1. Cryptocurrency Guide


What is Cryptocurrency?

Cryptocurrency is a digital virtual currency designed for the global community or private groups and individuals to own and use as a secure online asset to trade for services or goods. Cryptocurrencies use blockchain as secure ledger and encryption technologies to validate transactions and regulate creation of new units. These virtual coins are reported to be very difficult or near impossible to be reproduced as counterfeits.


New cryptocurrency transactions are recorded and added to the blockchain in chronological order. To understand blockchain, think of it as a chain of blocks. Every single block on the chain has recent valid transactions, block timestamp, previous block hash and address of creator transparently recorded, viewable by anyone anywhere in the world.

Blockchain Block Diagram

Every successive block will contain the hash of the previous block, hence chaining all blocks together ensuring block cannot be modified without modifying all following blocks. Blockchains are thus widely believed to be impossible to be hacked due to the distributed consensus security process. [ Read Complete Blockchain Guide ]


Transactions

Cryptocurrencies are typically decentralized with transactions completed peer to peer (P2P) and do not go through any middle man nor any centralized organization. Transaction records are stored on a blockchain that can operate by itself autonomously without any central administration needed. Every node has a copy of the blockchain, hence the network has no single central point of failure and is believed to be theoretically immuned to manipulation or government interference.


Limited Supply

New decentralized cryptocurrencies are created by the entire network collectively, with the production rate defined at the start when the system was created and publicly known. Decentralized cryptocurrencies are typically designed to gradually decrease production of coins, placing a cap on the total circulating supply globally. For example, Bitcoin has a supply cap of 21 million coins, once 21 million Bitcoins are circulating around the market, no more new Bitcoin can be created.



If supply remains around the same and demand grows, the value of the coins will increase to keep up. For example if today 1 unit of bitcoin is worth $4000 and you need to obtain 100 units worth $400,000 to buy a house. With new production of coins slowing down 10 years later, demand grows and bitcoin price rises to $40,000 each. You will only need to obtain 10 bitcoins worth $400,000 to buy a house. So the coin quantity supply will always be sufficient for the population and bitcoin can be divided down to as small amount a quantity as 8 decimal places, eg. paying for a cup of coffee in the future with 0.00000001 btc.


Fiat Currencies

On the other hand for Fiat Currencies (also known as government-issued currencies) have no supply limit. Central governments and banks can print and release as many fiat currencies as they want, and hence are able to manipulate the value of the currencies relative to others. Fiat currency holders, mostly citizens have little choice but to bear the cost if they do.


Centralized Cryptocurrencies

The other type of money that is similar to fiat currencies are Centralized Cryptocurrencies which are centrally controlled and administrated. The above central authority has the power to decrease, increase the value of the cryptocurrencies that they are managing, even add or removing them completely. Tether (USDT) is an example as of May 2019.


Mining

The integrity, safety of transactions and balance of ledgers in a decentralized blockchain, for example, Bitcoin Cash, are maintained by a community of miners who validate and timestamp transactions, then add them to the blockchain ledger by solving complex mathematical cryptographic puzzles using mining node computers. The successful miner will then be rewarded with a new cryptocurrency for his/her work and effort. [ Read Complete Mining Guide ]


Crypto Wallet

When a user send cryptocurrency to another user, he is actually sending the virtual coin to a hashed version of a “Public Key” representing the public address location typically of a cryptocurrency wallet, owned and used by the receiving user. The receiving user will let the sending user know of his wallet public address, so that the sending user knows where to send his virtual coin to. It is similar to an email address except that instead of sending email, the user is sending digital crypto coins.


Private key is a set of randomly generated long string of numbers and letters, used as passcodes to authorize spending, withdrawing, or transfers of cryptocurrencies to others. The sending user needs to key in the passcodes of his private key to prove he/she is indeed the owner before he/she can send the coins to the public address of the receiving user. Blockchains use cryptography to ensure that every user can modify only parts of the blockchain that they own by using private keys. For security purposes to prevent theft, the randomly generated private key passcodes (mentioned above) should be privately known only by the wallet owner. [ Read Complete Wallet Guide ]


Example of private key:

Kzawmdzu99S6Qzki5YZSVSj31cQESnEtPCQ1D4cpJBPZNbpDxrBm

Example of public address:

19Exk5acQkMd8CtTb4o2J4GddVW59XvTfF

Cryptocurrency Exchange

The best place to trade cryptocurrencies is via a Cryptocurrency Exchange, not conventional stock exchange. At a Cryptocurrency Exchange, users can buy, sell and trade among cryptocurrencies and conventional fiat money. For example, traders can exchange EOS coin for Ripple coin or use USD dollar to buy Litecoin.


Caption: A Crypcurrency Exchange Web Platform

Decentralized Network

Decentralized applications, currencies and exchanges running on a decentralized network are open source, with its ledger, transaction records and codes transparent for everyone to verify, use and even develop freely. Anyone can verify if the apps are really built as claimed or as per the whitepaper, and check for hidden functions eg. spyware, malware. Since there is no middleman or centralized organization needed on the transparent network, the chance of someone committing fraud successfully is greatly reduced.


Decentralized Exchange

There are news in the past about crypto coins stolen from an exchange or wallet by third parties or owners themselves. Most of the root causes are because those exchanges and wallets are centralized, not decentralized as designed or claimed. As of May 2019, there are still very few truly decentralized exchanges that are completed and operating around the globe, probably only around 3 to 4 although more will come sooner or later.


Initial Coin Offerings (ICO)

Some development startups seek crowdfunding capital funds from external investors for early support by creating their own crypto tokens and selling those coins to investors through an ICO, or Initial Coin Offerings. It is similar to Initial Public Offering (IPO) except that crypto tokens are issued to investors instead of company shares for IPO.


For ICO, startups will usually try to convince investors that they will be developing a digital currency or an application that will work with their tokens to be issued and eventually become an exceptional product that will bring outstanding returns to their investments. Since ICO is minimally regulated as of May 2019, it is a controversial way to raise funds and critics denounce it as a fund raising method with the intention to avoid regulation.


There are considerable risks to invest in ICOs. After raising millions of dollars, many ICO startups are criticized for having no progress to a workable product launch or releasing any product at all after years of development work. It is hard to verify if some of those startups are putting any efforts to development after getting the funds. With minimal regulations for such markets, it is very difficult to bring the mentioned dishonorable companies to court.


NEXT: Is it safe to invest in cryptocurrencies?