Introduction – What are cryptocurrencies?
Cryptocurrencies are digital currencies that are secured by cryptography and math on the blockchain. The blockchain is a system built to ensure the secure transfers of cryptocurrencies and allows to register every transaction on it.
The blockchain works by getting the approval of every single user on it, through reaching consensus over a mathematical problem. The best example of a cryptocurrency working this way is of course Bitcoin. There are also Ethereuem and Litecoin of course. We will get to that later.
Bitcoin is the first crypto that was ever invented, back then in 2009. Its inventor is the anonymous person named Satoshi Nakamoto – to this day there are many speculations as to who he is, and if it was a group of people or a single man. The Mechanism of Bitcoin and its system is one of the most complicated yet beautiful digital creations and is marveled at by many expert programmers and hobbyists alike to this day.
In a nutshell, this is how Bitcoin and many other Cryptocurrencies work – As we said for bitcoin to run, users need to run the blockchain on their computers. As they do so, their computer runs a script to try and solve a hard mathematical problem. The first computer to solve the answer get’s some bitcoin as a reward for it. The people competing to solve the problem are called miners. Every 10 minutes approximately there is a new block added to the blockchain that user’s can compete to try and solve and get rewarded.
Sounds cool! So how can I mine Bitcoin?
In the early days, it was fairly easy and anyone who had a computer could mine bitcoin. Today, you need lots of computing power to even come close to solving the mathematical problem of the protocol. In fact there is a giant industry for mining bitcoin and many other coins.
The most important part is that each transaction is written on the block it was made on and stored on the blockchain forever. That way, it is impossible to spend a bitcoin twice – and if you sent it by mistake, or to the wrong address it is gone forever. There is no manager or owner to the blockchain to revert the transaction. Bitcoin is run by anyone participating and running the blockchain. Therefore, Bitcoin, and other cryptocurrencies are called Decentralized.
This was a very brief explanation of how bitcoin works. We would need the whole article to understand it fully. I have an intention to create in-depth guides about Bitcoin and other coins in the future.
Here’s a list of some of the most popular cryptocurrencies –
What are the use cases of cryptocurrencies?
Besides investing purposes, Cryptocurrencies have many potential uses. In fact today we are only utilizing a small amount of their full potential. It’s believed by experts that Cryptocurrencies and the technology of the blockchain behind them will disrupt many industries in the future.
Industries like healthcare, insurances, education, real estate, and traditional finance all have the potential to benefit greatly from digital currencies. Many Entertainment Industries like gaming, collectibles, art, music and more are already seeing major involvement with the cryptocurrencies world.
Though cryptocurrency is still not fully mainstream, 2021 has definitely been its first year of widespread recognition.
Cryptocurrencies can help people take true ownership over the property or a college diploma for example. All it takes is issuing a unique code on the blockchain signifying you are the owner of a certain house or a diploma. This sort of information can be carried by you anywhere with your digital wallet. More on what is a digital wallet later on in this article.
In addition to that, many artists are already taking advantage of the vast world of cryptocurrencies by using NFT’s – which are unique art creations printed on the blockchain.
Here is a list of the most common usecases of cryptocurrencies-
1. Store of value – A store of value is an asset that people believe will hold or even grow in value over time. Many people believe cryptocurrencies are the best store of value available in the world today. There are many arguments as to why this is the case. If we take a look at Bitcoin, for example, there will only ever be 21 million Bitcoins in the world.
Compared to the USD and the unlimited amount that can be printed is a major argument for Bitcoin. In addition to that, people believe that the fact that Bitcoin is decentralized and does not have an institution behind it that can suddenly mess with the protocol makes it a better store of value than cash.
Another argument for Bitcoin over gold – is that bitcoin can be held in your private wallet, without anyone ever getting access to it. all you need is to remember your private keys and no one in the world can get access to your money.
Another case for bitcoin and other crypto is that you can transfer huge sums of money with bitcoin, with almost zero problems. If you try and move 10 MIL dollars in cash, or even gold you will face many obstacles. With bitcoin, it’s as simple as pressing a button.
