Are you interested in dipping your toes into the cryptocurrency waters?
While there are big coins like Bitcoin and Ethereum, there are thousands of tiny ones like Cosmos or Celo. Determining which one to get into and how to use them can be confusing.
Don’t worry, because here is your cryptocurrency guide to get you started in the world of decentralization.
What Are Cryptocurrencies?
Cryptocurrencies encompass the world of tokenomics. This means that rather than using fiat currency like the United States Dollar, they’re using their own coin to power their personal economy.
Not all cryptocurrencies are currencies, even if they contain some type of value.
The purpose of most tokens is to secure the network in a process known as Proof of Staking (PoS). PoS means that you’re choosing to hold on to your tokens and validate transactions that happen on the platform. In return for holding and staking, the holder gets paid in fees that occur over the network.
Cryptocurrencies use a blockchain to show and process transactions on their network. When you want to make a transaction, you send your request off to the blockchain, where it is then processed in the order it was received.
What Is Bitcoin?
Bitcoin was the first cryptocurrency to go mainstream. This cryptocurrency is a type of digital currency that can be used to store fiat currency value or buy goods. This is why retailers and merchants are allowing users to buy products with Bitcoin now.
Because major players are starting to recognize Bitcoin as a store of value that can increase greatly compared to the USD, the value has skyrocketed. Bitcoin has a limited supply, with only 21 million ever going to be minted. This is why it has been labeled the best digital currency by certain users.
To see the value of Bitcoin in 2021 and beyond, be sure to check out the link.
What Is Ethereum?
Ethereum (ETH) differs greatly from Bitcoin in terms that it is not a currency. The network instead focuses on building a platform for other users to build their own networks on. These networks are known as “cryptocurrency dapps”.
When you purchase something with fiat currency, you don’t see the transaction fees that happen behind the scene. This is something that companies have to take into account.
When using the Ethereum platform, you’ll see the fees that go into making transactions on the blockchain. These fees are known as gas fees.
Because Ethereum is the main provider for “dapps”, you are able to make your own side token on the Ethereum network. For instance, say you have a token called UNI. This token is labeled as an ERC-20, which means it exists on the Ethereum blockchain and uses that blockchain to process transactions.
What Is a Cryptocurrency Wallet?
A cryptocurrency wallet refers to the place where you store your coins. There are several ways to secure your coins, with each having a different risk associated with it.
The first way to hold your coins is on a centralized exchange. These are exchanges that don’t give you access to your own wallets and instead pull from one central wallet.
A software wallet is a private wallet held on your computer, phone, or other devices. These are more secure than centralized exchanges, as you’re in charge of your own coins, rather than someone else.
A hardware wallet is a private wallet that exists off the internet. No one can hack into your computer and steal your wallet. The only risk you have is if you lose the device itself.
What Is Cryptocurrency Mining?
Cryptocurrency mining refers to the process of using computer components, more often than not GPUs, to secure a network. This process is known as Proof of Work (PoW). Both Bitcoin mining and Ehtereum mining work on this PoW method currently.
Through the PoW method, the networks need a lot of computing power to process the number of transactions that happen. Because of the large number of transactions that are happening on both Bitcoin and Ethereum blockchain, the network gets congested and the fees rise.
When your computing power helps process these transactions, you receive a portion of the fees from the transaction like with PoS. You also receive the block reward of 2 ETH or 6.25 BTC if your computing power or pool is the one that processes the transaction first.
What Is “DeFi”?
Decentralized finance (DeFi) refers to the fact that there isn’t any one place that can control the money be exchanged.
With Bitcoin or Ethereum, there is no limit on how big of a transaction can occur or how much you can withdraw. If you choose to remove $5 million USD, it’ll take a couple of minutes but it gets done without a hassle.
With centralized finance, you have a limit on how much you can withdrawal in one go. Banks don’t need to have all your money on hand and will often require you to visit multiple locations to get to the same amount you’re looking for.
Decentralized finance also allows you to use decentralized exchanges. These exchanges allow you to swap your tokens for other tokens with no hassle or holdup.
If you choose to, you can also provide liquidity to the exchange. In return for providing liquidity, you get rewarded with transaction fees that occur on the network.
Think of it as if you were providing money to a savings account or CD for a bank to use.
Use This Cryptocurrency Guide to Get Started
Now that you have this cryptocurrency guide to getting started, you can start the process of getting involved in the crypto space. One of the main things to remember is that cryptocurrency is treated as an asset. Make sure you understand how taxes work before diving in.
If you want to learn more about cryptocurrency and what it means for the future, be sure to check out the rest of the blog. Know someone interested in Bitcoin? Share this article with them so they understand what they’re getting into.