Cryptocurrency 101 for Beginners
New to crypto? Start your journey right here where we explain the basics of cryptocurrency, blockchain, and everything you need to know to get started.
In this guide, we’ll first talk about the essence of cryptocurrency and Bitcoin, as well as blockchain technology, which is what makes the crypto world possible. In this way, we can distinguish between what is cryptocurrency and what is not.
Then we’ll get to how it is stored, sent, traded, and invested using tools like crypto wallets and platforms like crypto exchanges.
Finally, we’ll run through some of the ways you can benefit from crypto, and how you can protect yourself from scammers and avoid other problems that could make you lose your money.
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What is a cryptocurrency?
Cryptocurrency can sound daunting because of the ‘crypto’ part in the word. But if you ignore that part for a second, it becomes just currency — because it is just currency, with a few extra steps. Cryptocurrency is a medium of exchange, like the South African rand, except it exists purely in the digital realm.
If the rand is enough for everyday use, why should anyone use a cryptocurrency? You must be aware that the rand keeps its value by the full faith and credit of the South African government.
When policymakers make the right decisions, the economy can grow, and the rand can be of good use to the people. However, there is always a risk for any government-backed currency to lose its value due to governmental mismanagement. Examples of hyperinflation are plentiful in modern history.
Cryptocurrencies solve the problem of relying too much on the government. The first cryptocurrency, Bitcoin, was envisioned to separate the money from the state, after the 2008 global financial crisis.
Of course, many more cryptocurrencies were made after Bitcoin, such as Ethereum and XRP. These are what we call altcoins, cryptocurrencies other than Bitcoin.
Regardless of the type of cryptocurrency, all of them are never distributed by any central authority, and the payments networks are run by citizens of any nation around the world. This is the first major difference between cryptocurrency and ordinary money — the former is decentralised.
Crypto validators are special participants who voluntarily serve a crypto payments network. They expend computational power and consume real electricity, and are paid in crypto for their service. The payment is made automatically through the network’s programming.
When you transfer a cryptocurrency such as Bitcoin, you will likely pay a small fee to these validators like how you would pay a transfer fee when making a bank transfer. Due to the decentralised nature of the crypto network, it’s actually not practical to use conventional money, like ZAR or USD, for paying the vastly diverse global crypto community.
In a decentralised economic network, a unique token to settle debts in the network must be considered, and therefore, cryptocurrency is used.
What is blockchain technology?
Blockchain is a special way in which crypto transactions are recorded. When we record transactions in a personal accounting book or ledger, we usually keep it straightforward and write down the changes in the account balances over time.
However, the ledger that records all crypto transactions isn’t being maintained by only one person (otherwise, it wouldn’t be decentralised). To make sure that the transaction history is immutable once recorded, blockchain uses cryptography — this is where the ‘crypto’ part comes in.
When you make a crypto transaction, this transaction is ‘combined’ with other transactions made by other people around the same period into a new single block. Let’s call this Block B. The block also contains unique information about the previous block in the past, which is Block A’s signature. All the information contained in this new block is encrypted to produce the signature of Block B.
When the next set of transactions are made, a new block will be created, Block C, which will contain information about the transaction at present, as well as Block B’s signature. This cycle repeats indefinitely, and each block is chained together by cryptography — hence, blockchain.
The layer upon layer of cryptography ensures that the ledger is immutable. If at any point in the past the transaction data is manipulated or the order of the blocks is changed, the attacker must expend a ridiculous amount of computing power to convince the entire network that the falsified ledger is truthful.
So, hopefully, you now have a full picture of what a cryptocurrency is. It’s a digital token of debt settlement (currency) whose transactions are recorded on a blockchain ledger through layers of encryption. Its payments network is maintained by a decentralised network of validators around the world and isn’t backed by any government or central authority.
How is a cryptocurrency stored and sent?
Cryptocurrency is technically not stored anywhere. Blockchains store the information about an account’s crypto balance at a given time from the past to the present. If the owner of the cryptocurrency were to access it, they must use special software called crypto wallets.
Crypto wallets can read the blockchain and determine the most updated crypto balance of a given account. With crypto wallets, a user can send their cryptocurrencies to anyone.
All they need to do is type down a valid wallet address, the amount of crypto they’d like to send to that address, and optionally, how much they’d like to tip the validators of the crypto network.
A crypto wallet can access multiple wallet addresses, even the ones that are active on different crypto networks. For example, the Exodus wallet can grant you access to cryptocurrencies for Bitcoin, Ethereum, and XRP, along with dozens of other networks.
It’s important to note that Bitcoin cannot be sent anywhere that is not a Bitcoin wallet address. Doing so will cause you to lose the Bitcoin forever, and no one else can even have access to it. The same is true for altcoins — don’t send Ethereum coins to XRP’s wallet address, and vice versa.