2. Using them as digital cash – using cryptocurrencies as digital cash is a very common usecase. For the last decade many people got paid for goods and certain services using Bitcoin, Ethereum , Litecoin and more. This is a very convenient way to transfer money as it doesn’t have to involve a middle man.
This was the vision Satoshi Nakomoto had in mind when he created Bitcoin. He believed it should be digital cash – as he states in the Bitcoin Whitepaper. Though ironically bitcoin itself today isn’t normally used to pay for services, Ethereum has definitely caught its place in that regard. Ethereum is used in many services around the world, in many platforms and apps because of the vast ecosystem created on it and the design of its blockchain.
Though Cryptocurrencies are still not accepted in many places, it is getting more and more common around the world. Some websites help you convert your crypto tokens to redeemable gift cards and popular services like Amazon Netflix, Spotify, phone payments hotels, video games, and much more. In addition to that crypto credit cards are getting much more common.
They allow you to use them anywhere by converting your cryptocurrencies instantly at the point of purchase. As you can see – the options are vast as for using and paying with cryptocurrencies.
3. Smart contracts – One of the most revolutionary parts of the crypto world is Smart Contracts. Smart contracts are decentralized digital contracts on the blockchain. The first network that introduced this feature was Ethereum, the second-biggest Crypto network today.
These contracts are coded programs that run when certain conditions are met. For example, if person A sends X money to the smart contract, the smart contract sends person A a certain document. You can program the smart contract to do whatever you want, all automatically with no way of cheating the system.
That way a system can work autonomously in a trustless form. Every side of the agreement can be sure that the program will run as intended because the smart contract runs on the blockchain without any access for any party.
Another example of this concept would be to create a digital automatic Will on a smart contract. The terms could be to ping the owner of the will once every 3 months. If the owner of the will has not responded to it 3 times in a row then all the money stored on the smart contract will move to a destined person.
4. Decentralized Finance – Decentralized Finance is an amazing example of a whole ecosystem developed on the concept of smart contracts. It is so intricate and developed that it sometimes seems as if it has a life of its own. Decentralized finance is normally revolved around decentralized exchanges, Lending and borrowing, and providing liquidity to protocols.
Let’s say you want to borrow money from the bank. You need to fill many forms, prove that you can give the loan back, and wait for its approval. Defi (Short for decentralized finance) helps overcome the bureaucracy and the middle man in a beautiful way. In fact you can loan directly from other people or become the bank yourself in these platforms. Compound is a decentralized platform that allows you to lend your crypto, and get a nice interest on it.
You can also take a loan through Compound by depositing your crypto in the smart contract of the platform. This is good for people who don’t want to sell their crypto and need cash in hand. You can also use platforms like Uniswap to exchange different types of coins without a middleman.
Another option to use defi is to provide liquidity to protocols, you help support the protocol with your coins and in turn, can get interest on it. The caveat in defi is that there is always some risk in these operations, and you can find yourself losing your crypto over a scam platform or project.
Take in mind that crypto is still a new industry without a lot of regulations. This attracts many bad actors that try and scam people out of their money. That is why I recommend tinkering with defi only after you are well established with your knowledge on this topic and have taken the time to research it properly. It is most certainly not a beginner’s trade!
5. NFTs – Stands for Non Fungible Tokens. These are unique tokens that are created once, representing a specific asset. Most NFT’s today work on the Ethereum Network. Anyone can issue an NFT and put it up for sale in an NFT marketplace like opensea. Nft’s are used by artists, musicians, collectors, and even for memes and ordinary jpg’s. When you buy an nft you are the sole owner of the digital piece that you bought.
It is still not possible to prevent people from downloading the raw file from the web, but you cannot sell it as your own NFT. Each NFT is marked with a specific code number and has its worth in the marketplace.
Beeple, a well-known artist in this scene has sold his artwork at the whopping price of 69 Million USD equivalent to 42329.453 ETH at the time of purchase. That’s a huge sum of money for digital art, this shows there is a market for these creations.
