What Is Cryptocurrency? A Beginner's Guide To Cryptocurrencies

The term Cryptocurrency was coined to describe virtual currencies, like Bitcoin (BTC), Ethereum (ETH) and Monero (XMR).

Those names may sound like a load of gobbledegook, but they're actually three of the leading Cryptocurrencies — a bit like British Pound Sterling (GBP), Euro (EUR) and the United States Dollar (USD).

But how do Bitcoin and Ethereum differ from a more traditional tender, like the Euro and the United States Dollar? Well, before we can answer that question, we must first understand how Cryptocurrencies work.

How Does Cryptocurrency Work?

Instead of relying on financial institutions, Cryptocurrencies use a decentralized peer-to-peer network to monitor and verify transactions. It’s called the Blockchain, and at the center of it lies the Distributed Ledger.

The role of the Distributed Ledger is to track all balances and transactions. To do that, it forces those wanting to hold a digital balance to create a Cryptocurrency Wallet, which is made up of a Public Key and Private Key.

Your Public Key is essentially your username  it’s how you’re identified on the Blockchain (since it’s decentralized, all transactions are public), and it’s what people — including exchanges — use to transfer funds to your Wallet.

The Private Key, on the other hand, is the unique address you use to sign in to your Wallet. It’s the location all your funds are stored, regardless of the Cryptocurrency being used, so you’ll need to keep it extra safe.

Building on our earlier note, the Blockchain is a public record  meaning the information stored on it is visible to the masses. That said, while transaction amounts are public, the identity of the sender is kept anonymous.

When a transaction is initiated on the Blockchain, it will need to be confirmed at least four times before the funds are made available to the recipient. The process of confirming a transaction is known as Mining.

Related: How To Mine Your First Bitcoin

Just like in the real world, Mining requires Miners  computers dedicated to processing such transactions. They’re tasked with solving a computational process that’s triggered by the transaction to confirm it’s legitimate.

Once solved, the transaction is assigned a confirmation on the Blockchain and the Miner is credited a small transaction fee for their efforts in the same Cryptocurrency that was used to issue the initial payment.

      So, now we have a clear understanding of what Cryptocurrencies are and how they work, we can start focusing our attention on how to acquire them (it's not as difficult as you would think) and how they're valued.

      How Do You Get Cryptocurrency?

      The most common method of acquiring Cryptocurrencies is purchasing them through an exchange, like BinanceCoinbase, and Poloniex. From there, you can choose to store the funds on either platform or move them elsewhere.

      But there's another way to acquire Cryptocurrency, often for a fraction of their market rate. That's right — using the Mining method we touched on earlier, you can task your computer with solving mathematical issues, in exchange for Crypto.

      Once a problem is solved, the transaction is awarded a confirmation on the Blockchain and the Miner is credited a small transaction fee  the more processes solved, the more transaction fees earned.

      We ran the numbers and it turns out Mining is the cheapest way to acquire Cryptocurrencies in 2019. In the United States, it costs around $4700 to fund the electricity required to mine a whole Bitcoin, versus its $7800 market value.

      If you’re looking to stack up some Cryptocurrency on the cheap, Bitcoin isn’t the way to go. That would be Ethereum, which had a token value of $246 and cost around $152 to mine (again, in the United States) at the time of writing.

      How Do You Spend Cryptocurrency?

      The most obvious use is to spend it (it's a form of tender, after all). And there's no shortage of places to do so, with several retailers, including Expedia and Microsoft, accepting Bitcoin as a means of payment — both in-store and online.

      You'll have a tough time finding retailers that accept other types of Cryptocurrency, though. That's because Bitcoin is the most popular. But that doesn't mean they won't be added in the future. It will just take a bit of time.

      There is a workaround, however. If you store your Cryptocurrency in Coinbase, you can register for a Coinbase Card  a Visa debit card, funded by your Coinbase balance, that will let you spend your Cryptocurrency anywhere that accepts Visa cards.