The Computer Science Behind Bitcoin: A Beginner Guide to How Do Cryptocurrencies Work

Cryptocurrencies

Do you want to know how cryptocurrencies work? It’s understandable if anyone new to the crypto industry is curious about it, seeing that it is valued at over $3 trillion. However, many newbies find it difficult to wrap their heads around it. The computer science behind how cryptocurrencies work is fairly simple. So, if you are new to the cryptocurrency industry, from this guide, you will learn:

  • What are cryptocurrencies?
  • Should you own cryptocurrencies?
  • Are cryptocurrencies safe?
  • How do you make money with cryptos?
  • And how to get started with cryptocurrencies?

By the end of this guide, the hype of the crypto industry will make more sense to you. Without further ado, let’s get right into this guide.

What is Cryptocurrency?

Cryptocurrency is a term used to categorize some digital assets. But do not get this confused, all cryptocurrencies are digital assets, but not all digital assets are cryptocurrencies. Cryptocurrencies can be securely sent from one user to another as digital assets. When trying to understand the whole idea of cryptocurrency, there are two main types of cryptocurrencies.

Decentralized crypto

Unlike fiat currencies with a central body that regulates them, most cryptocurrencies are decentralized. For example, Bitcoin and Ethereum are decentralized cryptos. Decentralized crypto means crypto that users control. Users can send this type of crypto between themselves without a third party.

This type of crypto comes with several benefits and downsides. For example, transaction fees are way less expensive because of the lack of a third party. Also, if you send decentralized crypto to the wrong account, there is no way you can cancel the transaction.

Centralized crypto

Many beginners in the crypto industry make the mistake of thinking that all cryptos are decentralized. Because a vast majority of popular cryptos are decentralized, this doesn’t mean that all cryptos are decentralized. Examples of popular centralized cryptos include the likes of Binance, Coinbase, and so on.

One distinctive feature of centralized crypto is that a central body regulates them. The central body acts as a middle man to help conduct transactions. Because there is a middle man in this type of crypto, transaction fees are usually higher, but you have more support options when you run into challenges.

What is a Blockchain?

Blockchain

To better understand how cryptocurrency works, you need to know what blockchain is all about. Like in fiat currency, when a user makes a transaction, the transaction history is stored in the financial institution server. This server lists all the account holders’ names, balances, and transaction records. Hence, when an account holder wants to perform a transaction, the financial institution confirms from their server the account balance of the account holder before approving the transaction of the user.

So, like financial institutions’ servers, the blockchain is the equivalent but quite different.

For example, the blockchain is a public ledger, meaning anyone with a PC or smartphone and internet connection can access it. If you send crypto to someone, it is a public record, and anyone can view the transaction. However, the blockchain will not display your personal information or banking details.

Simply put, even if someone wants to monitor your transaction, there are thousands of other transactions going on at the same time, and it will be hard for anyone to associate any transaction to any particular person except if they have information about the person’s wallet such as wallet address and so on.

It might also interest you that the blockchain is made up of blocks. In each block, miners (in the case of fiat institutions, the bankers) confirm several transactions. It is stored in the blockchain when a block is full, forming a new block. As in the case of Bitcoin, a block size is only about 1MB. Different cryptocurrencies that use blockchain technology have different block sizes. For example, Ethereum has a block size of 80kb or around 4MB in ten minutes. The bigger the block size, the more transactions the crypto can perform and the faster it will be.

How do cryptocurrencies work?

Now to the main question in this guide, how does cryptocurrency work? When you buy crypto assets, what is actually happening? Think of Cryptocurrencies as a marketplace with buyers and sellers. To own crypto assets, you need to buy them from a seller.

Depending on the seller, you can purchase crypto assets using different payment methods. Some sellers let you buy any crypto assets with your local currency; some use only USD, while others let you buy one crypto asset with another. The bottom line is that you need to give up something for a particular crypto asset.

When you pay for crypto assets, what exactly are you paying for since you are not getting any physical product? Buying crypto assets simply means exchanging money to own the key to decrypt a code. Every crypto asset is unique, and there can never be two of the same types. Crypto assets are made available by miners. Miners use sophisticated tools to solve complex problems to generate encrypted codes through cryptography.

At this stage, it is normal, especially if you are a beginner, to wonder why you should convert fiat currency to crypto.

Well, there are several benefits of using crypto rather than fiat currencies, such as:

  • Faster transactions.
  • Fewer transaction fees.
  • Not regulated.
  • Tax-free.
  • Boundless by jurisdiction.

Is Cryptocurrency Safe?

Secure

Cryptocurrency is easy to use and secure. However, this doesn’t mean that using cryptocurrency does not have its challenges. One particular challenge of using crypto is that it is the major target of internet fraudsters and scammers. Stealing cryptocurrency is not as easy as it may seem at first. Fraudsters cannot merely come to your wallet and steal your crypto assets. Fraudsters can only successfully steal funds from users when they do not take necessary safety precautions.

Think of it this way; if you do not protect your credit card PIN, anyone can easily steal your funds if they can lay their hands on your card. Similarly, cryptocurrency is safe if you take the necessary precautions to secure your wallet. Fortunately, you can take several security measures when you want to store your crypto assets safely. Below are three common safety measures to protect your crypto assets.

Use a strong password

Using a strong password makes it hard for hackers to guess it. You can use several online password generators to create a strong password.