Another famous NFT sale was that of the Kings of Leon rock band which offered an NFT auction for their new album. The band offered to sell their album with digital art in addition to free VIP access to every world tour they will have for life. This means that the holders of the NFT can redeem one free access in a single tour to any location in the world the band performs for the rest of their life! The NFT owners can also sell the NFT whenever they want to the next person, making it hold its value across time. The band has generated around 2$ million from this NFT sale.
Some may argue that this is a bubble, and these digital creations have no value. Some would say that art is art, and this is the future. Whatever your opinion is of this subject, I wouldn’t be so fast to dismiss it considering the numbers which we just represented. There are many more examples of NFT crazes, and it is hard to take notice of them all. Though it is wise to keep up to date with the technology and its possible financial potential.
How widespread is Crypto?
Cryptocurrencies exist in the world for only 13 years, since the beginning of Bitcoin. Today there are estimations that around 300 million people around the world own crypto in some way. Many people in countries with failed monetary systems use crypto as a means to transact instead of the local currency.
Venezuela for example lives with an unbelievable rate of 2,355.2 % hyperinflation. This is a scenario in which every second your money is just losing its value and buying power. Today, many Venezuelan people use Bitcoin and other cryptocurrencies as a way to purchase goods and pay for services.
Even though 300 million people using and holding cryptocurrencies is indeed a large number, this is still a very small percentage out of the world population. In order for cryptocurrencies to evolve and become more widespread, it will take some time and momentum in the right direction.
Some of the reasons that are holding crypto back involve the many stories of people losing their keys, being scammed by shady exchanges, and crypto being involved in criminal activities.
That’s not to say that cryptocurrencies don’t have their disadvantages.
Some of Cryptocurrencies disadvantages include –
Crypto prices fluctuate on a daily basis. It is the most volatile asset class, soaring 100% in a day only to go down 60% percent on the other. It does depend of course at which crypto currencies you are examining as there are some more volatile than the others. The volatility of this asset derives mostly because it is still relatively small and with a low market cap overall.
The whole market cap of the entire cryptomarket (which has more than 10,000 coins) is around 2$ Trilion. Consider that Bitcoin sits comfortably around 1 Trillion, and Ethereum around 400 billion. That means that around 60% of the market share is those two coins. For reference there are companies in the stock market that are worth more than the entire market cap of cryptocurrency.
The lower the market cap is, the more each movement of money affects the entire market, and crypto is known for wild moves both up and down. A lot of the market movements is based on positive/negative news and speculation which is a sign for a market yet to mature. Elon musk is an example for a person who can move the markets with a single tweet!
So for now if you want to participate in the crypto markets you will need to accept the day to day volatility. In the long run, the crypto trend is upwards – that means no matter how much it fluctuates in the short term. Long term you have higher chances to win.
There are some crypto coins which are called stable coins – they are pegged to a certain rate, mostly to the USD. The most common ones are USDT , and USDC. Each have a different approach to the pegging of the token, though they are both pretty reliable. Pesonally I would prefer dealing with USDC as they are trusted by coinbase – one of the largest exchanges in the world, and the first exchange to go public in the stockmarket.
Security and Wallets
Keeping your Crypto secured is another aspect that needs to be taken in a serious manner. In order to secure your crypto you need a good and reliable wallet. There are 2 types of wallets available – a hot wallet or a cold Wallet. Both wallets operate in the same fashion. They store your crypto, and allow you to access with a secured password or pin code.
Both wallets require you to store your private seed physically on a piece of paper in case you forget the pin/password to your wallet. The private seed is the most important thing for any crypto holder and must be protected at all costs. I suggest you make 2 copies of your private seed and store them at different places you will remember around the house.
It is also advisable to make a second location in case of a natural disaster or fire rendering your backup unusable. You should never let anyone see your private seed or else you risk losing all your funds. The private seed allows you to recover your wallet if anything goes wrong.
Hot Wallet VS Cold Wallet – Which one should I choose?
The difference between hot or cold coin storage is that the hot wallet is connected to the internet and stored on your computer or phone. Metamask for example is a popular hot wallet for the Ethereum network.
The cold wallet is a secluded piece of hardware that protects your funds from being stolen at all times. Trezor and ledger are the most recommended cold wallets in the market today. You cannot make a transfer from this wallet without physically signing the transaction with your hardware wallet. The only way for funds to be stolen from your hard wallet is if your private seed has been compromised in any way.
