{"id":35136,"date":"2019-06-10T13:02:37","date_gmt":"2019-06-10T11:02:37","guid":{"rendered":"https:\/\/www.getsmarter.com\/blog\/?p=35136"},"modified":"2025-10-10T14:45:29","modified_gmt":"2025-10-10T12:45:29","slug":"what-is-cryptocurrency-an-easy-to-understand-guide","status":"publish","type":"post","link":"https:\/\/www.getsmarter.com\/blog\/what-is-cryptocurrency-an-easy-to-understand-guide\/","title":{"rendered":"What is Cryptocurrency? An easy-to-understand guide"},"content":{"rendered":"\n<p>Blockchain or fintech continue to make news with headlines ranging from people becoming millionaires overnight to opinion pieces about how industries view financial transactions.<sup>1<\/sup> Often viewed as a volatile market for investment, it is still attracting a high volume of interest with Coinbase reporting that 70,000 to 100,000 new crypto trading accounts are being opened daily on their platform.<sup>2<\/sup> However, in spite of so much press, due to the technical nature of the topic, there is often a fair amount of uncertainty around cryptocurrency. As US Senator Thomas Carper said, \u201cVirtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us.\u201d<sup>3<\/sup><\/p>\n\n\n\n<h2>What is cryptocurrency?<\/h2>\n\n\n\n<p>Cryptocurrency is the joining of two words: cryptography and currency:<sup>4<\/sup><\/p>\n<ul>\n<li><strong>Currency<\/strong> <br>This channel of exchange allows people to convert their work into something of value that can be exchanged for goods or other services.<\/li>\n<li><strong>Cryptography<\/strong><br>This is the process of converting understandable text into unintelligible text and vice-versa for confidentiality, integrity, and authentication purposes.\u200a<\/li>\n<li><strong>Cryptocurrency<\/strong><br>Put the two together, and you get word that means a medium of exchange that is digital and uses encryption to make the transactions secure.<\/li>\n<\/ul>\n\n\n\n<h2>Useful cryptocurrency terms to know:<sup>5<\/sup><\/h2>\n<ul>\n<li><strong>Block<\/strong><br \/>Each record or series of records on the blockchain.<\/li>\n<li><strong>Block reward<\/strong><br \/>When a person who adds a new block to the blockchain is paid in bitcoin.<\/li>\n<li><a href=\"https:\/\/www.getsmarter.com\/blog\/blockchain-explained-what-you-need-to-know\/\" target=\"_blank\" rel=\"noopener noreferrer\"><strong>Blockchain<\/strong><\/a><br \/>A digital public ledger on which every transaction in the network is recorded.<\/li>\n<li><strong>Proof of stake<\/strong><br \/>A consensus algorithm that allows miners \u2018put up a stake\u2019 of their currency to verify a block of transactions.<\/li>\n<li><strong>Proof of work<\/strong><br \/>A hash \u2013 an algorithm that turns a large amount of data into a large number that is of a fixed length, typically written as a hexadecimal \u2013 that is so difficult, it could only have been solved through significant work or power.<\/li>\n<\/ul>\n\n\n\n<p>Cryptocurrencies are quantified entries in a database or ledger that no one can change or exchange unless specific conditions are met.<sup>6<\/sup> Cryptocurrencies are like virtual accounting systems and allow you to transact like you would typically with cash, credit cards, or cheques in order to make purchases, invest, or accept payment. The transactions are recorded within digital blocks, and then cryptographically signed (hence \u201ccrypto\u201dcurrency) making them entirely secure.<sup>7<\/sup><\/p>\n\n\n\n<p>When Satoshi Nakamoto \u2013 a pseudonym for the person or group \u2013 introduced Bitcoin in 2009, it was described as a \u2018peer-to-peer electronic cash system\u2019, a completely decentralised system, with no servers or central controlling entity involved.<sup>8<\/sup><\/p>\n\n\n\n<h3>Double-spending solved<\/h3>\n\n\n\n<p>The reason why this was so revolutionary, is that blockchain \u2013 the technology that underpins cryptocurrency \u2013 solved one of the most critical challenges digital payments faced; that of \u2018double spending\u2019, which is a fraudulent technique of spending the same amount twice.