Crypto wallets come in two broad categories — hot and cold wallets. Hot wallets exist purely as software. This means to access your account and cryptocurrencies, you’ll need to log in directly on a computer.
On the other hand, cold wallets exist as a hardware, which you can ‘unlock’ using the device itself. You’ll still need to connect the device to a computer with Internet access to transact.
Hot wallets are great for everyday transactions as it is convenient. However, they’re not the most secure of wallets. A keylogger computer virus, for example, can potentially read your hot wallet’s password and compromise your security. However, the same malware can’t read your cold wallet’s access code, giving you a greater security option.
For more security tips on crypto wallets, check out this article: Crypto Hot & Cold Wallet Security Tips
How is a cryptocurrency traded, bought, and sold?
In the early days of Bitcoin, people exchanged regular money for Bitcoin at wildly different rates. This was done in online marketplaces and usually involved negotiating and bidding one-on-one, which was time-consuming.
Nowadays, cryptocurrencies are traded at a much faster rate on crypto exchanges, where thousands of buyers and sellers set their prices and meet in the middle.
When more buyers want a particular cryptocurrency, they will accept higher and higher offers made by the sellers, which will cause the price to rise. Conversely, when fewer buyers want the cryptocurrency, they’d bid on a lower price to pressure the sellers to sell at lower and lower price, which will cause the price to fall.
Crypto exchanges fall under two broad categories — centralised and decentralised exchanges. Centralised exchanges are run by a company, and usually have more regulatory oversight than decentralised exchanges. However, on decentralised exchanges, anyone can issue any type of cryptocurrency to be sold in the open market.
The mechanisms of both centralised decentralised exchanges can be complex, and one could argue that on centralised exchanges, there is a risk of data security breach; on decentralised exchanges, there is a risk of scam. Fortunately for starters, there is a middle ground between the two — crypto retailers.
Think of crypto retailers like a shop for crypto, where you buy and sell directly with a company. You can make an order for Bitcoin, for example, at a predetermined rate. The Bitcoin will then be sent to your Bitcoin wallet, and you get to keep your asset under your own total control.
One such crypto retailer in South Africa is none other than Easy Crypto. But what’s the difference between a crypto exchange and a retailer? Check out this article.
How to use a cryptocurrency as an investment vehicle?
Unlike regular money, cryptocurrencies typically have a limited supply. For example, there could only be 21 million Bitcoin in existence. As of 2021, almost 19 million of them have been issued. This makes cryptocurrency a deflationary asset — it becomes increasingly rare over time.
So, if the demand for Bitcoin stays consistent, its price could rise as buyers continue to bid higher and higher prices just to own Bitcoin. It’s important to note that cryptocurrencies can be divisible by many units. The smallest possible fraction of Bitcoin is 1 satoshi, which is 100 millionth of a single Bitcoin unit.
This makes Bitcoin and altcoins very attractive assets to invest in. Furthermore, the robustness of crypto networks gives confidence to investors the longer the network stays online.
Since 2009, the Bitcoin network has never stopped running and has never been breached by hackers. Interestingly, Bitcoin is perhaps the only system in the world that becomes increasingly secure as time goes by.
To start investing in cryptocurrency, you first need to prepare three things:
- A crypto wallet. Hot wallets like Exodus are good to start with. However, once you accumulate more and more wealth in crypto, consider investing in cold wallets like Trezor and Ledger Nano to increase your asset security.
- A reliable gateway to the crypto world. You’ll need to convert your rands into Bitcoin and other cryptocurrencies, and at the end of the investment period, you’d want your rands back. You can reliably trust crypto retailers such as Easy Crypto to make the conversions for you. Here are the cost comparisons for Easy Crypto against other exchanges.
- The right mentality. Unlike the previous two, this isn’t anything technical but worth mentioning. Crypto assets are volatile, and if you have never invested in volatile assets before, a sudden short-term rise and fall may cause you to make poor investment decisions.
Below are tips on how to prepare the right mentality
1. Crypto is not a get-rich-quick tool
The crypto space is no short of news about a coin that goes up by thousands of percent in value within a month. What these killer headlines don’t tell you is that hundreds of similar coins have quickly become useless. Traders who jump in on these coins might as well be gambling.
On the other hand, Bitcoin, Ethereum, and XRP have existed much longer, and have proven their usefulness and network robustness over time. These are the types of coins that make more sense to invest in over a longer time frame.
So, if you want to invest and not to gamble, resist the urge to buy things you don’t understand, even if everyone is telling you to buy it because “it could make you rich quicker”. In other words, don’t let fear of missing out (FOMO) creep up on you.
2. You can never time the market right
“Buy low, sell high” is easier said than done. Many investors focus too much on timing the market so that they could buy at the lowest price possible and sell at the highest price. The crypto market never sleeps, so these moments could happen while you’re asleep.
