The 9 most important concepts every cryptocurrency beginner should know
When you start with cryptocurrency, the complicated terminology often flies around your ears. No worries, with this article we will explain the most common concepts, so you can focus on more important things.
Let’s start at the beginning. The word “crypto” means “secret” or “hide. It includes a technique used to encrypt a message so that only the sender and receiver can read it. Cryptography thus ensures that unauthorized persons cannot gain access to sensitive information.
This form of security consists of a combination of mathematical formulas, computer science and engineering. But cryptography has been around for centuries. A typical example of cryptography was already seen during the Greek era. Here a secret alphabet was created that could only be deciphered by the sender and receiver. This allowed important letters to be sent without fear of interception.
You may have heard that Bitcoin is decentralized. But what exactly does this mean? A decentralized structure does not depend on a third party to function. Think about downloading via torrents. Or maybe you even remember Limewire or Bittorrent? In these applications, a direct connection was made between the two users, no third party was involved. This is also called peer-to-peer (or user-to-user).
With a centralized structure you do depend on a third party. Think for example of the banks. To make a transaction from person A to person B, cooperation with a bank is required. You are dependent on a third party to realize such transactions.
Now that you understand what these terms mean, it is important to know that Bitcoin is decentralized. The workload of the network (e.g. transactions) is spread across multiple machines without relying on a single central server. This is called “decentralized”. This means that all the machines work together to ensure that a transaction is approved. If one machine is hacked or fails, the transaction can continue without any (security) problems. This is also one of the reasons why Bitcoin has never been hacked.
So, you can actually think of decentralization as an independent network where no one is the boss. Transactions are traded peer-to-peer and the users control each other.
Blockchain technology is also called the greatest invention after the Internet, but what is it exactly? A blockchain is a kind of database in which information can be stored. You can think of it as small blocks of information that are added to a long chain. Each new block that is added contains information about the previous and current block (such as time, price, wallet address, etc.). If the old and new block do not match, it will not be connected to the chain.
Thus, this chain gets longer and longer and, moreover, can never be modified. Every transaction is kept forever. Thus, this technology can be used to carry out transactions. The advantage of a blockchain is that every transaction ever made can be traced forever, and cannot be undone in any way. It is therefore possible with a blockchain to record a transaction permanently, without the need for a third party.
Now we have finally arrived at Bitcoin. Almost everyone has heard of it these days, even my grandmother asked me the other day what exactly a Bitcoin is. Bitcoin is the very first decentralized digital currency ever created, and is based on cryptography, decentralization and blockchain technology.
The coin was created by Satoshi Nakamoto. But no one knows who this person is; Satoshi has always remained anonymous. The special thing about Bitcoin is that it was predetermined how many coins will be available. This number can never be changed at a later stage. Thus, despite being digital, it is impossible to ever create additional coins. A total of 21,000,000 Bitcoins have been created, and that’s all we have to go on.
Bitcoin is also known as “the digital gold. This is because it has many similarities to gold. Bitcoin is scarce, it cannot be reprinted (unlike fiat or paper currency), and it is not regulated by any government agency. All of these factors combined mean that Bitcoin’s value is constantly changing. You can think of it as a stock or an investment. The price is determined by supply and demand, just like gold.
On a side note, El Salvador has been the first country to make Bitcoin a legal tender, which means it has become actual money. This could create a domino effect in third countries.
A “cryptocurrency” is a digital currency often used as an alternative to conventional currencies. After the creation of Bitcoin, a lot of new coins were created, these coins are called altcoins (Alternative Bitcoins). These coins looked at Bitcoin at the time with the intention of improving it. Popular altcoins include Ethereum, Litecoin and IOTA.
With the emergence of new cryptocurrencies, and competition among them, innovation has occurred at a rapid pace. For example, Litecoin was one of the first successors to Bitcoin where more and faster transactions were possible. When the potential of blockchain technology became apparent, parties such as Ethereum put a new spin on it. Through the Ethereum network, it is possible to build entire applications that will run on the Ethereum blockchain. Today, it is still a hugely dynamic industry. Major companies such as PayPal, Microsoft and many others accept payments through Bitcoin.
If you start trading, buying or selling cryptocurrency, you have undoubtedly dealt with a “wallet. A cryptocurrency wallet is a kind of bank account where digital currency can be stored (think Bitcoin and Ethereum, for example). There are different types of wallets, namely hardware and software wallets:
A hardware wallet is a physical USB that you can connect to your computer. Since these wallets are not directly connected to the internet, they are a lot safer. The disadvantage of a hardware wallet is that they can be fairly pricey, and should always be kept safe.
A software wallet is a program that you can install on a computer or phone. It allows you to store crypto coins on your personal devices.
Do you want to buy a cryptocurrency coin? Then you do this at a crypto broker or crypto exchange. These are places where coins can be traded, sold and bought. Through an exchange this is peer-to-peer, meaning directly from customer to customer. On an exchange you can trade and store various types of coins. The risk is that if the exchange is hacked, you as a user can potentially lose your coins.
With a crypto broker this is different, this is a place where you can buy and sell cryptocurrency, but not trade. So the coins you buy will be deposited directly into your personal wallet. The focus at crypto brokers is often on making it easy to buy and sell crypto coins, giving customers service and providing all the necessary information needed to find your way in the cryptocurrency world.
Trading is seen as a way to make money within cryptocurrency. The systematic buying and selling of crypto-currencies is seen as ‘trading’. Since thousands of cryptocurrencies exist today (and they all have different prices), it can be interesting for investors and traders to trade a particular coin. Again, compare it to the stock market. Of course, traders try to make a profit on their portfolio in this way.
The difference between investing and trading is the regularity with which one trades. An investment is seen as a one-time purchase, which after a longer period of time is sold with a profit (or loss). But trading is aimed at making a quick profit. Thus, there is absolutely no consideration of the added value of the project, but purely invested based on potential profit.
Mining and Staking are mechanisms used to approve and verify transactions. The way one can validate transactions is different for each coin. Miners and Stakers provide a reliable network and in return are paid in cryptocurrency. It is therefore a way to generate additional income, while contributing to the security of the network.
Again, this is related to the decentralization of a blockchain. These mechanisms are replacements for third parties. Instead of one entity controlling all transactions, there are thousands of controllers taking care of this. So the security of a blockchain is unprecedented.
Now you are equipped with the basic concepts to understand the fascinating crypto world. Do not hesitate to get in touch if you have any doubts about concepts, vocabulary or anything else that crosses your mind. We would be more than happy to help you in your journey to become an expert in the blockchain so that you can make the most of it. Possibilities are endless and we are here to help you. Send us an email to firstname.lastname@example.org and visit us at https://brickken.com. We look forward to hearing from you!