<sup>9<\/sup> Blockchain released digital platforms from having to depend on trusted third parties to prevent double spending, as the decentralised network uses a universal public ledger that visibly displays every transaction within the network. If someone tries to spend the same cryptocurrency more than once by making two separate transactions with the same input in the same block, then the two transactions cancel each other out.<\/p>\n\n\n\n<h3>The key is key<\/h3>\n\n\n\n<p>When you buy or receive cryptocurrency, such as bitcoin, you\u2019re given a secret digital key, or password, that proves to anyone on the network that a certain amount of bitcoin is yours to spend or use as you wish. When you spend that bitcoin, the entire network will know that you have transferred ownership of it, and your key is proof that you have authority to do so. The history of every transaction made is a permanent record of who owns what. That record is called \u201cblockchain\u201d.<sup>10<\/sup><\/p>\n\n\n\n<h3>Use wallets for assets<\/h3>\n\n\n\n<p>It\u2019s important to keep your key or password safe, as anyone who discovers your key can gain total, irreversible control over your cryptocurrency. Cryptocurrency wallets allow you to keep your cryptocurrency safe. There are a variety of online and offline cryptocurrency wallets to choose from, where you can \u2018download\u2019 your cryptocurrency to, such as desktop wallets, mobile, paper, and hardware wallets.<sup>11<\/sup><\/p>\n\n\n\n<h2>How to buy cryptocurrency<\/h2>\n\n\n\n<p>The disclaimer that is often attached to <a href=\"https:\/\/www.getsmarter.com\/blog\/eight-types-of-cryptocurrencies-compared\/\" target=\"_blank\" rel=\"noopener noreferrer\">cryptocurrency investments<\/a> serves as a stark reminder that this is an unstable investment environment, \u201cInvesting in cryptocoins or tokens is highly speculative and <a href=\"https:\/\/www.getsmarter.com\/blog\/bitcoin-regulation\/\" target=\"_blank\" rel=\"noopener noreferrer\">the market is largely unregulated<\/a>. Anyone considering it should be prepared to lose their entire investment.\u201d<sup>12<\/sup><\/p>\n\n\n\n<p>Here are some tips for when investing in cryptocurrency:<\/p>\n<ol>\n<li><strong>Start slowly<\/strong>. Risk and investment go hand in hand, and it\u2019s wise to bear in mind that digital currency is still in the early stages of development when compared to investments such as stocks or bonds. Tim Enneking, managing director of Crypto Asset Management, suggests being patient and allowing the Bitcoin price to come to you, and once the price is right, investing a little at a time in varying stages.<sup>13<\/sup><\/li>\n<li><strong>Diversify investments<\/strong>. Diversifying investments means that, when one component declines, another will improve. Consider an investment portfolio of an equal amount of Bitcoin, Ether, Litecoin, Ripple, and Bitcoin Cash, plus traditional stocks and bonds, in order to mitigate fluctuations.<sup>14<\/sup><\/li>\n<li><strong>Use your wallet<\/strong>. Exchanges are a good place to buy digital currencies, but assets should be stored in online and offline crypto wallets in order to prevent being hacked.<sup>15<\/sup><\/li>\n<li><strong>Buy and hold<\/strong>. The strategy of invest-then-wait is used successfully for all investments, not just cryptocurrency, and is advocated by legendary investor Warren Buffett.<sup>16<\/sup> Gavin Yeung, founder and CEO of digital asset management firm Cryptomover, offered a similar point of view. &#8220;We at Cryptomover believes that a passive investment style will outperform active strategies in the long term,&#8221; he stated. &#8220;Not only is passive investing inexpensive and simple, it also lowers trading fees leading to much lower operating expenses.&#8221;<sup>17<\/sup><\/li>\n<\/ol>\n\n\n\n<h2>Being street-smart as a crypto-newcomer<\/h2>\n\n\n\n<p>Although digital-ledger technology, or blockchain, has never been hacked, cryptocurrencies are vulnerable to theft and hacking. The most infamous theft occurred in 2014, when someone assumed another person\u2019s identity and 850,000 bitcoin was taken from the Mt. Gox exchange.