Cryptocurrency for Dummies: How to Start and Earn from Scratch

What is Cryptocurrency

Initially, Bitcoin (the first cryptocurrency) was intended as a means of payment. At the dawn of the crypto industry, BTC was indeed used as a unit of account; however, over time, it became clear that Bitcoin is better used as an investment tool: you don't need to pay for things with it, but rather buy and hold it to get a good return.  

But for someone who has never encountered cryptocurrencies, it may be unclear how digital money can be used for payments, let alone investing in them? This article will cover: what cryptocurrency is, how it differs from fiat currencies (regular money), how to obtain it, and much more. 

Definition

Cryptocurrency is electronic money that does not exist physically. Its primary unit of measurement is a coin or token. Cryptocurrencies are used as a means of payment or investment assets. It operates on a decentralized system (e.g., blockchain) without a central regulator. 

History of Cryptocurrencies

Bitcoin was created in 2009 by a person or group of persons under the pseudonym Satoshi Nakamoto. A distinctive feature of cryptocurrency is that it is not controlled by any state, law, financial institution, or individual. All transfers within the system occur publicly, yet the privacy of the sender and recipient is maintained. Bitcoin's source code is open-source, and anyone can review it. The network's functioning is ensured by its participants, and anyone can become one.

In 2011, an analog of Bitcoin appeared, but with an improved blockchain that could handle a larger number of transactions at a time — Litecoin. Although this cryptocurrency is not a priority for the crypto community today, it contributed to the formation of the crypto industry. 

In 2015, Ethereum was released — a blockchain on which other tokens could be created, as well as decentralized applications (dApps) — analogs of regular applications, but built on distributed ledger technology. 

How Cryptocurrency Differs from Regular Money

Overall, they have quite few differences, if we set aside the issue of convenience. For some people, creating a crypto wallet, buying cryptocurrency, and entering the addresses where they want to send it may seem like a complicated process. On the other hand, 10 years ago, mobile banking didn't exist, but today it is hard to imagine life without it. 

One of the main arguments of people who reject cryptocurrencies as a means of payment is that nothing stands behind them—they are backed by nothing. However, stablecoins already exist, which are backed by real assets, and cryptocurrencies function within the blockchain, where it is impossible to falsify information. Furthermore, nothing stands behind fiat currencies today either, except the sovereignty of the issuing state: the standard that previously required currencies to be backed by precious metals is no longer valid.

The main difference between fiat money and cryptocurrencies lies in the cross-border and cheap transactions of the latter. For example, Elon Musk bought Twitter for $44 billion, and another $200 million had to be paid for the transfer of this amount as a commission. If such a transfer were made in USDT, it could be sent to another country for a fee of 1.5 to 2.5 USDT. 

Types of Cryptocurrencies

Bitcoin (BTC)

Bitcoin is a decentralized P2P payment network built on blockchain technology and protected by cryptographic encryption. The BTC cryptocurrency is used within this system as a means of payment or as an internal currency. Today, Bitcoin is much more frequently used as an investment asset rather than a means of settlement. In 2009, when Satoshi Nakamoto launched the Bitcoin blockchain, it was in demand due to low fees and fast transfers. However, today there are many other cryptocurrencies and blockchains that offer faster transfers and lower fees. And considering that the price of BTC has already surpassed $100,000, this investment asset is popular among market participants. 

Ethereum (ETH)

Ethereum is an open-source decentralized blockchain platform. This means that other cryptocurrencies, such as SHIBA or PEPE, can be launched on the Ethereum blockchain. The Ethereum network allows for the creation and launch of smart contracts and decentralized applications (dApps). Crypto enthusiasts are convinced that if the Ethereum blockchain had not launched in 2015, the crypto industry would have taken much longer to develop. The reason is as follows: after the release of Ethereum, many decentralized applications appeared, contributing to the development of a new market. 

Tether (USDT)

USDT is a stablecoin. With the growth of the crypto audience, it became clear that the market sorely lacked a dollar analog for interacting with various cryptocurrency platforms. As a result, the idea of a stablecoin was proposed: essentially, it is the same cryptocurrency, but backed by a real asset. Initially, there were many stablecoins backed by the Euro, gold, Yuan, and other assets from traditional markets. However, stablecoins backed by the US Dollar are the most common in the market today, with USDT being the primary representative. Tether was released in 2014. 

How Cryptocurrency Works

Blockchain

Blockchain (a chain of blocks) is a type of distributed ledger technology consisting of a chain of blocks, each containing information about the previous ones. It is impossible to change, delete, or add information to one of the blocks because this data is contained in all blocks of the system simultaneously. 

To add a new entry, for example, information about transferring Bitcoin from one wallet to another, a new block must be generated. All previous blocks contain information that there was 1 BTC at your address and 0 BTC at the recipient's address. Once the new block is generated, your 1 BTC will transfer to the recipient, and information about this will be recorded in the new block and confirmed by the entire network simultaneously. Consequently, if you try to send 1 BTC again, the network will not allow it, as it already knows your balance is empty.

Other blockchains like Ethereum, Solana, Cardano, and others work on the same principle.

Mining

To create a new block, a cryptographic equation must be solved using special computing equipment. This is done by miners. For each generated block, miners receive a network reward. Currently, the reward in the Bitcoin network is 3.125 BTC. The time required to solve the equation and create a new block is 10 minutes. That is, every 10 minutes, 3.125 new BTC appear. 

Every 210,000 blocks, which takes about 4 years to mine, the reward size is reduced by half. This process is called halving. The next halving will take place around 2028, after which the miner's reward will decrease to 1.56 BTC, meaning new Bitcoins will appear twice as rarely.

