The Beginners Guide To Crypto

Crypto-Lingo

In this section we will learn some of the most important concepts to understand the cryptocurrency technology.

Introduction

Cryptocurrency is a totally new type of technology. It is so useful that it is growing at an amazing speed. You won't be able to ignore this for long. Not knowing how does it work may put you in disadvantage, or expose you to new dangers and scams.

At the time of this writing there are thousands of cryptocurrencies, and the literature, videos, webinars, etc. About it is enough to discourage most people from even trying to learn how does it work.

That is why we have prepared this introduction, as a step by step guide that provides you a hands on experience to discover by yourself the wonders of this new technology.

First some encouraging ideas:

1) Even though there are thousands of cryptocurrencies, if you have a basic understanding of Bitcoin and Ethereum you will have the tools to understand any other crypto project.

2) The same way you don't need to be an engineer to operate a computer or a car, you don't need to understand everything about cryptocurrencies. Using them will be as easy as using your phone.

Second, an encouraging warning:

With every great power comes a great responsibility.

Nowhere else is this more true than in crypto.

A great Power:

Crypto puts in your hands the power to access markets where billions of dollars fly around. Imagine somebody gave you a free entrance ticket to the stock-market, or a pool full of sharks!

Great Responsibilities

Most people trading in these markets loose money. It is easy to be lured by the dream of making lots of money in one lucky trade, which you may, but making consistent profits in the crypto or stock market is an art of its own. But you can adopt low risk strategies that will create value over time. Knowing more about the factors affecting a cryptocurrency's price will surely help a lot.

But even in your daily life there are great responsibilities. If you loose your crypto, or send them to the wrong place, nobody in the world can help you recovering them.

Therefore even though you don't need to understand integrated chips and engines to operate a car or phone, a basic understanding of the way they work is very important because of safety reasons, and to maximize the benefits you can get from this technology.

To conclude:

There are two basic types of cryptocurrency represented by Bitcoin and Ethereum. We will talk about Ethereum on section X. But in the following sections let's talk about Bitcoin-Type cryptocurrencies. So when we say "cryptocurrency" you can think of Bitcoin as the most important example.

Basic Fundamental Principles

We mention that cryptocurrency is a totally new technology. But money is nothing new, and most of the money we use everyday with credit and debit cards is digital, so what is new about crypto?

The groundbreaking innovation of Bitcoin is that it behaves like digital cash.

With electronic money like debit or credit cards, you have a balance with the bank and any transaction you make is processed by the bank, this system is "centralized" because the bank has to process all transactions and approve or deny them.

The bank act as a "trusted third party"

With cash, If you give a coin or a bill to somebody, you don't need any third party or approval. The money is physically transferred from one person to the other immediately.

Therefore what is totally new about cryptocurrency is that it behaves like digital cash, you can transfer it from one person to another and don't need the approval of a central authority that functions as a trusted third party. When you transfer cryptocurrency to other person it is similar to giving a coin or physical bill, the transaction is complete, you can't take it back, or cancel it.

Two classes of cryptocurrency

Most cryptocurrencies fall on one of two fundamental types represented by Bitcoin and Ethereum.

Bitcoin was designed to be digital cash.

Ethereum was designed to be a decentralized virtual computer.

Here in these words is summarized all we need to know about cryptocurrency! But we will spend some time understanding in depth the meaning of these sentences. First let us talk about money.

Two classes of Money

Bitcoin was designed to be like money, but there are fundamentally two types of money represented by Gold and Fiat.

Gold

Gold is a commodity, a physical object and it's price is determined by the balance of supply and demand, it's value is influenced by the cost of production, the handling of the asset, transportation, storage, checking its purity, etc.

Fiat

Fiat is a form of money created by banks and adopted by a government to run a country. Its value is decided by the banks and governments, and one of the most important features is that they can create it at will. This creation of money out of nowhere is the cause of inflation, which decreases the value of the fiat currency. Another interesting fact about fiat money is that only 5% exists in the form of coins and bills, most of it is purely electronic money.

Gold 2.0

Bitcoin is a digital asset that behaves similar to a commodity like gold, for example. That is why you will hear it called Gold 2.0

Like gold, bitcoin has a cost of production, the process of producing bitcoin is called "proof of work mining" or simply mining, and requires energy and special equipment. The process of proof of work effectively converts energy into currency. bitcoin's price is determined by the supply and demand of the digital asset.

Following Bitcoin's example there are other cryptocurrencies produced by proof of work, and so they have an intrinsic value given by the cost of production.

And there are cryptocurrencies that can be created out of thin air as well, without spending time or energy in creating them. We are not going to talk about those in this introduction to cryptocurrency. And we advise you to stay away from them.

In the following sections we will be talking about digital assets that have a connection with the real economy given by their cost of production.

Summary

Bitcoin was designed to be Digital Cash. The ground breaking Bitcoin innovation is that you don't need to trust third parties to make transactions. (Bitcoin transactions are made trough a decentralized computer network that we will be discussing in section XYZ)

Bitcoin is very different from digital money like credit or debit cards that need a centralized database to process all transactions. Bitcoin is closer to a physical coin than to a credit card.