That means even if someone physically steals your wallet, without knowing your pin code he cannot access your funds. You would be able to recover it with your private keys and restore the wallet on a new hardware wallet if you wish.
Here are a few wallets that I recommend :
Hot wallets – recommended for storing up to ~2000$
- Edge wallet – a mobile only wallet, fully opensource and high security measures with a 2fa authentication. I love this wallet for it’s security and sleek user experience. The cons of this wallet is that it doesn’t have a connection to dapps , but it is also a pro for users who only need a safe storage for their crypto. Edge wallet allows storing Bitcoin, Ethereum + erc20 tokens, Litecoin, XRP , and more – giving you a flexible wallet for many types of coins.
- Metamask – A browser wallet with a mobile app. Metamask is the go-to wallet for the Ethereum network. In order to use many of the dapps and platforms built on Ethereum you will need a Metamask wallet. Apps such as Opensea, Compound, and Uniswap require a browser wallet to interact with and this is by far one of the best options. Metamask is very user friendly, has great UI and is suitable for both beginner and advanced users. Metamask lacks a bit in security, it doesn’t have a 2fa authentication which is a downside for me. Personally I wouldn’t store a lot of money on a hot wallet as it is by far less secure from a cold wallet.
- BlueWallet -Is a great Bitcoin only Wallet. It provides great security with a fantastic UI and great experience all around. BlueWallet is an open source wallet which adds to its security and competitiveness in my opinion. If you are a Bitcoin Maximalist you should definitely check this one out.
Cold wallet –
- Trezor wallets- Trezor offers 2 types of wallets – one of them is the Trezor One, and the newer model Trezor T. They are both amazing wallets, providing top notch security and allowing you to store multiple kinds of cryptocurrencies. The Trezor one model allows you to store some of the most popular cryptocurrencies and has everything you need in a wallet for most users. Trezor model T offers support for a few more tokens, advanced security options like shamir backup and a touch screen that allows to enter the pin on the device. For most users who plan on buying and storing the mainstream coins I would recommend going with the classic Trezor Model One. For advanced users who are searching for the next gem in crypto, want a greater variety of coins and the added security benefits go with Trezor Model T.
How can I get involved in the cryptoverse?
It’s never too late if you want to join the crypto party, and there are many ways you can do that. Keep in mind that before you go ahead and spend all your savings on a crypto project that you risk losing your capital.
As I mentioned here before crypto is a volatile industry, full of unknowns, and lacks regulation for good and bad. Take that in mind before investing even a single penny and learn from the mistakes of others. Always do your own research and double-check yourself, especially as a beginner in the crypto world.
Some of the ways you can get involved with crypto:
1. Purchase crypto – the most straightforward way is to go ahead and buy some crypto. The most well-established cryptocurrency today is, of course, Bitcoin. Over the last decade, Bitcoin made an average of 300% ROI each year. This is the best ROI in the world, no matter which asset class you look at, and one that is definitely hard to beat. Bear in mind if you buy bitcoin today, it may not replicate these numbers again as it gets exponentially harder to create those types of returns.
Despite that, Bitcoin is still one of the “safest” assets to invest in crypto considering the many coins and tokens which have gone to zero over the years. To this day it still stands the test of time, growing in value and attracting more and more users. It is the king of crypto and doesn’t look like it will get overthrown soon. It has the biggest community around it, products, exchanges and worldwide recognition.
So if you are a beginner looking to take your first steps in the crypto world, I recommend on starting with Bitcoin. Ethereum is another very solid option for the same reasons, with even bigger potential for growth. The rest of the coins are the big unknown, yet to have made their name for the years to come. Though they hold more risk they have a bigger reward in case you choose the right ones.
Steps for buying Crypto:
2. Buy Crypto with your credit card
3. Optional: Open a wallet from the list above, or use a hardware wallet -transfer your funds to the wallet.
Congratulations, You are now a proud owner of the coins that you bought.
