Cryptocurrency Explained: Cryptocurrency Guide For Dummies

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What is a cryptocurrency?

In the last year, you must have heard of bitcoin and other cryptocurrencies that over the last years increased in value and earned investors unimaginable amounts of money. This might have led you to wonder, what exactly is a cryptocurrency? Well, it is not that complicated. A cryptocurrency is simply a digital coin that does not involve any middleman like a bank or other financial institutions. This is achieved through a revolutionary technology known as the blockchain technology.

Blockchain allows for cryptocurrency transactions to be verified by any individual with a computer anywhere across the world, unlike in the current system where such transactions are verified through centralized databases, such as those owned by banks and other financial institutions. It is this decentralized nature of the blockchain technology that have given cryptocurrencies the impetus to rise. That’s because, many people still remember what happened in 2008/9 when the banking sector nearly collapsed, and people lost lots of money. With cryptocurrencies, people feel like they are now more in control of their money, and cannot lose it in case the financial system goes haywire again.

So are governments Ok, with cryptocurrencies?

The decentralized nature of cryptocurrencies has attracted mixed reactions from governments. There are governments that have openly adopted cryptocurrencies as legal tender. Japan is a good example of such a country. On the other hand, there are those that have taken a different approach and decided to create their own cryptocurrencies.

Russia and the UAE are leading the way on this, by planning to issue state-backed cryptocurrencies. Then there are those like China that have out rightly banned cryptocurrencies, but have been unsuccessful in these endeavors.

That’s because the decentralized and anonymous nature of cryptocurrencies make them impossible to get rid of. In fact, despite its best efforts to control, China is still the leader in bitcoin and other cryptocurrency mining businesses, due to its low electricity costs.Speaking of mining, what exactly is cryptocurrency mining?

Cryptocurrency mining explained for dummies

If you are familiar with how fiat money works, then you know that it is the government through central banks that prints it. For cryptocurrencies, the process is a little bit different, and new coins are created through a process known as mining. Cryptocurrency mining entails the use of computer hardware to solve complex mathematical problems so as to generate a new cryptocurrency. The more difficult the computations are, the more expensive the hardware required. That is why bitcoin, which is generated by extremely complex computations, requires high capacity computer hardware that is very power-intensive. In fact, if you live in a high-energy cost country, you would not successfully mine bitcoin. The power costs you incur would be way higher than the money you generate from your mining activities. It is this costly nature of mining that has led some cryptocurrency developers to think of new and more innovative ways of generating cryptocurrencies. To give you better insight into cryptocurrency mining, let’s look at its different variations.

How cryptocurrency mining works?

Cryptocurrency mining simply works by allowing an individual or a corporation with the right equipment to solve mathematical problems, and generate a new cryptocoin. There are 2 ways in which to do this. The first one is buy the hardware and set it up yourself. To do this successfully, you have to ensure that power costs in your country are cheap enough to accommodate cryptocurrency mining electricity expenses.

The second way to do it is through cloud mining. Cloud mining entails joining hands with other investors, and buying a stake in an established mining rig in a low cost country. You are then rewarded with a part of the cryptocurrency that you collectively mine, depending on how much you have invested.Cloud mining is emerging as the best way for small investors to mine cryptocurrency. That’s because, it doesn’t require any hardware investment, and the investor does not have to deal with high power bills that may pour cold water on their cryptocurrency investments.

However, even when making an investment in a cloud mining pool, it is important to determine beforehand, whether the expected reward is financially worth it. That’s because, due to rising mining costs, cloud mining too is pricing out small time investors.

Overall, it is safe to conclude that there is no future in cryptocurrency mining for small investors. A small investor looking to make money in cryptocurrency will have to settle for trading.

Cryptocurrency trading for beginners

The first step to start trading in cryptocurrencies is to open an account with a good cryptocurrency exchange. To determine, whether an exchange is good or not, there are a number of factors you should consider. Some of these are as below:

Security

Cryptocurrency exchanges are loved by hackers. They are constantly under Denial of service attacks from hackers as they try to gain access and steal your crypto coins. That’s why before you register with an exchange, research its history, especially how it deals with hacking attacks.

Fees

Trading fees are another important factor to consider when looking to trade cryptocurrencies through an exchange. For best trading results, it would be best to go for an exchange with the lowest trading fees. This is information that you can easily access online.

Liquidity

When looking to trade in cryptocurrencies, you want to do so through an exchange that is highly liquid, so as to quickly take advantage of emerging trading opportunities. A low liquidity exchange would deny you such an opportunity, significantly reducing your trading profits.

Now that you know how to choose a good exchange to trade your cryptocurrencies, the next step is the actual trading. When trading cryptocurrencies, you may adapt a number of strategies. The first one is to buy and hold. Under this strategy, you look for a high potential cryptocurrency and buy it for the long run. For instance, if someone had adapted this strategy towards bitcoin at the beginning of the year and bought it at $1000, they would now have made a tidy profit by now that it is trading at close to $20,000.

The other strategy that you may adapt when trading cryptocurrencies is to day trade. This entails buying and selling cryptocurrencies on a daily basis by taking advantage of price inefficiencies as they arise. While trading is a great approach to making money with cryptocurrencies, there is a challenge when determining which ones to get into, and which ones to sell at any given time. To help you out with this, let’s look at how you can get into cryptocurrencies and do so profitably.

Starting To Trade Cryptocurrency?
Are you like millions of others who wish that there was an easy (and fast) way to learn everything about how to start trading cryptocurrencies?

How to get into cryptocurrency?

As a beginner you may not know this but there are more than 100 cryptocurrencies out there. However, not every cryptocurrency has a potential for profitability. To make the best out of the cryptocurrency markets, it is imperative to understand what makes a cryptocurrency tick.

Since this may not be easy for a beginner, the best approach for you is to buy one of the top ten cryptocurrencies in the market. While the rest too may have a potential for growth, they might need specialized knowledge and experience to find the opportunity, knowledge that you may not have at the moment. That’s why when looking to invest in cryptocurrencies as a newbie, it’s safer to put your money in any of the following:

These are some of the best known cryptocurrencies in the markets today, and each of them as a viable functionality. That’s why making any one of them your starting point in cryptocurrencies would be a sure path to your success in this field. Later along once you are comfortable with the markets, you can try out lower ranking coins.

The greatest risk when it comes to the relatively unknown coins is pump-and-dump schemes. A pump-and-dump scheme is a scenario where unscrupulous businessmen push a low quality coin into the markets through exchanges, hype it up, sell, and then let it collapse. As an investor, buying into such a crypto-coin would end up holding a worthless coin that has zero intrinsic value.

How to purchase cryptocurrency?

Now that you understand exchanges, the different trading strategies you can adopt, as well as the best coins to trade in, the question arises, how do I get to purchase them in the first place?

Well, this is a simple procedure. There are exchanges out there that allow you to deposit fiat currency directly and start trading. However, the vast majority of them require that you first purchase bitcoin. Depending on the exchange, the first step is to buy bitcoin either in dollars or in your local currency.

Once you have access to your bitcoin, then you can trade them for any other cryptocurrency of your choice. For instance, if you want to purchase Monero in an exchange, the first step would be to convert your fiat currency into bitcoin then use it to buy Monero.

Lately, some exchanges also allow you to purchase cryptocoins using a US dollar backed token known as Tether. To use tether in buying cryptos, you still need to first deposit money into your account using bitcoin, if the exchange does not allow for fiat deposits.

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22:22
Great article! Thanks.
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