Hello, and welcome to our lesson on what cryptocurrencies are and how to use them. We’ll give you a basic explanation of how Bitcoin works, look at common terms such as initial coin offerings and mining, and explore what blockchains do.
Let’s begin with a basic definition of what cryptocurrencies are:
- They are the digital equivalent of paper money, and are stored and traded virtually.
- Cryptography is used to prevent them from being counterfeited or spent twice.
- There are thousands of cryptocurrencies currently in existence, and Bitcoin was the first one.
Below, we answer some common questions – and provide links that’ll enable you to learn about each topic in further detail.
BTC was launched in 2009 – and in a nutshell, it’s a digital asset that has been created without a central bank. No single person is in charge of it. The cryptocurrency was invented by an anonymous person or group called Satoshi Nakamoto, who was angry at the role banks played in the 2008 financial crisis. Only a maximum of 21 million BTC will ever exist, and this scarcity means that it’s often compared to gold.
A new cryptocurrency, including Bitcoin, typically enters circulation through a process called mining. Miners are responsible for verifying transactions and adding them to the blockchain – and as a reward, they get brand-new, shiny crypto. Most BTC is now in circulation, meaning there are only a few million left to find. They will be gradually released between now and 2140.
A blockchain is basically a cutting-edge database with one unique selling point: the records they keep cannot be tampered with. Batches of Bitcoin transactions are bundled into a block, which are then added to the chain of blocks that came before it. Many blockchains are public, meaning it’s possible for anyone to see how cryptocurrencies have been spent. They don’t have to be used for money, either – other use cases include food safety, for example.
You can change your fiat currency for Bitcoin using a cryptoexchange. Good trading platforms will support fiat from around the world – including dollars, pounds and euros. A cryptoexchange will give you up-to-the-minute prices that are based on market movements, as BTC is known for being a volatile asset. You may have to pay transaction fees.
In a crypto wallet. Not only can you keep your BTC safe, but it’s also possible to send these assets to other people – and receive payments from them too. A “cold wallet” refers to storage that isn’t connected to the Internet, improving the chance that your BTC can’t be stolen by malicious actors. As you’d expect, a “hot wallet” is the opposite. Wallets can come in the form of software, websites, apps, hardware and even paper.
An initial coin offering is a form of fundraising that crypto projects use to bring a new token to market. Investors rarely end up getting an ownership stake in the company – instead, they’ll get cryptocurrency that they can use and potentially sell at a later date for profit. It’s worth being super careful if you’re tempted in getting involved with ICOs, some of them are scams. In recent years, ICOs have become less popular – and instead, they’ve been replaced with things such as initial exchange offerings and security token offerings.
Just like seasoned investors trade things like stocks and bonds, it’s also possible to trade Bitcoin. Given how volatile it is, some traders try to capitalize on sudden market swings. Many cryptoexchanges allow their users to use stop losses and take profit orders to help take the emotion of out of trading. In recent years, as the industry matured, derivatives markets have begun to emerge – meaning that BTC futures and options are now available.
A futures contract is an obligation to buy and sell Bitcoin, or other cryptocurrencies such as Ethereum, at some date in the future. Options contracts are slightly different – meaning that a trader has the option, but not the obligation, to follow through with the contract.