It’s possible to miscalculate a price dip as an absolute signal to buy, because the price could fall further. Conversely, it’s also possible to mistake a price rise as a temporary ‘jump’, as the price could rise further when you expect it to fall back down.
Thinking about all these, and monitoring the price constantly may not be the best use of your time and energy. The best approach to investing in any asset, including cryptocurrency, is the Dollar Cost Averaging (DCA). In a nutshell, DCA means buying the asset at any given price, with the same amount of cost, at a consistent interval.
3. Consistency wins the race
You’d be surprised that the Dollar Cost Averaging strategy, in the long run, could outperform the most complex trading strategies. This is because when prices dip when you buy the cryptocurrency, you end up buying more for the same cost. Conversely, when the asset becomes more expensive, you buy less for the same cost.
Over time, you will have more cryptocurrency ‘units’ at a lower price than the ones bought at a higher price. Without needing to time the market, on average, you have bought your assets at a discounted price, which means having a larger potential return.
The caveat here is that you need to stay consistent with your investment. Buy even when the potential profit is at negative and you’re tempted to sell. Stick to the same buying pattern even when the potential profit is at positive and you’re tempted to buy more.
Don’t use borrowed money to invest in cryptocurrency, and always have backup cash to use for emergencies so that you don’t need to sell your holdings before they are due.
How to avoid cryptocurrency scams
Having the right mentality can help you to avoid most of the cryptocurrency scams out there. For example, if you know that cryptocurrency is not a tool to get rich quickly, then you’d want to avoid people who encourage you to buy a “crypto product” that could promise extravagant payouts for over a short period of time.
However, some scams are more elaborate and not obvious in plain sight:
- Multi-level marketing. The traits to look out for are recruitment schemes. For example, they tell you to pay in cryptocurrency for the right to recruit others into a program. If you do, they say, you’ll get recruitment rewards paid in cryptocurrency. The more cryptocurrency you pay, the more money they promise you’ll make. But these are all fake promises and false guarantees.
- Job scams. While many companies have clearly stated that they will not ask for money at any stage of the job recruitment process, job scams will do this. You could be asked to send them a “crypto fee”. Worst of all, the job may involve you “moving cryptocurrencies on behalf of clients”, which could be part of an illegal activity.
- Money mule. The scammer will send you money or cryptocurrencies to be moved elsewhere. As a reward, you’ll keep a portion of the money. If you question the source of the funds, these scammers may come up with an elaborate story to hide the fact that it’s stolen or not legitimate. Do note that this could be part of a money laundering scheme, which you don’t want to be involved in.
The list goes on, so please check out: Cryptocurrency Scams to Avoid. You also want to know who you should trust in the crypto space. To supplement, here is another article that you should be reading too: Trusted and Best Crypto Exchange Players: Who to Trust and Who to Avoid.
A general mindset that can help you avoid such scams is that there is no middleman between you and crypto. You buy or sell crypto with one other party, whether that’s another person or a company.
It should be as simple as buying candy. If someone were to come up to you and elaborate on a scheme that is enticing albeit confusing, don’t go further with that person.
So, please remember the Four S:
Stick to Simple to Stay Safe.
About Easy Crypto
Easy Crypto takes safety and simplicity in mind when introducing the world of crypto to new investors. We are a global crypto retailer, originally grown from New Zealand where blockchain technology is greeted with open arms.
We now operate in four countries — New Zealand, Australia, South Africa, and Brazil — and recruit the best talents from all over the world to help increase mass adoption for this fantastic new asset class.
Although our teams are spread across the globe, we are united under common values. We keep it simple, make the path, have each other’s back, collaborate and hustle together, and enjoy the ride wherever it takes us.
We are NOT an investment advisor, a multi-level marketing club, a get-rich-quick society, and we abide by every financial law and ethical code of conduct in all the jurisdictions that support us.
What you can do with Easy Crypto
Buy, sell, and exchange cryptocurrencies
You can easily, securely, and instantly buy the famous cryptocurrencies Bitcoin, Ethereum, and XRP directly from our platform using the South African rand. You can also sell Bitcoin and other crypto from your crypto wallet and receive ZAR.
Track the growth of your crypto with our portfolio
One beloved feature from Easy Crypto is free to use — the Portfolio Tracker. Whether you have bought crypto from us or not, you can use this tracker to measure the performance of your investments.
Automate your crypto investments
To stay disciplined and consistent with your Dollar Cost Averaging strategy, we also offer a feature called the Auto Buy to automate your crypto buy orders, which you can control with your bank account.
Earn crypto with our affiliates program
Finally, if you want to earn some discount from referring your friends and family to Easy Crypto, we have an Affiliate Programme that can earn you credit rewards from a limitless number of people you refer.
Stay curious and informed
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Disclaimer: Information is current as at the date of publication. This is general information only and is not intended to be advice. Crypto is volatile, carries risk and the value can go up and down. Past performance is not an indicator of future returns. Please do your own research.
Last updated October 11, 2022