Cryptocurrency for Dummies and Beginners - A Complete Guide

So, the technology behind cryptocurrency is called the blockchain. In a simple explanation, a blockchain is basically a decentralized ledger that consists of public records. It works like a database that saves all the transaction histories, but it’s not centrally managed like traditional databases. In relation to cryptocurrency, these public records inside the blockchain consist of crypto transaction records.

Think of it like this. In a normal database, there’s always one central authority that can always modify any record it wants, and everybody else (who wants to access that database) will have to accept whatever the central authority decides to change. 

In a blockchain system, you have hundreds or even thousands of validators that can confirm each other’s transactions and records, all linked in a peer-to-peer network. By having a decentralized system like this, you can trust that the information that’s presented is correct.

I won’t explain too much of the blockchain technical aspects in this article because this is the cryptocurrency for dummies guide, after all. Let’s use a simple analogy instead. Imagine if you own a map, and you distribute the copies of your map to 20 people that you don’t know. In total, there are 21 people owning the same copy of the map.

Now, imagine someone called Bob asking you for the direction of an address on the map. All 21 people, including you, will have to confirm the same information. Bob will be much more convinced that the information about that address is correct because there are 21 different individuals that show him the exact same direction to that address.

Now, how if someone out of the 21 people presents the wrong information to Bob? Well, whenever one of the 21 map owners purposely modifies the direction of the address on his map to trick Bob, Bob still won’t get lost. Why? Because the other 20 won’t modify the address on their map copies unless you conspire with all of them to do so. 

The chance is, if you don’t know these 20 people and you don’t know how to contact them, they will not change the address on their map copies. In this case, Bob would still trust the information that these 20 people provide, even though your map falsely points in a different direction, right?

This is how a blockchain system works, in a nutshell. All the validators will have to verify each other’s records and information, and the majority will reach a consensus. The new information that’s presented to the people will come from that consensus mechanism. 

This is different from a central database where one individual or entity controls all the information since nobody else will be able to become a “validator.” Using the above analogy with Bob and the map, in the case of a central database that manages fiat currency, whenever this individual or entity decides to modify the address direction, Bob would just have to believe that the information is correct since he can’t verify it through other sources.

At the beginning of the article, I mentioned how cryptocurrencies utilize cryptography processes for trustless, decentralized, and secure transactions. Yes, this is the easiest definition of cryptocurrency for dummies and beginners. But to dive deeper into this, these cryptography processes are actually maintained by the blockchain that supports that cryptocurrency.

Each time crypto is transacted from one party to another, the blockchain behind that crypto is always instantly updated to include the transaction record. A block is filled with these transaction records, and each one of them is tied to previous blocks, like how a chain works. That’s why it’s called a blockchain (all the blocks are tied to each other, connected by a chain).

Since every block in the blockchain is confirmed and verified by multiple different participants (validators) in the same blockchain network, you can trust the information is most likely to be correct. Just look at my analogy above with Bob and 21 map owners. 

A cryptocurrency cannot be secure or “trustless” without a proper blockchain system. The more decentralized one blockchain is, the more “trustless” the cryptocurrency becomes. 

Because when there are more validators, it becomes less likely that the majority will conspire to manipulate the transaction records inside the blockchain. When there are fewer validators, it’s the opposite scenario. The risk of transaction manipulations gets bigger.

You can imagine here, an established blockchain system like the Bitcoin blockchain is far more secure and decentralized compared to newer and way less famous blockchains. 

Usually, there are a significantly lower number of validators in the newer blockchain systems. On the other hand, there are over 12,000 validating computers that maintain the Bitcoin blockchain. 

This is why many traders and investors believe the transaction records in the Bitcoin blockchain can’t be manipulated like fiat currencies. 

And thus, all these crypto traders and investors are among the factors that give value to Bitcoin since they are the ones creating the market demand. So, as you can see, trust in one blockchain network is the thing that gives trust to the cryptocurrency supported by that same blockchain.

Still not convinced with the future of cryptocurrency? Let’s learn more about key crypto advantages:

Security And Immutability: In this cryptocurrency for dummies article, above I explained the fundamentals of blockchain mechanism. Yes, it’s one of the strongest advantages. Cryptocurrency transaction records become much more immutable and secure when there are more validators supporting the same blockchain network.

Less Corruption Risks: Government entities are always the ones managing fiat currencies. The government policies can dictate and modify the fiat currency’s valuation easily. Fiat is not really dictated by real market demand and supply.

With cryptocurrency, the valuation comes from the investors’ trust in the currency and the blockchain system behind it. All the participants in the network share the “power”.

Money Supply Problem: Arguably, one of the biggest issues with fiat currencies is the fact that central banks always abuse money printing policies to solve monetary problems. This creates a long-term inflation problem since most people lose their purchasing power over time.  

With cryptocurrencies, someone can’t just make decisions to print more money easily. Most of the monetary supply rules are already hard-coded from the very beginning. 

Faster and Cheaper International Transfer: Another problem with fiat currencies is the fact that it evolves at a very slow pace. International transfers are still mostly dependent on the SWIFT system or its equivalent. They can be expensive and slow.

On the other hand, you can just transfer cryptocurrencies from one wallet to another very easily. It doesn’t matter where the recipient is located; he or she will be able to receive the crypto almost instantly, sometimes in a matter of seconds. In more modern blockchain systems, sometimes, each transfer will cost less than a $0.1 transaction fee.

We have talked about the basics and the advantages of crypto. Now it’s time to talk about their risks as well. There are multiple risks you need to be aware of.

Cryptocurrency prices are subject to high levels of volatility. Here is one piece of advice about cryptocurrency investing for dummies. Prices can easily go up and down within weeks or even days. Even if you believe that crypto will have a place in our future, you must remember never to put more money than you can afford.

The level of decentralization might be questionable. Above, I explain how a strong and established blockchain system can help its cryptocurrency to gain trust from investors due to how immutable the transaction records may be. 

The thing is, many cryptocurrencies have questionable levels of decentralization. Some of the top cryptocurrency projects actually have very few entities managing the blockchain nodes, which means they are prone to manipulation risks.

Many newer projects might not fulfill their promises. Remember that the cryptocurrency industry is still very young. Many of the newer projects are only able to raise funds based on hype and promises. Their investors buy and hold their tokens only because of the developers’ promises.

History has shown that many crypto developers did not fulfill their own development promises. You must be super careful and do your own due diligence before you trust a new crypto project to invest.

You have studied the main crypto advantages and risks above. Hey, congratulations! It’s never easy to start learning cryptocurrency for dummies but you made it this far!

Now it’s time to get your hands dirty with actual experience. To begin, you need to exchange some fiat for cryptocurrencies by using fiat-to-crypto exchanges. Every country has its own established exchanges. Depending on where you come from, you might need to ask your social circle where to go from here.

In the United States, for example, people can just sign up with Coinbase or Kraken and exchange their USD to Bitcoin or Ethereum or other cryptocurrencies. In other countries, the go-to exchanges might differ. And by the way, I highly recommended to create your own non-custodial crypto wallet.

You want a non-custodial wallet because it is your own wallet where you control all the keys.

Meanwhile, your exchange centrally manage all the user accounts. We will write a guide on non-custodial crypto wallets right here at Despace University. Stay tuned!

I hope the above cryptocurrency for dummies article has helped you a lot. If you wish to go down the rabbit hole, you can always check out our tutorial section and start from there. Good luck!