptocurrency investing. Individuals can buy and hold cryptocurrency through an exchange or trade cryptocurrency CFDs through online brokers like CAPEX 

These are the most common ways to add crypto exposure to your portfolio, but when it comes to investing in cryptocurrency, you have a few different options: 

  • Buy cryptocurrency directly: Investors can buy and hold cryptocurrency, using any of the available crypto exchanges. Exchanges bring their own steep learning curve as you’ll need to get to grips with the technology involved and learn how to make sense of the data. Many exchanges also have limits on how much you can deposit, while accounts can be very expensive to maintain. Learn how to Buy Cryptocurrencies >>
  • Trade cryptocurrency CFDs: With CFDs (Contracts for difference), investors can speculate on the underlying asset's price movement, in this case, a specific cryptocurrency. CFDs are leveraged products, which means that you will not need to commit to the full value of the position. But bear in mind that leverage in trading can increase both your profits and your losses. Learn how to Trade Cryptocurrencies >> 
  • Crypto stocks: If you do not want a direct exposure to cryptos, the easiest way to invest in cryptocurrency is to buy shares in a company with a financial stake or future in digital tokens and blockchain technology. Your options include cryptocurrency mining companies like RIOT Blockchain (RIOT), Coinbase (COIN), Square (SQ), PayPal (PYPL), Nvidia (NVDA), Tesla (TSLA), or MicroStrategy Incorporated (MSTR). Learn how to invest in crypto stocks >>
  • Crypto and blockchain-focused funds: If you do not want to choose among individual assets, then you can decide to invest in a thematic fund instead. Blockchain ETFs are exchange-traded funds that own the stocks of companies that use or develop blockchain technology. They tend to invest in a wider variety of assets than Bitcoin ETFs or crypto ETFs, which focus more narrowly on tracking the price of individual cryptocurrencies. Learn how to invest in crypto ETFs >>

Advantages and disadvantages of cryptocurrency  

The cryptocurrency concept inspires passionate opinions among investors and followers all over the world. Here are a few reasons why some individuals think it is a game-changing technology, while others think it's a passing fad. Some advantages and disadvantages of cryptocurrencies are as follows.

The advantages of cryptocurrency explained 

  • Security. Cryptocurrency transactions are anonymous, and it’s not tied to someone’s identity. It’s more secure to transact money over the internet using cryptocurrency than fiat money. That’s because hackers can steal your cryptocurrency only if they have access to the wallet's private keys.  
  • Speed. Cryptocurrency transactions may only take a few minutes to be confirmed. After the transaction is confirmed, the recipient party can spend the funds. Traditional finance takes around a day to clear a transfer, and international transfers can take up to a few days, and they might be suspended during public holidays. 
  • Lower fees. The transaction costs for cryptocurrency are significantly lower than those in traditional financial institutions. Cryptocurrency storage is free, while many banks charge a monthly fee for deposits. International money transfers are cheaper when using cryptocurrency. 
  • There are no barriers to getting started. Cryptocurrency users don't need a valid ID to use cryptocurrency. No credit checks are required.

Disadvantages of cryptocurrency explained  

  • High volatility. Cryptocurrencies have volatile prices and this makes it difficult to use them as payment. Some cryptos can fluctuate around 10%-50% per day. 
  • No insurance. Cryptocurrency doesn’t benefit from the insurance that the financial authorities offer to traditional banks and account holders. You cannot recover your money if you lose your money to fraud or any internet scam.  
  • Transactions are irreversible. Accidental payments cannot be reverted, and senders can lose their money. All blockchain transactions are final. 
  • It is easy to lose access. Investors can lose their wallet private keys and then they lose access to the funds. Some investors simply forget the password for their wallets. To sign transactions and upload them to the blockchain, you will need your private key. It’s recommended to keep the wallet’s private keys written on paper and stored in multiple secret locations. 

How to get started with cryptocurrency 

How do you buy cryptocurrency online? With the help of the internet, anything is possible online and only requires a few steps. You will need to choose the right platform for you, fund your account, and place an order to buy or sell cryptocurrency.  

Step 1. Choose your platform 

What type of investment do you want to make? If you're going to buy and hold cryptocurrency for a long time, you can choose a cryptocurrency exchange. If you're going to speculate on the price movement of cryptocurrencies, you can choose an online broker.  