I recommend getting your coins off the exchange as that is the only way you will truly own your coins. In crypto there is a saying – “Not your keys, Not your coins”. That means that if you leave the coins on the exchange and the exchange goes bankrupt you may lose access to your coins. These incidents have happened before so you should take that in mind.
The only reason to leave coins on the exchange is if you bought a very small amount and the withdraw fees bite a large portion of your bag. Another reason is if you trade frequently (which I don’t recommend if you don’t know what you are doing). For most readers reading this post you will probably want to stay away from trading until you get the basics down.
So to sum it up, for sums larger than 1000$ I would consider to leave the exchange. Statistically if you bought Bitcoin or Ethereum , time is on your side. If you just hold (or should I say HODL) your coins you will gain much more than playing around with them. Don’t forget that there are also taxes for each sale.
Check out the Best Crypto Portfolios for 2021 : Chosen Crypto portfolios – for more info on which coins you should buy.
2. Following Crypto content – to gain the most out of your crypto experience, I recommend following events and news happenings daily. Remember, the crypto world is moving fast and there isn’t slowing it down.
Here are some great resources to follow and learn from:
Limitless Reader’s website – My website is updated weekly and I upload lots of relevant content on crypto and more – so be sure to subscribe!
Trading graphs – Tradingview
Track your portfolio – Blockfolio
Defi platforms – Compound, Aave, MakerDao , Curvefinance
3. Mining Coins, Reward pools and Node Rewards-
If you are tech savvy, you can mine coins at home with the right equipment. Some coins are more profitable then others to mine. You need to take the electricity and depreciation of the gear in mind to understand if the rewards are worthwhile for you. An easier way to get rewards in crypto is to set up Strongblock Nodes. You can read more about it in my guide here.
Another option is to provide liquidity for protocols and decentralized exchanges like uniswap and MakerDao. Keep in mind these are advanced methods that require a good knowledge of the subject beforehand. An easier method is to use Bancor Protocol, it is a loseless protocol that ensures you won’t suffer impermanent loss.
4. Start accepting and transacting with crypto – The best way to get involved and support the crypto community is to start implementing it in your daily life. Maybe if you are a freelancer you can offer to get payed in crypto for a portion of your payment. You can also use crypto to buy goods and services through companies like Bitrefill, Xbox store, Namecheap or even through private people.
What is the future of Cryptocurrencies?
Cryptocurrencies are most likely here to stay and grow over the next few decades. There might always be a black swan event no one expects that will wipe this industry away, but in general, it seems less likely.
There is a high demand from institutions and retail investors alike to participate in the crypto industry. As more and more of our lives combine with the digital space, it seems as if digital money is just another transition in that step.
Governments and Banks are also considering issuing digital currencies and regulation is starting to raise its head towards this industry. With so many companies and institutions involved there seems to be growing interest and a modern gold rush to participate in these exciting markets.
We might as well witness cryptocurrencies and blockchain technology entering our lives in our future in multiple ways. Such as real estate, insurances, digital ID’s, entertainment, the Internet of things, and many more industries. The extremists believe that cryptocurrencies will replace banks and the use of centralized coins. This might be a certain direction but I believe we are still far from this scenario. In my opinion, until crypto is not easy as Fiat money, it will never gain the mass adoption that it potentially can achieve.
As you can tell by now, crypto is a broad and extensive subject that has many subfields to explore. If you’ve come this far and read the Ultimate Guide to crypto, you now have a great view of the subject.
I urge you to go on and keep discovering about the infinite world of crypto, and maybe even get involved after you made your research. Remember to always take extra safety measures when dealing with crypto, always backup your private keys, never share them with anyone, and always double-check when transacting over the network. There are far too many stories about folks who lost millions because they didn’t take enough safety measures.
The biggest advice I can give out regarding crypto is that you should take a stance on the subject. Maybe you decide that you are interested in this world, and want to give it a try. Maybe you decide this isn’t for you and you prefer using more traditional finance tools. That’s great! Deciding not to do anything is also a great choice. Just make sure you take a well-educated decision that suits you, so you don’t feel you missed a great opportunity (or a downfall) in the future!
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I will also be happy to discuss your thoughts with you in the comments section.
Until next time,