The Basics Of Cryptocurrency For Beginners

Cryptocurrency has been gaining in popularity ever since the 2017 bull market. In 2021, the nonfungible token (NFT) boom happened and Bitcoin (BTC) hit its highest price so far.

If someone you know is interested in investing in cryptocurrency, here are some questions they might ask and some appropriate responses from experts in the industry.

1. What is cryptocurrency?

Cryptocurrency is a digital currency that is used to make payments and purchases. It is secure and difficult to counterfeit because of its cryptography. Cryptocurrencies are decentralized, meaning no central government or bank controls them.

Cryptocurrencies exist on the blockchain, which is a public ledger that records all transactions. This makes it possible for anyone to see how money moves through the network. However, users can remain anonymous by using wallets that have alpha-numerical identifiers.

1. What purpose does cryptocurrency serve?

Cryptocurrency is a way for people to send and receive money without needing a bank or other middleman. This is done through a decentralized peer-to-peer network. This is similar to how people use cash to pay others directly, without having to go through a bank.

Cryptocurrencies work on a digital level, which means they can be used to directly transfer money to other people, entities or organizations. This also allows people to keep control over their money at all times. Cryptocurrencies are also being used as investment vehicles because users can make high returns due to the limited supply, high volatility and high level of speculation.

Lee said that cryptocurrencies are becoming more and more popular investment options. Some variations offer the opportunity to make passive income, which can help investors expand and diversify their portfolios.

1. If crypto isn’t backed by anything, how is it worth anything?

Cryptocurrencies aren't backed by any traditional assets, except for stablecoins like USD Coin (USDC) and Tether (USDT). People may wonder why cryptocurrencies have value if they aren't backed by anything.

First, a lot of the value comes from the utility of a cryptocurrency. The more a cryptocurrency is needed for a particular task, the more demand there will be for that cryptocurrency. Examples include using crypto as a store of value and uses for particular protocols within sub-industries like decentralized finance (DeFi) and NFTs.

Igor Mikhalev, partner and head of emerging Tech at EY and decentralized autonomous organization chairman of Blueshift — a decentralized exchange — thinks that cryptocurrencies that are well-built are worth more because they have the same functions as traditional currencies: scarcity, medium of exchange/account and store of value. This is possible because of advances in the underlying technology, legislation and people's general attitude toward it.

Mikhalev spoke about fiat currencies like the United States dollar, euro and Great British pound. He said that these currencies are not backed by anything. The USD is not backed by gold, for example. Instead, it is only backed by people's trust in the US government.

Lee gave his opinion about cryptocurrency. He said that cryptocurrency is not backed by anything, but that it has value because people believe in it. The price of a cryptocurrency is determined by the forces of supply and demand.

The value of cryptocurrencies can go up or down depending on how people think about it. People who think the cryptocurrency will be worth more in the future buy it and hold on to it. The more people who want to sell it, the less valuable it becomes. But blockchain technology is very reliable and secure so a lot of people believe in its future, which is why they invest in cryptocurrencies.

1. Can cryptocurrency replace real money?

No, in a broad sense, cryptocurrency isn't regulated. There are still a lot of services and products that need traditional cash. However, some governments are looking into creating their own digital tokens, called central bank digital currencies (CBDCs). And there are growing uses for decentralized cryptocurrencies.

Lee also believes that the answer to this question depends on the country and its economic system. In countries like Venezuela, where the government has mismanaged the economy and caused hyperinflation, cryptocurrency has become a way of life for many people.

Some people think that the principles behind cryptocurrencies make them more likely to be adopted than traditional currencies.

Mikhail Mikhalev said that cryptocurrencies are becoming more popular than national currencies because they are democratic and transparent. People don't trust official institutions as much as they used to, so this could lead to a faster adoption of cryptocurrencies.

1. Can cryptocurrency be hacked?

Blockchains are difficult to hack because they are decentralized and use different security mechanisms. However, if you are not careful with things like hot wallets, centralized wallets, bridges, and smart contracts, your blockchain can be vulnerable to cyberattacks.

For users to secure their funds, the best way is to store them in a noncustodial wallet. This is a wallet where users keep the private keys and seed. An attacker would need this information to get access to the funds. When it comes to platforms, hackers usually try to trick users into giving away personal information such as passwords and login info. This way, they can steal the users' funds.

1. What makes cryptocurrency prices go up?

Some things that make prices go up are when there is a lot of demand for the coin and when the supply is low. Most cryptocurrencies have a limited amount, and when people want it and there's not a lot of it, the price usually goes up. Another reason prices might go up is because of outside things like politics or the economy.