<sup>18<\/sup> More recently, in January 2018, $530 million was stolen from a Tokyo-based cryptocurrency exchange in a single hack.<sup>19<\/sup><\/p>\n\n\n\n<p>But losing your investment could be simpler than someone hacking your account. The U.S. Commodity Futures Trading Commission (CFTC) warns of \u201cpump and dump\u201d schemes that target inexperienced crypto investors. This is where large groups of people coordinate to push the price of a certain coin up by buying into it at the same time, and making it look more attractive to new, naive buyers.<sup>20<\/sup> When the price is high these scammers sell their coins at the same time, dropping the value of the coin drastically, and making the newcomer lose significant investment value.<\/p>\n\n\n\n<p>There\u2019s also the threat of the \u201851%\u2019 attack.<sup>21<\/sup> This hasn\u2019t happened yet, but threatens to happen from time to time. This is where a group of miners controls over 50% of a network\u2019s computing power and can deny verification of transactions and refuse to pay users.<\/p>\n\n\n\n<h2>Success stories of cryptocurrency adoption<\/h2>\n\n\n\n<p>While the prices of individual cryptocoins have a tendency to fluctuate freely, blockchain-based currency is here to stay, and there are some investors and fintechs who have made huge successes of their investments. Here are the top five people listed on Forbes\u2019 list of cryptocurrency millionaires:<sup>22<\/sup><\/p>\n\n\n\n<ul>\n<li><strong>Chris Larsen<\/strong>, well-known for co-founding a host of fintech apps, saw his net worth reach nearly $20 billion in early 2018, thanks to his ownership of 5.2 billion XRP, the tokens of Ripple, the company he founded. XRP has since crashed dramatically but Larsen still tops the Forbes list.<\/li>\n<li><strong>Changpeng Zhao<\/strong>, the Chinese-Canadian coder who runs Binance, a cryptocurrency exchange that can process a lightning 1.4 million transactions per second, has a personal fortune worth as much as $2 billion.<\/li>\n<li><strong>Joseph Lubin<\/strong>, the founder of the 600-employee business ConsenSys, home to the Ethereum ecosystem, began his career working in robotics, machine vision, neural nets and software engineering, is now estimated to be worth $1 billion &#8211; $5 billion.<\/li>\n<li><strong>Tyler and Cameron Winklevoss<\/strong>, the twins famous for suing Mark Zuckerberg for $65 million for stealing their social media platform idea, bought cryptocurrency in 2012, during its infantile stages. They also started a successful New York-based cryptocurrency exchange, Gemini, where investors can buy and sell digital currencies. The twins are estimated to be worth $900 million-$1.1 billion each.<\/li>\n<\/ul>\n\n\n\n<p>Investing in cryptocurrency can be extremely lucrative, but it\u2019s reward is given to those who approach it with a long-term view of financial return. Assessing these factors reasonably and sensibly will reveal the correct strategic approach on where and how to invest in cryptocurrency in order to allow investors to start seeing a return in the long run.<\/p>\n\n\n\n<p>Enhance your knowledge of cryptocurrency and the way it operates within the economic environment in the <a href=\"https:\/\/www.getsmarter.com\/products\/mit-media-lab-cryptocurrency-online-short-course\" target=\"_blank\" rel=\"noreferrer noopener\">Cryptocurrency short course<\/a> from MIT Media Lab.<\/p>\n\n\n\n<div id=\"accordion\">\n<div class=\"card\">\n<div id=\"headingOne\" class=\"card-header\">\n<h6 class=\"mb-0\"><button class=\"btn\" style=\"background-color: transparent;\" data-toggle=\"collapse\" data-target=\"#sources\" aria-expanded=\"true\" aria-controls=\"sources\"> <strong>Click here to view sources<\/strong> <\/button><\/h6>\n<\/div>\n<div id=\"sources\" class=\"collapse\" aria-labelledby=\"headingOne\" data-parent=\"#accordion\">\n<div class=\"card-body\">\n<ul class=\"mx-0\" style=\"list-style: none;\">\n\n<li class=\"mb-4\"><sup>1<\/sup> Schnurenko, G. (Feb, 2019). \u201810 bitcoin millionaires: people who became rich from <a href=\"https:\/\/u.today\/10-bitcoin-millionaires-people-who-became-rich-from-cryptocurrency\" target=\"_blank\" rel=\"noopener noreferrer\"> cryptocurrency\u2019 Retrieved<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>2<\/sup> Fenech, G. (Jan, 2019). \u2018What is plaguing the cryptocurrency market?