Wallets

Cryptocurrencies are stored in wallets. More precisely, that's not quite the correct phrasing: any cryptocurrency is stored inside the blockchain and cannot be removed from it. A crypto wallet stores private and public keys: with the private key, the holder gains access to them in the blockchain (i.e., can transfer them), while the public key is analogous to account details that other blockchain users can use to send cryptocurrency. 

Crypto wallets are divided into hot and cold: in the first case, the private keys are constantly connected to the network, and in the second, they are connected only when a transaction needs to be made, providing increased security. 

How to Get Cryptocurrency

Direct Purchase

There are many ways to buy cryptocurrencies: 

• Via an online exchanger. They offer a limited set of cryptocurrencies that can be exchanged for fiat currency. They are known for speed and high commissions—up to 5% per transaction. You will need a bank card or a crypto wallet;

• Buy on an exchange. Here you can buy cryptocurrency at the average market rate, with a small commission—usually around 0.2% per transaction. However, this may be restricted depending on your region and bank card support;

• P2P exchange. Most crypto exchanges have these platforms: the exchange occurs between two users, and the platform acts as a guarantor in case one party fails to fulfill the terms. Usually, to use P2P platforms, you need to undergo identity verification (KYC) with a passport photo and a selfie; 

• Buy in a Telegram bot. The most dangerous type of exchange, as many fraudulent bots are created to steal users' money. It's fast and has high commissions, but it's better to choose an online exchanger to minimize the risk of fraud.  

Mining

If you have a large warehouse or hangar-type space, cheap electricity, and significant capital, you can purchase mining equipment and generate new blocks, for example, in the BTC blockchain. Miners earn in two ways:

• Network reward for computing a new block;

• Transaction fees. The standard fee is 0.0001 BTC. On average, more than 300,000 transactions are carried out per day, which brings miners a total of 30 BTC. 

Staking

Staking appeared as an alternative to mining. Traditional mining involves the PoW (Proof-of-Work) consensus algorithm, requiring large computing power to solve complex math problems. Staking uses the PoS (Proof-of-Stake) algorithm. Blockchain users "freeze" cryptocurrency in special wallets, proving they can be validators—network participants who verify transactions and add them to new blocks. 

For example, in the Ethereum blockchain using the PoS algorithm: to become a network validator, you need at least 32 ETH ($67,200+ at the current rate), and the yield is paid as an annual percentage ranging from 4% to 7%. The reward is paid in the blockchain's coins, in this case, ETH.  

Where to Store Cryptocurrency

A crypto wallet should be chosen based on how you plan to use the cryptocurrency. Let's divide them into two types: 

1. Hot wallets—these include crypto exchanges, online, and mobile wallets. They are convenient for daily transactions because the private key is always connected to the internet. However, security suffers: it's not uncommon for hackers to gain access to hot wallets and steal funds;

2. Cold wallets—these include desktop applications, hardware, and paper wallets. The undisputed advantage of these wallets is that the private key connects to the internet only when a transaction needs to be made. 

Essentially, you can choose a wallet based on this principle: if you need to regularly send small amounts, choose a hot wallet. If you plan to invest and store crypto long-term, choose a cold wallet. 

Cryptocurrency Application

Payment for Goods and Services

Today, there are many online companies that accept payment in various cryptocurrencies. Furthermore, there are physical stores where you can also pay for goods with digital assets. 

Investments

Cryptocurrencies are popular among investors because no other investment asset can provide such returns. Bitcoin once cost only $1, and today its high was recorded at over $100,000. This is not the only example, but one point should be considered: crypto investments can both bring super profits and leave the investor with nothing. Carefully select the cryptocurrency you intend to invest in. 

Transfers

As mentioned, cross-border and cheap transactions are a "feature" of cryptocurrencies. Any blockchain user can send cryptocurrency to the other side of the world for a small fee. While it can increase depending on network load, it remains tens or hundreds of times smaller than bank fees. 

Pros and Cons of Cryptocurrencies

Pros:

• The blockchain on which cryptocurrencies function cannot be hacked, meaning they won't disappear from it; 

• Thanks to blockchain transparency, you can track the path of a transaction; 

• Most cryptocurrencies have a limited supply, meaning there won't be more than what was initially programmed. Because of this, their value may grow over time;

• Fast, cheap, and cross-border payments. 

Cons: 

• If you lose access to the private key, the cryptocurrencies are lost forever;

• If you send cryptocurrency to the wrong address, it is impossible to cancel the transaction;

• Cryptocurrencies are the most volatile asset class, which can lead to losses for holders. 

Cryptocurrency Security

Fraud and Theft

Follow a few simple recommendations to secure your stored cryptocurrencies: 

• Use hot wallets only for transfers, not for storing significant amounts;

• Private keys should not be stored on devices constantly connected to the internet. You can print them as a QR code or buy a hardware wallet;

• Do not tell third parties that you store cryptocurrency: private keys can be extorted from you through force. 

Recommendations for Safe Investing

If you are a beginner, pay attention to the TOP-20 cryptocurrencies by capitalization. These coins are considered "blue chips": projects on this list have proven their integrity, so the probability of encountering fraud is minimal. 

Important: do not pay attention to various meme-coins, dozens of which appear daily. The probability of making money on them is about the same as winning the lottery. 

Conclusion

Cryptocurrency is a new financial system that gives its holders the opportunity to make fast transactions and receive super profits. However, the safety of digital assets lies with the holder, and failure to follow storage rules can lead to their loss very easily. In skillful hands, cryptocurrency is an excellent payment and investment tool that is difficult to endanger or lose control over. You can find even more articles about cryptocurrencies in the Blog section of our Arbitrage Scanner service.