If you do not want to use that when you want to create a password, ensure it contains upper and lower case alphabets, numbers, and a special character.

Activate two-factor authenticator

With a strong password, you can activate a two-factor authenticator. The good thing about a two-factor authenticator is that the password it generates is constantly changing. Moreover, you need to have access to the authenticator to access the crypto assets. In other words, even if fraudsters can guess your wallet password, they can’t steal your funds remotely.

Cold storage

Another option you can take advantage of is to opt for cold storage. Most online crypto wallets store their users’ crypto assets offline. But you can as well store your crypto assets offline. If you want to use cold storage, buy a hardware crypto wallet, transfer your crypto assets to it, and store it in a safe, unplug, and safely away from any wireless device.

How Does a Cryptocurrency Get Its Value?

Piggy bank

The crypto industry is very lucrative, but what is the cause for its value? Because from the explanation above, cryptocurrency is simply a bunch of codes. So, why will a bunch of codes be more valuable than products like medicines, foods, and even gold?

Utility

The utility is one of the major reasons for the value of cryptocurrency. The use of cryptocurrency surpasses fiat currency; hence, some cryptocurrencies have more value than fiat currency. For example, cryptocurrency can purchase products and services internationally with minimal charge. Also, cryptocurrency is fast and almost instantaneous, making it more useful than fiat currency which can take days or weeks to confirm international transactions.

Demand and supply

In any industry, demand and supply can influence the value of any commodity. If there is a high demand for a commodity, it has value. Similarly, if the supply is high, it can push the value of the commodity down. When it comes to cryptocurrency, the number of crypto assets pumped into the market can influence its value, as its demand for it.

News

Also, the news about any particular crypto-assets can influence the asset’s value. News of SEC scrutinizing any crypto or regulations against the use of any crypto assets can depreciate the value of a crypto asset. Also, news of an influencer buying certain crypto can increase the value of such an asset.

How to Buy Cryptocurrency Safely?

As a beginner, you must do so safely when you want to buy cryptocurrency. Here is a step-by-step guide on how to go about it.

Step 1: Choose an exchange

The first and crucial step to buying cryptocurrency safely is to choose an exchange. Exchanges such as BinanceCoinbaseGemini and the likes have made a name for themselves as leaders in the industry. When searching for an ideal exchanges, look out for features like security, fees, and available coins.

Step 2: Fund your account

Next, you are to fund your exchange account. There are several ways to fund your exchange account to buy crypto assets. The method you end up using should depend on the exchange. Find out the different payment methods available on the exchange, and use the most convenient one.

Step 3: Place an order

Once that is done, you can then place an order for the number of crypto assets you want to buy. Take note of the rate of the exchange and the amount of cryptocurrency you will receive in your wallet.

Step 4: Practice safe storage

Depending on the exchange, but most exchanges have a wallet. So, you can either receive the ordered crypto asset in the exchange wallet or a wallet you choose. As a safety measure, you should always transfer your crypto assets to a wallet you trust. Note that not many exchanges wallet is safe; opt for cold storage or an offline hardware device. Below are some of the best wallets you can use:

  • Exodus – best wallet for beginners.
  • Payeer – best wallet to shop online.
  • Luno – best wallet to buy and store crypto with local currency.
  • Ledger – best cold wallet.

Can Cryptocurrency Be Converted to Cash?

Convert to cash

Yes, you can convert cryptocurrency to cash. The way you buy cryptocurrency from an exchange, you can also convert any crypto asset to cash. When you want to convert cryptocurrency to cash, visit a crypto exchange, and take note of the type of crypto assets they exchange. Note that some exchanges only buy and sell certain types of crypto assets.

How Do You Make Money With Crypto?

The cryptocurrency industry is very lucrative, and you can make money from it in so many ways. Here are some of the common ways people make money with the crypto.

Mining

Mining is one of the top ways people make money with crypto. It involves investing in mining equipment to mine crypto. Note that investing in mining can be very expensive, and the cost of buying the equipment and running it can run high quickly. If you can’t afford to buy the mining equipment and run it yourself, you can always consider cloud mining.

Trading

As we said earlier, cryptocurrency is very volatile, which means its price is constantly fluctuating. You can use the volatility of the crypto industry to your advantage. As a crypto trader, you monitor the market using several strategies and charts to know when to buy crypto assets when the price is down and sell them when the price is high.

Buy and hold

If you do not want to be a crypto trader, you can always consider buying and holding crypto assets. Despite the volatile crypto industry, good crypto assets will increase in price in the long run. Take bitcoin, for example, from when it was launched and now a couple of decades later.

Is Cryptocurrency a Good Investment?

Cryptocurrency is a good investment if you have a high-risk appetite. While the crypto industry is very volatile, cryptocurrency is potentially profitable in the long run. While there is a high chance you may lose all your money, there is also a chance you can make more than 100% profit. So, if you are considering investing in cryptocurrency, it is good to take note of the type of cryptocurrency you invest in. Some crypto assets are Shitcoins and are designed to steal your money. Do well to research the cryptocurrency you want to invest in before investing your money.

Conclusion

To sum things up, cryptocurrency is potentially the currency of the future. What are you waiting for if you are yet to get on the train of people investing in cryptocurrency? Get yourself a secure crypto wallet, find a secure crypto exchange, and research the type of crypto asset to buy. Many people are making money with cryptocurrency, and you can make money too.