Owning crypto requires investors to have a crypto wallet, either within the exchange or a private wallet. The CFDs (contracts for difference) are stored in your account and are far more liquid when trading crypto. Unlike cryptocurrency exchanges, online CFDs brokers like CAPEX are regulated by financial authorities offering a higher level of data and funds protection.    

Step 2. Fund your account 

After choosing the right type of cryptocurrency trading platform for you, you will need to fund the account. In the case of cryptocurrency exchanges, you can use credit or debit cards to buy cryptocurrency directly from the platform.  

However, some credit card companies and banks don’t allow cryptocurrency transactions. Other limitations of the cryptocurrency exchanges include transaction fees, withdrawal fees, and imposing minimum amounts for funding and withdrawing funds. Online brokers offer multiple payment methods, including wire transfers, e-Wallet solutions, and the most popular money transfer options (View available payment methods in your country).  

Step 3. Place an order 

Investors can place buying and selling orders on the cryptocurrency exchange or the broker’s account. Most of these also have a mobile crypto app 

For instance, on the broker’s account, you can open a buy position (for the available cryptocurrencies) by simply selecting “Buy”. 

You can select the type of order you want to place as well as the amount you want to buy. After reviewing all the details, simply click on “Place order”. Note that more experienced investors can also use more Stop Loss and Take Profit options.  The same process applies to "sell" orders.  

 

Is Cryptocurrency the Future of Finance?  

While the total number of people on the planet is going to surpass 8 billion by 2032, it is estimated that around 2 billion people don't have a bank account. Those people are not part of the global economic system and cannot access basic banking services such as credit or debit cards, lending, or borrowing money. They are strangers to financial investments, and things will not change unless there is a simpler way to provide them access to the financial world.  

Luckily, thanks to blockchain technology, starting in the cryptocurrency space only requires a mobile device and an internet connection.  

Blockchain technology and cryptocurrency have many financial applications. New projects are emerging almost every day, and they all bring new and innovative ways to use cases in the blockchain space.  

The world's financial institutions are well aware of the threat posed by these big blockchain networks and are all researching ways to be part of this trend. The most important central banks in the world have already started deploying pilot programs to launch their own digital currencies. Governments are researching how these new financial instruments can be used and working to issue regulations that will protect the users.  

Whatever the future of finance is, it will surely include blockchain technology and some form of digital currency that is easy to use and accessible to the masses.  

Final words about Cryptocurrency  

When talking about cryptocurrency as an investment, each investor must try to understand the project and its utility for those directly using the coin. While cryptocurrencies might be a good fit in a diverse portfolio, it is unlikely that you will want to put all of your money into cryptocurrency. Because cryptocurrencies are still new, it is difficult to understand their risks. Most technical analyses rely on poor and non-existing price history. Nobody can forecast what will happen with the price of a digital asset in the future. Simply put, there is not enough historical data to predict how cryptocurrencies’ prices will fluctuate, especially when trying to correlate them with the price of other assets. This makes it difficult to create a balanced portfolio that maximizes returns while minimizing risk. 

The growing trend of cryptocurrency projects cannot be ignored, and many investors, including banks and CEOs of companies, believe that cryptocurrency should be part of everyone's portfolio. Before investing in cryptocurrency, it is important to understand what cryptocurrency is and how it works. 

Free Resources  

Before you get started with cryptocurrency, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free crypto trading courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more-informed investment decisions.  

Our demo account is a suitable place for you to learn more about derivatives trading, and you’ll be able to get an intimate understanding of how trading and investing work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged securities. 

FAQs about Cryptocurrencies

This information prepared by capex.com/en is not an offer or a solicitation for the purpose of purchase or sale of any financial products referred to herein or to enter into any legal relations, nor an advice or a recommendation with respect to such financial products.This information is prepared for general circulation. It does not have regard to the specific investment objectives, financial situation or the particular needs of any recipient.You should independently evaluate each financial product and consider the suitability of such a financial product, by taking into account your specific investment objectives, financial situation or particular needs, and by consulting an independent financial adviser as needed, before dealing in any financial products mentioned in this document.This information may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Company’s prior written consent.Past performance is not always indicative of likely or future performance. Any views or opinions presented are solely those of the author and do not necessarily represent those of capex.com/en 

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Cristian Cochintu
Cristian Cochintu
Financial Writer

Cristian Cochintu writes about trading and investing for CAPEX.com. Cristian has more than 15 years of brokerage, freelance, and in-house experience writing for financial institutions and coaching financial writers.