Understanding Crypto Currency
It’s like a different language, isn’t it……………all this Crypto talk? Maybe that’s why they call it Crypto……. because it’s all so very “cryptic”. When you’re getting into Crypto you start hearing terms and phrases you’ve either never heard before of ones that just sound like someone is trying to come also all fancy with their big long words that do nothing other than confuse the life out of you. Well I’m here to help. I want to take your hand and walk you through the minefield of the confusion and hopefully by the end of this post you’ll have a far greater understanding of what all those fancy words actually mean.
Bitcoin
Ok so this isn’t a long fancy word but it can cause some to scratch their heads. Let’s start with the one thing we have all heard of – BITCOIN.
So far you and I are well versed with traditional forms of money – cold hard cash that we can see and hold in our hands. But have you ever noticed that EVERY single paper note in the world (regardless of currency) has a serial number on it? Take a look – it’s actually hard to miss. Now what if EVERY single piece of paper money was logged on a computer database somewhere………….and we were no longer able to withdraw physical money from the bank. All we could do is transfer it on-line with each transaction being recorded digitally. Well that’s how I think about digital currencies. There are over 10,000 digital currencies out there, with Bitcoin the most popular…………..probably because it’s how it all started.
Ok so that’s all well and good……………….but I still don’t get it. Why is crypto any different from traditional forms of money that have been around for hundreds of years? Why fix what isn’t broke? Well that’s a good question………………………but what if I told you that A LOT of people think the current structure IS broken? You see, Banks hold all our money and are what we call “centralised” institutions that are controlled by a few powerful entities. This can lead to a lack of transparency and accountability, and make it easier for fraud or corruption to occur. However the vast number of Crypto currencies are “decentralised” and operate on a peer-to-peer network, which can provide greater transparency and security.
Decentralisation
In the context of cryptocurrency, decentralisation means that the system operates without a central authority or intermediary, such as a bank or government. Instead, transactions and operations are verified and processed by a network of participants who work together using a shared protocol and rules.
In a decentralised cryptocurrency system, each participant……………so you and I……….often referred to a “node” in this space, has a copy of the same blockchain ledger (we’ll come to this shortly), which contains a record of all transactions that have taken place on the network. When a new transaction is initiated, it is broadcasted to the entire network, and each “node” independently verifies the transaction before adding it to their copy of the blockchain. Don’t worry, this happens without you needing to physically do anything.
This system provides several advantages over traditional centralised systems, such as increased security, transparency, and resistance to censorship or control by a single entity (i.e a Bank or the Government). Because there is no central authority or intermediary controlling the network, there is no single point of failure or vulnerability that could be exploited by attackers or regulators.
Ok……………so far so good……………it’s all starting to come together now. But you mentioned a blockchain ledger earlier. Can you elaborate on this one? Of course!
Blockchain Ledger
So a blockchain ledger may sound confusing…………….but like most things in life it’s only confusing until you find out what it is. A blockchain ledger is like a digital ledger – also known as a record book – that keeps track of all the transactions that happen on the network. A bit like a shop keeper would keep note of everything he sold in a day before computers took over.
Each time someone sends or receives cryptocurrency, it gets recorded in the ledger as a new block. Each block is connected to the one before it and the one after it, forming a chain of blocks – hence the name “blockchain”.
Because the blockchain ledger is distributed across the entire network, every “node” or participant has a copy of the same ledger. This means that transactions can be verified and validated by many different parties, making it difficult for any single participant to cheat or tamper with the system.
This system is designed to be very secure and transparent, as it is very difficult to alter or manipulate the blockchain without the consensus of the network. Additionally, the blockchain is resistant to censorship or control by any single entity, as it is decentralized and operates on a peer-to-peer network.
Peer to Peer Network
Aaa yes……I’ve been waiting for you to explain this one as I have no idea what this is.
Well a Peer to Peer network is a type of network where all “nodes” or participants in the network act as both clients and servers, sharing information directly with each other without the need for a central authority or intermediary (those pesky Banks and Governments).
Often written as P2P………………in a P2P network, each “node” has equal status and functionality and can both receive and transmit data and resources. This allows for transactions to occur directly between individuals without the need for a central authority.
Cryptocurrency Exchanges
Excellent…………….I’m really starting to piece this all together now. Although there are a few more things I’m not clear about. What can you tell me about Cryptocurrency Exchanges?
Well this one is a bit easier as there is a clue in the title. It’s essentially a platform (website) that allows you to exchange cryptocurrency. Think of it like a stock exchange, but instead of buying and selling stocks, people are buying and selling digital currencies. Users can deposit funds into their exchange account and then use those funds to buy different cryptocurrencies, which they can hold as an investment or use for transactions.
Mercedes or Fiat?
I have heard the term “FIAT” currency before and this one REALLY confused me. What is FIAT currency?
Well it has nothing to do with cars. FIAT is essentially what your local currency is. It’s as simple as that. Whatever country you’re in has a currency, typically GBP, USD, EURO etc. You need to exchange your FIAT for crypto as that’s how you buy it in the first place. Once bought you can either buy more using the same method or buy different crypto with the crypto you have. It’s a bit like buying USD with GBP. Once you have your dollars you can use that to buy Yen or Euro or just use your FIAT currency to buy more dollars.
I see……………..that is easy to understand. Just a few more……………….what is a ALT coin?
CTR ALT DELETE
An ALT coin…………….or alternative coin…………..is any crypto that is alternative to Bitcoin. That’s it.
Aaaaaaa right. Good stuff. Last two – I promise. What about Mining and Wallets? What can you tell me about those?
Mining
So Crypto Mining is confusing and not something many of us get involved in. It’s something complex and if nothing else good to know what it is even though it’s highly likely we’ll never actually do it ourselves.
Cryptocurrency mining is the process by which new units of a particular cryptocurrency are created and transactions are verified on the blockchain network.
When a new transaction is initiated, it is broadcasted to the entire network and bundled with other pending transactions into a “block”. Miners then compete to solve a complex mathematical puzzle associated with the block. The first miner to solve the puzzle and validate the transactions in the block is rewarded with newly minted cryptocurrency as well as transaction fees.
Mining requires a significant amount of computational power, which is provided by specialized hardware called “mining rigs” or “mining machines”. These machines perform complex mathematical calculations at a high rate of speed in order to solve the puzzle and validate transactions.
Wallet
So you have bought some crypto………………but where do I keep it? The security of your crypto is paramount to anyone who holds it. You may only have a few hundred pounds or dollars invested but who know when those “few hundred” could turn into “few thousand” or even more? So you can keep your crypto on an exchange but exchanges can and do get hacked. So the best place is a crypto wallet. I’ve written an in-depth blog about the types available and where to buy them.
So that’s it friends. Thank you for reading and I hope you learnt something of value. I encourage you to read my blog about Crypto Investment for Beginners which offers additional insights into this fascinating world of Crypto. Although, if you would like to read about how you can start your crypto journey buy holding the hand of an expert (no, not me) then I encourage you to read my post about Copy My Crypto.
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