Learn about cryptocurrency

There’s a lot to get your head around, so we’ve condensed what you need to know into a short set of items.

Crytpcurrency, bitcoin and blockchain word cloud

Andreas M. Antonopoulos is a best-selling author, speaker, educator, and one of the world’s foremost bitcoin and open blockchain experts. It is worth checking out his:

  • Podcast interview by Kevin Rose 'Bitcoin's true potential'. In this, Andreas gives a really good overview of the purpose, benefits and future potentials of blockchain and cryptocurrencies
  • YouTube playlist 'Bitcoin for Beginners', taken from various talks he has presented
  • Book 'The Internet of Money' - this is one of most popular books on the subject of cryptocurrency and blockchain technologies

StockCharts have excellent learning resources - blog articles, Stockcharts TV and ChartSchool. All of which will teach you about concepts, strategies and common terminology of technical analysis, as well as other financial analysis methods and important investing topics.

Investopedia is a great resource for learning how to manage your money. It covers all aspects of trading, including virtual currencies.

FIAT

Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material from which the money is made.

Read more on Wikipedia

FIAT money comes in many forms, including, but not limited to; coins, banknotes and digital representations. These are all essentially IOU's (promises) from the government to a set value (e.g. a $10 banknote equals $10 of value). One problem with this is that additional IOU's can be created by the government at any time, when the governments wants to introduce more money into the banking system - this results in inflation, meaning that the $10 you have today is worth a bit less tomorrow.

Cryptocurrency

Cryptocurrency is a digital representation of currency that is finite in quantity (i.e. more cannot be made, which in turn leads to devaluation of currencies), offers secure and confidential forms of transmission between parties and is decentralised (not owned by any one entity, such as a government or organisation).
  • All transactions are sent and received securely and anonymously
  • All transactions are reviewed and verified as being valid
  • All transactions are recorded in a public ledger, known as a blockchain. Once written to, records in the blockchain cannot be changed or deleted. This removes the possibility of fraudulent transactions, lost payment details, etc.
  • A copy of the blockchain is held by multiple parties (can be downloaded by anyone) and can be viewed by anybody at any time (note – transactional data will be visible, but no personal data will be visible)
  • You can store cryptocurrency using secure methods, which are retrievable. FIAT money can be lost or taken away from you if it is stored under your bed, in your wallet, in a bank (governments have taken money away from people’s bank accounts). If you have cryptocurrency in a digital wallet (e.g. on your mobile phone, laptop or hardware wallet) which you lose (stolen, misplaced, fire, etc.), you can easily retrieve the wallet and all of the currency in it if you have the backup key written down (which you generate when you create the wallet)
  • The amount of each cryptocurrency available is often limited (Bitcoin is limited to 21 million), which means that no more can be made; so the value of the currency will not be reduced, so there will be no inflation. Ethereum (another popular cryptocurrency) does not currently have a limit, but might do in the future
  • International transactions are not an issue, as Cryptocurrencies are global, not limited within geographical locations
  • Cryptocurrencies are not owned or controlled by any one entity, such as a government or organisation

The term 'altcoins' is actually a bit ambiguous.

Some people use it to refer to cryptocurrencies that are like Bitcoin in nature i.e. cryptocurrencies that are designed to act as a coin, unlike some cryptocurrencies such as Ethereum, which are designed to be used as tokens for specific utilities.

Other people use it to simply refer to any cryptocurrency other than Bitcoin.

Each time a payment is made using Cryptocurrency, a small charge (known as a ‘transaction fee’) is paid. This fee is paid to the miners, whose job it is to review and validate the transaction before it is placed onto the blockchain.
A blockchain is a decentralised ledger, where details of all validated transactions are stored. The benefits of a blockchain are:
  • Only verified (by miners) transactions can be written to the blockchain. No records within it can be changed or deleted without the record cannot be altered without the alteration of all subsequent blocks and the consensus of the network
  • It is stored on all nodes, not in a single location - this makes it very secure, highly available and fast to access
  • It can be viewed and downloaded by anyone, at any time
  • Only transaction infomation can be read (e.g. sender and receiver wallets and the value sent), no personal or identifiable information can be read
  • Cryptocurrencies are not owned or controlled by any one entity, such as a government or organisation

In cryptocurrency networks, mining is a validation of transactions. For this effort, successful miners obtain new cryptocurrency as a reward. The reward decreases transaction fees by creating a complementary incentive to contribute to the processing power of the network.

For more information on mining, see Wikipedia

Any computer that connects to the Bitcoin network is called a node. Nodes that fully verify all of the rules of Bitcoin are called full nodes.

A cryptographic wallet is where you store your cryptographic currency. The different categories of wallets are hot wallets and cold storage.

Hot wallets have a direct connection to the Internet. They can be a website, or a program that runs on a PC or phone.

Cold Storage wallets do not have a direct connection to the Internet. They can be a hardware device or non-electronic device (such as paper).

For more information on wallets, see this post on Medium.

A cryptocurrency Private Key is used to ‘open’ the wallet (by which I mean the place where the Cryptocurrency is stored — i.e. Hot Wallet or Cold Storage), in order to withdraw the Cryptocurrency. If you share the Private Key with someone else, they could potentially take all of the Cryptocurrency out of the wallet.

Note that when you have a Hot Wallet that is hosted on a Website, you are not the sole owner of the Private Key — the owners of the website have access to the Private Key. Because your Private Key is not 100% under your control, your wallet (and any Cryptocurrency within it) is not 100% under your control, therefore, you should limit the amount of Cryptocurrency that you hold in this wallet to a minimum value and storage duration, in order to minimise risk of theft.

For more information on public keys, see this post on Medium.

Buying, selling and trading

Exchanges are where you exchange currencies – e.g. from FIAT to cryptocurrency (e.g. US Dollar to Bitcoin) or from one cryptocurrency to another (e.g. Bitcoin to Ethereum).

Go to our comparison of cryptocurrency exchanges.

When you store your cryptocurrency on exchanges, you don’t own the private key. This means that there is potential for your cryptocurrency to be lost by accidental or malicious means. Therefore, it is recommended that you only store on them the amount of cryptocurrency that you will be using for trading. Remember that the safest place to store your cryptocurrency is in a cold storage device.

With decentralised exchanges, because all transactions are performed on a peer-to-peer basis (i.e. between end-users computers, not on a central exchange system), you never keep cryptocurrency on a central exchange, instead; your cryptocurrency can be kept in your personal warm wallet or cold storage device.

Leverage involves borrowing a certain amount of the money needed to invest in something.

To keep leveraged positions open, traders are required to hold a percentage of the value of the position on the exchange, known as the Maintenance Margin percentage.

If you cannot fulfill your maintenance requirement, you will be liquidated and your maintenance margin will be lost.

With some less popular cryptocurrencies, there might not be enough people on the exchange buying or selling the volume of cryptocurrency that you want to buy or sell, at the time and price that you want to make the trade. This means that you might only be able to buy or sell part of what you want (e.g. $60 worth instead of $100 worth)

Bots are automated tools that buy and sell cryptocurrencies for you, using your capital, aiming to make you a profit.

Go to our comparison of cryptocurrency bots.