What Is Cryptocurrency? The Complete Beginner’s Guide

If you are wondering how someone you know suddenly went from being broke to rich overnight, the chances are that they got rich through cryptocurrency. Yes, you heard that right. What was initially dismissed as just a passing trend has evolved into a full-blown financial revolution. Cryptocurrencies change the way how we handle money by cutting out middlemen like banks and financial institutions and putting power back into the hands of the people. In this guide, we’ll walk you through what is crypto, how it works, the pros and cons, and how to get started safely.

What is Cryptocurrency?

Cryptocurrency, or crypto for short, is a digital currency that is secured using cryptography, making it nearly impossible to double-spend or fake transactions. It uses a peer-to-peer system that allows two people to transfer funds directly to each other anywhere without the need for middlemen like banks or institutions. A key characteristic of cryptocurrencies is that they are decentralized, which means they are not controlled by any central authority.   

Brief History of Cryptocurrency

Although crypto concepts existed before the 21st century, it was Bitcoin’s launch that first gained widespread attention. Satoshi Nakamoto introduced the whitepaper in 2008, and he is called the founder of Bitcoin. Whether Satoshi is an individual or a group still remains a mystery. 

BTC was officially launched in January of 2009, and Satoshi became the first to mine the coin. According to various reports, Satoshi mined nearly 1 million BTC before going dark in 2010.   

In 2024, the CEO of the analysis platform CryptoQuant, Ki Young Ju, stated in an X post that Satoshi never sold his Bitcoin, ever. This sparked widespread discussion around the real identity of Satoshi, which spread like a wildfire. Although there have been many attempts to find the mysterious creator of Bitcoin and even a few individuals were identified as potential targets, these claims remain unproven. In a recent X post, Coinbase Director Conor Grogan stated that Satoshi’s wealth exceeded $100B, making him wealthier than Bill Gates on paper at Bitcoin’s peak. 

How Does Cryptocurrency Work?

Cryptocurrencies use blockchain, a type of digital ledger technology, and the transactions are recorded on a public ledger. Each transaction is organized into a block, which is validated by network participants using consensus mechanisms like PoW and PoS. In the Proof of Work (PoW) consensus mechanism, miners compete to solve the mathematical problem to find the correct hash, and in the Proof of Stake (PoS) consensus mechanism, validators are chosen based on their staked amount in the network. Only if the block is correct, it will be added to the blockchain, and once added, it becomes immutable. For verifying the block and adding it to the blockchain, miners or validators are rewarded.

Examples of Cryptocurrencies

Bitcoin

As the first cryptocurrency, Bitcoin holds a special position as the original and largest crypto. Over the years, BTC has grown from a coin worth a few dollars to surpassing the milestone of $100K. The main reasons behind the growth are the increasing adoption of Bitcoin and the launch of Spot Bitcoin ETFs. 

Ethereum 

Ethereum is the leader among altcoins and has played a fundamental role in the decentralized finance (DeFi) landscape with its smart contract functionality. Most of the DeFi protocols are built based on Ethereum due to its large developer community, security, and growing ecosystem. Similar to Bitcoin, Ethereum also saw Spot ETH ETFs launch, and on its first day, it recorded $1 billion in trading volume and $107 million in inflows. 

Cryptocurrency Vs Traditional Currency

Cryptocurrencies are different from traditional currencies, where fiat currencies are controlled by governments and central banks, whereas cryptocurrencies are decentralized, meaning no one truly controls them. Fiat transactions typically go through banks, recording who sent what to whom, offering less user privacy. On the other hand, crypto transactions are recorded on a public blockchain where anyone can view the transaction. The perk here is anonymity. Only the address will be made visible, and the identity can never be found. If money stored in a bank account is lost or stolen, banks and financial institutions have mechanisms to recover or reimburse the funds. In contrast, cryptocurrencies are stored in a digital wallet, and if you lose your private keys or lost seed phrase, your funds can never be recovered. 