\u2019 Retrieved from <a href=\"https:\/\/www.forbes.com\/sites\/geraldfenech\/2019\/01\/17\/what-is-plaguing-the-cryptocurrency-market\/#57daae694edf\" target=\"_blank\" rel=\"noopener noreferrer\"> Forbes<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>3<\/sup> (Nov, 2013). \u2018U.S. officials: virtual currencies vulnerable to money laundering\u2019. Retrieved from <a href=\"https:\/\/www.reuters.com\/article\/us-senate-virtualcurrency\/virtual-currencies-vulnerable-to-money-laundering-u-s-justice-idUSBRE9AH0P120131118\" target=\"_blank\" rel=\"noopener noreferrer\"> Reuters<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>4<\/sup> Deikin, L. (Apr, 2018). \u2018Explain me like I\u2019m five: what is cryptocurrency\u2019. Retrieved from <a href=\"https:\/\/medium.com\/meetngreetme-ico\/explain-me-like-im-five-what-is-cryptocurrency-ed1276d5f4c5\" target=\"_blank\" rel=\"noopener noreferrer\"> Medium<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>5<\/sup> (Nov, 2018). \u2018What is cryptocurrency &#8211; and how can I use it?\u2019. Retrieved from <a href=\"https:\/\/www.finder.com\/what-is-cryptocurrency\" target=\"_blank\" rel=\"noopener noreferrer\"> Finder<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>6<\/sup> (Nov, 2017). \u2018What is cryptocurrency. Guide for beginners\u2019. Retrieved from <a href=\"https:\/\/cointelegraph.com\/bitcoin-for-beginners\/what-are-cryptocurrencies#most-common-cryptocurrencies\" target=\"_blank\" rel=\"noopener noreferrer\"> CoinTelegraph<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>7<\/sup> Deikin, L. (Apr, 2018). \u2018Explain me like I\u2019m five: what is cryptocurrency\u2019. Retrieved from <a href=\"https:\/\/medium.com\/meetngreetme-ico\/explain-me-like-im-five-what-is-cryptocurrency-ed1276d5f4c5\" target=\"_blank\" rel=\"noopener noreferrer\"> Medium<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>8<\/sup> Nakamoto. S. (2008). \u2018Bitcoin: A peer-to-peer electronic cash system\u2019. Retrieved from <a href=\"https:\/\/bitcoin.org\/bitcoin.pdf\" target=\"_blank\" rel=\"noopener noreferrer\"> bitcoin<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>9<\/sup> (2018). \u2018How Satoshi Nakamoto and bitcoin solved the double spending problem\u2019. Retrieved from <a href=\"https:\/\/www.worldcryptoindex.com\/how-bitcoin-solved-double-spending-problem\/\" target=\"_blank\" rel=\"noopener noreferrer\"> World Crypto Index<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>10<\/sup> Hern, A. (Nov, 2017). \u2018Everything you wanted to know about bitcoin but were afraid to ask\u2019. Retrieved from <a href=\"https:\/\/www.worldcryptoindex.com\/how-bitcoin-solved-double-spending-problem\/\" target=\"_blank\" rel=\"noopener noreferrer\"> The Guardian<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>11<\/sup> (Nov, 2018). \u2018What is cryptocurrency \u2013 and how can I use it?\u2019. Retrieved from <a href=\"https:\/\/www.finder.com\/what-is-cryptocurrency\" target=\"_blank\" rel=\"noopener noreferrer\"> Finder<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>12<\/sup> Chambers, C. (Nov, 2018). \u2018Buy bitcoin cash when the dust settles\u2019. Retrieved from <a href=\"https:\/\/www.forbes.com\/sites\/investor\/2018\/11\/26\/buy-bitcoin-cash-when-the-dust-settles\/#4a19d7e41f99\" target=\"_blank\" rel=\"noopener noreferrer\"> Forbes<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>13<\/sup> Bovaird, C. (Nov, 2017). \u2018Top 5 tips for new bitcoin investors\u2019. Retrieved from <a href=\"https:\/\/www.forbes.com\/sites\/cbovaird\/2017\/11\/21\/top-5-tips-for-new-bitcoin-investors\/#28fba0ff1e80\" target=\"_blank\" rel=\"noopener noreferrer\"> Forbes<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>14<\/sup> Bovaird, C. (Nov, 2017). \u2018Top 5 tips for new bitcoin investors\u2019. Retrieved from <a href=\"https:\/\/www.forbes.com\/sites\/cbovaird\/2017\/11\/21\/top-5-tips-for-new-bitcoin-investors\/#28fba0ff1e80\" target=\"_blank\" rel=\"noopener noreferrer\"> Forbes<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>15<\/sup> (Nov, 2018). \u2018What is cryptocurrency \u2013 and how can I use it?