A Beginner's Guide to Cryptocurrency

The world of cryptocurrency is constantly evolving.

This beginner's guide to crypto teaches you the basics, including the following: what cryptocurrency and blockchain mean; different types of cryptocurrencies (think Bitcoin); how to purchase cryptocurrency; and how to safely store crypto.

What is cryptocurrency?

Cryptocurrency, often referred to simply as crypto, is known as any form of currency that exists either digitally or virtually and uses cryptography to ensure secure transactions. Unlike traditional currencies that have a central issuing or regulating authority (like the government), cryptocurrencies circulate without a central monetary authority. Instead, crypto uses a decentralized system to record transactions and issue new units.

Crypto is digital, meaning that is it only generated and traded in a digital or virtual format. Additionally, because it is a digital currency, the value of most cryptocurrencies is not pegged to a fiat currency like the United States Dollar or Japanese Yen, nor is it determined by precious metals like gold or platinum.

Cryptocurrencies can be mined or purchased from cryptocurrency exchanges.

What is cryptography?

Cryptography is the study and practice of sending secure, encrypted messages between two or more parties. It allows digital currency transactions to be pseudonymous and ensures that each unit of cryptocurrency is secure and can’t be copied. It also protects from double-spending. If you are interested in investing and trading in cryptocurrency, you can rest assured that your transactions are safe and secure.

What is blockchain?

A blockchain is a distributed database that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in a digital format.

Blockchains are most widely known for their crucial role in cryptocurrency systems. The widespread use of blockchain as the core platform for most types of cryptocurrencies started in 2009 when the innovative use of blockchain technology allowed for the successful launch of Bitcoin (a type of cryptocurrency). The innovation with blockchain technology guarantees the fidelity and security of data and generates trust without the need for a centralized regulating authority.

Blockchain gets its name because the system is built from blocks of data that are chained together in chronological order so that all transactions are visible to everyone on the network. The way the system is constructed means that the records are theoretically unchangeable. A blockchain runs on a decentralized network of computers, called nodes, which allows for peer-to-peer confirmation that drives faster, more secure transactions. The speed, security, and transparency of blockchain have allowed for the growth of cryptocurrencies worldwide.

Types of cryptocurrencies

Below are the details on three popular cryptocurrencies:

Bitcoin

If you’ve heard of crypto, you’ve likely heard the term Bitcoin. Bitcoin is the largest and most popular form of digital currency. It was introduced to the public in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto. One of the key characteristics of Bitcoin is that its coin supply is limited. The maximum number of bitcoins that can be issued – mined – is 21 million, due to the halving feature written into the code. Bitcoin inventors designed the cryptocurrency essentially as digital gold and capped the maximum supply to mimic the finite quantity of physical gold. As of January 2022, 18.9 million bitcoins have already been issued, with 2.1 million still to be released. The current cost of one coin is roughly $20,000, but because of its digital nature, you can purchase fractions of one coin.

In November 2021, the aggregate value of all cryptocurrencies in existence had reached over $2.1 trillion - Bitcoin represented approximately 41% of that total value.

Ethereum

Ethereum is the second-largest cryptocurrency by trade volume and market cap. It is a blockchain network and software platform that developers can use to build apps and other cryptocurrencies. The associated currency for Ethereum is called Ether, and the current cost of one token is roughly $1,500. If you don’t want to purchase a whole Ethereum token or don’t have enough money in your account for a full coin, you can purchase a fraction of one.

XRP

This is the cryptocurrency of the Ripple digital payment network. The XRP ledger is a decentralized, public blockchain built for digital payments. XRP touts itself as a faster, more efficient way to power global payments. These tokens are much cheaper to purchase, roughly $0.30 per coin. Ripple crashed at the end of 2020 due to actions filed against Ripple by the SEC, causing the price to tank. It is predicted that the price will rise to roughly $1 by the end of 2022.

How do you buy cryptocurrency?

Buying cryptocurrency safely involves three basic steps:

Step 1:

Decide where and how to buy: There are many ways to purchase cryptocurrencies, but the most accessible method for beginners is a centralized exchange. Centralized exchanges serve as a third-party overseeing transactions to give purchasers confidence that they are getting what they pay for. These exchanges generally sell cryptocurrencies for market rates and make money on various services they provide to purchasers. You also have the option to purchase through an online broker that offers access to cryptocurrencies as well as stocks. Additionally, some credit unions are enabling members to buy and sell cryptocurrencies through their digital banking solutions.

Decentralized exchanges are another way to purchase cryptocurrencies, and they generally have lower fees than those charged by centralized exchanges. However, decentralized exchanges are typically more difficult to use and require more technical know-how.

Cryptocurrencies can also be traded through peer-to-peer transactions.

Step 2:

Add value to your account: Depending on your method of payment, you may be required to fund your account before buying any crypto. If you are using fiat currency, most exchanges allow for debit and bank transfers, and some allow for purchases through credit cards.

If you already own cryptocurrency, you can transfer it into your account from a digital wallet or other platform and use it to trade. As a note of caution, be sure to verify that your crypto exchange allows trading between the assets you’re looking at. Another thing to consider is that exchange fees vary depending on what you're buying and how you're buying it, so review these details carefully.

Step 3:

Select a cryptocurrency: Now it’s time to make a purchase! As mentioned, there are thousands of cryptocurrencies to choose from, and not all cryptocurrency is created equal. It is important to do your research and determine your goals for this investment before making a purchase.

How do you store cryptocurrency?

Once you purchase cryptocurrency, it’s important to store it safely to protect it from hacks or theft. Typically, cryptocurrency is stored in crypto wallets, which are either physical devices or online software used to store the private keys to your cryptocurrencies securely. Some exchanges provide wallet services, making it easy for you to store directly through the platform. But not all exchanges or brokers provide wallet services, so it may be up to you to acquire a crypto wallet.

There are two different types of crypto wallet storage options:

Hot Wallets: crypto storage that uses online software to protect the private keys to your assets. Typically, hot wallets don’t charge fees.
Cold Wallets: (also referred to as hardware wallets) crypto storage that relies on offline electronic devices to securely store your private keys. Cold wallets tend to charge fees.

Further Resources on Cryptocurrency

Here are some credible resources on cryptocurrency.

Coinbase: This is one of the largest and most popular cryptocurrency exchanges. Their website provides information on different cryptocurrencies, market trends, and investment strategies.
Coindesk: This is a news and information website focused on cryptocurrency and blockchain technology. They provide in-depth analysis on market trends, regulatory developments, and the latest news in the crypto world.
Investopedia: This is a finance and investing website that provides information on a wide range of topics, including cryptocurrency. They have articles and tutorials that cover the basics of cryptocurrency, as well as more advanced topics like blockchain technology and smart contracts.

What else should I know about crypto?

Just like any investment product, it is important to get a good understanding of cryptocurrency before you buy. Make sure to do your research! While this is a great introduction, cryptocurrency is a relatively new phenomenon and there is plenty more to learn.

Did You Know?

Credit unions have begun to explore the potential of offering members the ability to buy, sell, and hold digital currencies like Bitcoin and Ethereum. This reflects a growing interest in cryptocurrencies as a legitimate investment option and a way to diversify portfolios. If you're interested in exploring cryptocurrency as an investment, it may be worth checking with your local credit union to see if they offer any services or resources in this area.