How to Buy Cryptocurrency?

Select a Platform

There are lots of crypto exchange platforms available in the market, including both centralized and decentralized. The main advantage of choosing a centralized platform is that it has a user-friendly interface, numerous cryptocurrency pairs, customer support, and advanced security measures. On the other hand, decentralized platforms offer enhanced privacy and complete control over the funds. Based on your personal preference, you can choose a platform. You need to consider if the platform holds the crypto pairs you need, its fees, and its security features.     

Fund The Account

Once the platform is selected, the next step is to fund the account. Most centralized exchanges (CEXs) require investors to complete KYC (Know Your Customer) and AML (Anti-Money Laundering) verification before deposits can be made. Once the verification is over, investors can deposit fiat currencies (USD, EUR, etc.) and use them to buy stablecoins like USDT/USDC or major cryptos like BTC or ETH. Some exchanges also support the purchase of digital assets through debit or credit cards. 

In the case of decentralized exchanges (DEXs), the method of funding an account works differently. Different from centralized exchanges where investors deposit fiat currencies, in DEX, investors need to connect a crypto wallet, such as Trust Wallet, Ledger, or MetaMask, to the platform, allowing direct peer-to-peer swaps. Once connected, they can freely trade cryptocurrencies without any intermediaries. One thing to note is that DEXs do not support fiat deposits, and investors need to transfer assets from another wallet or exchange. 

Placing An Order

After the account is funded, the next step is to place an order to buy or sell the asset. Based on the type of exchange, the process varies. On centralized exchanges, go to the trending section and choose the trading pair that you want, like BTC/USDT or ETH/USDT. Then, select the order type (market order, limit order, stop loss order, take profit order) and enter the amount of crypto to buy or sell. Each exchange charges a trading fee, and depending on factors like payment method and trading volume, the fees can be between 0.1% and 0.5% per trade. Once the trading fee is checked, review and confirm the order.   

Unlike CEXs that use order books, DEXs rely on liquidity pools to swap tokens directly. Once the wallet is connected to the DEX platform, investors can choose the token to swap, and to avoid any slippage, they need to check the slippage tolerance for smooth execution. When executing the transaction, ensure you have enough native tokens (like ETH on Ethereum) in your wallet to cover network transaction fees (gas fees). In your wallet, approve the transaction, and the tokens will be swapped.   

Where to Store Cryptocurrencies?

After buying cryptocurrencies, the next step is deciding where to store them. Unlike traditional currency, which can be held in a bank, cryptocurrencies require a crypto wallet. These crypto wallets can hold cryptocurrencies and allow investors to send, receive, and manage crypto. They are divided into two types:

• Hot Wallets: They are connected to the internet and are ideal for quick or frequent trading. Furthermore, they are easy to use and give fast access to crypto assets. Examples of Hot wallets include Trust Wallet and MetaMask. One thing to note is that security relies on protecting your private keys or secret phrase; losing them usually means losing your funds..
• Cold Wallets: They are offline storage solutions, making them safe from online threats. These wallets are ideal for long-term storage or for those holding large amounts of crypto. Examples of cold wallets include Ledger and Trezor. If the physical device, such as a USB drive or external hard disk, is damaged or lost, consider the assets to be gone.     

Is Cryptocurrency Legal?

Some countries regulate and support cryptocurrencies, while others restrict or ban them. So, it really depends on where you live. 

In the United States, cryptocurrencies are generally considered legal, but they exist in a complex regulatory landscape. The IRS treats crypto as property for tax purposes, while the Securities and Exchange Commission (SEC) classifies certain cryptocurrencies as securities. One of the most high-profile legal battles was the SEC vs. Ripple case. The SEC claimed XRP should be classified as a security, but Judge Analisa Torres later ruled that XRP is not a security. Meanwhile, SEC Commissioner Hester Peirce stated that most memecoins likely fall outside of the SEC’s jurisdiction, offering some clarity to this unpredictable market.  