\u2019. Retrieved from <a href=\"https:\/\/www.finder.com\/what-is-cryptocurrency\" target=\"_blank\" rel=\"noopener noreferrer\"> Finder<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>16<\/sup> Town, P. (Nd). \u201850 Warren Buffett quotes on investing, life, and success\u2019. Retrieved from <a href=\"https:\/\/www.ruleoneinvesting.com\/blog\/how-to-invest\/warren-buffett-quotes-on-investing-success\/\" target=\"_blank\" rel=\"noopener noreferrer\"> Rule One Investing<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>17<\/sup> Bovaird, C. (Nov, 2017). \u2018Top 5 tips for new bitcoin investors\u2019. Retrieved from <a href=\"https:\/\/www.forbes.com\/sites\/cbovaird\/2017\/11\/21\/top-5-tips-for-new-bitcoin-investors\/#28fba0ff1e80\" target=\"_blank\" rel=\"noopener noreferrer\"> Forbes<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>18<\/sup> Batra, G., et al. (Jan, 2019). \u2018Blockchain 2.0: What\u2019s in store for the two ends\u2014semiconductors (suppliers) and industrials (consumers)?\u2019. Retrieved from <a href=\"https:\/\/www.mckinsey.com\/industries\/advanced-electronics\/our-insights\/blockchain-2-0-whats-in-store-for-the-two-ends-semiconductors-suppliers-and-industrials-consumers\" target=\"_blank\" rel=\"noopener noreferrer\"> McKinsey<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>19<\/sup> (Jan, 2018). \u2018Tokyo-based cryptocurrency exchange hacked, losing $530 million: NHK\u2019. Retrieved from <a href=\"https:\/\/www.reuters.com\/article\/us-japan-cryptocurrency\/tokyo-based-cryptocurrency-exchange-hacked-losing-530-million-nhk-idUSKBN1FF29C\" target=\"_blank\" rel=\"noopener noreferrer\"> Reuters<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>20<\/sup> Rooney, K. (Feb, 2018). \u2018US regulator warns of \u2018pump-and-dump\u2019 cryptocurrency frauds\u2019. Retrieved from <a href=\"https:\/\/www.cnbc.com\/2018\/02\/15\/u-s-regulator-warns-of-pump-and-dump-cryptocurrency-frauds.html\" target=\"_blank\" rel=\"noopener noreferrer\"> CNBC<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>21<\/sup> (Nov, 2018). \u2018What is cryptocurrency &#8211; and how can I use it?\u2019. Retrieved from <a href=\"https:\/\/www.finder.com\/what-is-cryptocurrency\" target=\"_blank\" rel=\"noopener noreferrer\"> Finder<\/a>.<\/li>\n\n<li class=\"mb-4\"><sup>22<\/sup> Ambler, P., et al. (Feb, 2018). \u2018The richest people in cryptocurrency\u2019. Retrieved from <a href=\"https:\/\/www.forbes.com\/richest-in-cryptocurrency\/#1ba517a71d49\" target=\"_blank\" rel=\"noopener noreferrer\"> Forbes<\/a>.<\/li>\n\n<\/ul>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Blockchain or fintech continue to make news with headlines ranging from people becoming millionaires overnight to opinion pieces about how industries view financial transactions.1 Often viewed as a volatile market for investment, it is still attracting a high volume of interest with Coinbase reporting that 70,000 to 100,000 new crypto trading accounts are being opened [&hellip;]<\/p>\n","protected":false},"author":74,"featured_media":40299,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"footnotes":""},"categories":[117],"tags":[128,120],"article-format":[],"class_list":["post-35136","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-market-trends","tag-finance","tag-systems-technology"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.5 (Yoast SEO v27.5) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>What is Cryptocurrency? 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