Crypto Knowledge for Beginners – Cryptocurrencies Explained

Last Updated on August 24, 2022 by aicrypto

Have your friends told you about cryptocurrencies and how much money they’ve made from it? Now you want to know more about cryptos, how to use, trade and invest in them properly. There is a lot to learn.

Avoid mistakes and create the necessary base of knowledge for a successful start.

What are cryptocurrencies?

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  • Cryptos are a form of electronic money and were first developed in 2008. At that time, Satoshi Nakamoto invented Bitcoin.

This cryptocurrency was the first, based on the new blockchain technology. Over the years, other cryptos followed with new technologies and different uses.

  1. There are more cryptocurrencies than just Bitcoin
  2. What is the difference between a coin and a token?
  3. What is a Blockchain?
  4. Where are your coins and tokens stored?
  5. How and where do you buy a cryptocurrency?
  6. Where does the price of a cryptocurrency come from?
  7. What can you do with cryptocurrencies?
  8. How to choose the right cryptocurrency?
  9. Advantages of cryptocurrencies
  10. The disadvantages of cryptocurrencies
  11. What is the best way to get started?

Much more than just Bitcoin

Most people think of Bitcoin when they hear “cryptocurrency.” This is not surprising, as Bitcoin is the most well-known cryptocurrency. However, it is not the only one. There are thousands of different cryptocurrencies and tokens.

  • All cryptocurrencies except Bitcoin are also called altcoins (alternative coins). Well-known altcoins include Ethereum (ETH), Binance Coin (BNB), Cardano (ADA), and Litecoin (LTC), for example.

What is the difference between coin and token?

Not every cryptocurrency starts with its own blockchain. Instead, an already established blockchain is often used as a basis.

  • A cryptocurrency with its own blockchain is called a coin.
  • Without its own blockchain, it is a token.

Many tokens even use several blockchains at the same time.

What is a blockchain?

Banks use their own servers, all under their own control. External parties do not have access to this data, so there is no transparency. The idea behind the blockchain is that the data of all transactions is public and therefore does not belong to a single institution.

  • The blockchain is a decentralized network of thousands of computers that are all interconnected. Anyone can participate in this blockchain network by simply downloading an application from the Internet and installing it.
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Where are coins and tokens stored?

  • There are several ways to store crypto coins. They can stay where you bought them, for example on a crypto exchange. You can also transfer them to a wallet on your phone or PC, and those who want to be completely safe use a hardware wallet.

Strictly speaking, the cryptos are always on the blockchain. Only the keys to control the coins are stored in a wallet. This means that the same coins can be accessed from different wallets, as long as the correct key is used.

For each blockchain only one key is needed to control all own tokens on this blockchain.

How and where do you buy a cryptocurrency?

  • You buy a cryptocurrency from a private individual (peer-to-peer). This can be done directly or through an intermediary on the Internet. The fees are very high with this method.
  • Buying from a crypto dealer who specializes in buying and selling cryptocurrencies. Payment here is made in fiat, i.e. euros or dollars. In most cases, KYC verification is required. The fees are also high depending on the payment method.
  • Buying on a crypto exchange, in exchange for fiat money or for another cryptocurrency. Buying a cryptocurrency with the help of another cryptocoin is usually less complicated. Once fiat currencies are used, crypto exchanges require KYC verifications of the account.
  • Crypto ATMs are already available in many countries. At some, cryptos can only be purchased. At other ATMs, you can also get cash in exchange for your coins. The regulations and options are different in each country and change frequently.

Where does the price of a cryptocurrency come from?

  • The prices for crypto coins and tokens are created by supply and demand on the various crypto exchanges. This results in an average price, which can be seen at Coinmarketcap, for example. The prices for cryptos can fluctuate a lot.

Stable Coins, whose price is tied to the US dollar or another fiat currency, offer an alternative. The most well-known providers include USDT and USDC, as well as Binance’s stable coin, BUSD. All major crypto exchanges now offer trading in stable coins.

What can you do with cryptocurrencies?

Before buying a cryptocurrency, you should do extensive research on the utility of the particular coin or token.

Some tokens are merely intended as a kind of joke and are referred to as meme coins. Others have real applications. Here are some examples:

  • Paying fees on a blockchain or exchange.
  • Freezing / staking of coins for a certain amount of time in order to receive a reward
  • Lending cryptocurrencies in exchange for interest
  • Having a say in important decisions (on a blockchain or crypto project).
  • Sending money to someone quickly and anonymously, without high fees
  • Speculation through trading, even with leverage, i.e. several times your own capital
  • Use as a safe digital store of value (as a substitute for gold).
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How to choose the right cryptocurrency?

For a beginner, it is recommended to buy one of the major and established cryptocurrencies first, such as Bitcoin or Ethereum. Later, with some experience, you can also dare to buy smaller altcoins, which are usually much more volatile. What aspects should be taken into account when choosing?

  • What benefits does the coin offer? Is it needed for anything, or is it just a fun coin?
  • Who is behind the crypto project? Are they people who have a good reputation in the industry?
  • How has the price of the cryptocurrency developed so far? Can a trend be derived from it?
  • What are the future plans of the project? Is there a roadmap on the website?
  • Does the coin have a presence on many crypto exchanges? Does it have sufficient liquidity?
  • Has the security of the project been verified by an independent body?
  • Is there a limit on the maximum number of coins? Is there a high inflation?
  • How high is the market cap? Is the coin already very expensive and thus has less potential?

Advantages of cryptocurrencies

The advantages of cryptocurrencies are of course very dependent on the individual currency. However, the following points are worth mentioning:

  • Cryptocurrencies offer greater transparency than fiat currencies.
  • With cryptos, you no longer need the banking system. You are your own bank.
  • Investments and speculations are possible even with small capital.
  • Very low costs when sending money abroad.
  • Anyone can create their own cryptocurrency with a good idea and succeed.
  • The crypto market is still very small compared to gold and stocks, and thus has good chances of positive development in the future.

What are the disadvantages of cryptocurrencies?

Despite all the enthusiasm for cryptos, there are of course some disadvantages that should also be mentioned.

  • Cryptocurrencies have become very popular, but they are still not accepted by everyone.
  • The high number of digital currencies makes it hard to make a choice.
  • The technology behind various crypto projects is often not understood.
  • There is a high number of scammers in the crypto world.
  • You are responsible for your own mistakes. Support at crypto exchanges is very poor.
  • Crypto transactions are often slow and can be expensive when demand is high.

What is the best way to get started?

  • First, you should choose a crypto exchange that you like and that offers all the features you need. There, you create an account and enable two-factor authentication (2FA). If necessary, start the KYC process.

You will also need a wallet and, of course, a computer or cell phone with Internet access. You should write down all passwords and keep them in a safe place.

  • In order to buy cryptos, you will also need money. A bank account and a credit card are very helpful when buying. You don’t have to invest large sums right away if you are inexperienced or unsure. In the beginning, $20 is enough to get your first experiences.