The United Kingdom recently introduced the Property Bill, which legally classifies Bitcoin and NFTs as personal property, offering better legal protection and clarity for investors and innovators. In Europe, Switzerland has become a beacon for blockchain innovation thanks to its clear and favorable crypto regulations, earning it the nickname “Crypto Valley.” 

Russia, too, has seen rising interest in cryptocurrencies. In response, the government passed two major bills to define and regulate the use of digital assets, though it still restricts their use as legal tender. 

On the other hand, some countries have taken a hard stance against crypto. China has imposed a complete ban on cryptocurrencies, citing concerns about financial crimes and risks to the traditional financial system. Still, reports suggest that Chinese investors continue to hold a significant amount of Bitcoin.  

Is Cryptocurrency Safe to Invest in?

The technology is not perfect, and it comes with risks. However, the gains and losses of cryptocurrency tend to occur much faster than with other investments. With cryptocurrency, it’s either a boom or bust. Smart traders and investors have built fortunes thanks to the volatility of digital currencies. Likewise, there are those who lost their fortunes due to the same volatility. Investors need to be cautious and do thorough research before investing in any cryptocurrency.  

Pros and Cons of Cryptocurrencies

Pros

• Privacy: Privacy and Security are the core design of cryptocurrencies. Transactions are recorded on a blockchain and secured through complex mathematical algorithms. To validate a transaction and add it to a block, miners or validators must solve the complex puzzle. This makes crypto more secure than traditional systems. 
• Decentralization: One of the greatest advantage of crypto is decentralization. Cryptocurrencies operate based on peer-to-peer networks, reducing the risk of manipulation or monopoly by a single authority.   
• Easy Transfer: Cryptocurrencies are one of the best ways to send money across borders as it only takes minutes to achieve the desired result. The same process through banks would not only result in a waste of time, but investors also need to go through a lot of hassle. The only requirement to send money across borders is to have internet access and a crypto wallet.
• Low Fees: Cryptocurrencies offer low trading fees when compared to traditional banking services. This makes crypto more useful for micropayments or international money transfers. 

Cons

• No Cancellations or Refunds: Once a crypto transaction is confirmed, it’s permanent and irreversible. So, in case you send funds to a wrong address or fall victim to a scam, there’s no way to get the money back. 
• Volatility: The crypto market is known for its volatile nature, where in hours or sometimes even minutes, the market can jump from low to high and high to low. While this creates an opportunity for high returns, there’s also the possibility of losing money.   
• Possible Hacks: While it is extremely hard or even impossible to attack a blockchain successfully, the same cannot be said for users and crypto exchanges. Hackers could try hacking your account through malware, phishing attacks, or other methods. If they succeed, the funds stored in the wallet will be lost with no way to recover them. 
• Regulatory Uncertainty: In various countries, the rules and regulations regarding cryptocurrencies are in the process of evolving. There is no way to know if crypto will be adopted and, if it is, then what might be the restrictions surrounding it. 

Conclusion

Cryptocurrency has evolved from an obscure concept into a global financial phenomenon. With its potential for decentralization, pseudonymity, and innovation, it’s reshaping the way we think about money and financial systems. However, like any new technology, it comes with its own set of risks, from volatility to regulatory uncertainty. Whether you’re an investor, developer, or just curious about the future of finance, it’s important to approach crypto with careful research. As global adoption continues to grow, understanding crypto today could be the key to thriving in the financial landscape of tomorrow.

Reference Links

https://www.investopedia.com/terms/c/cryptocurrency.asp

https://www.kaspersky.com/resource-center/definitions/what-is-cryptocurrency

https://www.coursera.org/articles/how-does-cryptocurrency-work

https://groww.in/p/cryptocurrency

https://www.british-business-bank.co.uk/business-guidance/guidance-articles/finance/what-is-cryptocurrency-and-blockchain-technology

https://www.schwab.com/learn/story/cryptocurrencies-what-are-they