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Cryptocurrency beginner’s guide – everything you need to know

23–27 minutes to read

In this essential cryptocurrency beginner’s guide, we look at why ‘crypto’ is the new wave tearing through the financial world. However, cryptocurrencies themselves aren’t that new. In fact, they’ve been around for at least two decades. Yet the public’s interest level in them seems to be at an all-time high. So, if you’re thinking of investing in crypto, it’s important to do your research and understand what you’re getting into.

This cryptocurrency beginner’s guide walks you through the basics. From where it’s come from to how it is potentially so valuable. And why many people strongly believe it is a force for good in society.

A new era

If you haven’t been living under a rock, then you most probably have heard about cryptocurrencies. You may have heard about them from a friend over coffee. Or a relative who wouldn’t stop prattling on about how much profit they made on some random virtual coin. They witter on and on about how cryptocurrencies like Bitcoin (BTC) are the future of finance.

Sound familiar? Then we can safely assume that your interest in cryptocurrencies has been suitably piqued. At least enough that you are here reading this article right now. The problem is, what is fact and what’s fiction? It’s a minefield of information, opinion and speculation out there.

Which is why we have created this essential cryptocurrency beginner’s guide. It contains everything you need to know about cryptocurrency and investing in cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH).

A word of warning

Cryptocurrencies are well known for being highly volatile investments. They can be a real rollercoaster of emotions on an almost daily basis. So, if you’re reading this guide as you’re thinking of investing in crypto, take this as a heed of warning. Many have won big, but remember that many, many that have lost…a lot.

Graph showing volatility between Bitcoin and the S&P500

Courtesy of Coindesk

But what are cryptocurrencies, really? Are they just some ‘magic coins’ as many people pejoratively refer to them? Can you really make a lot of money investing in them? In fact, are they even a legitimate investment vehicle, or just another scam? Let’s find out by doing a little background check on the history of crypto!

Heads up – We aim to produce honest and accurate content, however, we are not financial advisors. If you need financial advice, Unbiased can connect you with a suitable professional for free. Some of our links may earn us a small commission to help us run the site.

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Jargon buster - what does it all mean?

Before we get started, we need to understand some of the terminologies. The world of crypto is full of confusing jargon which can be confusing to decipher. Let’s take a look at what some of the most commonly used terms mean.

"Cryptocurrency"

A cryptocurrency is a digital (or virtual) currency that can be spent online. The ‘crypto’ part refers to complicated cryptography used to create the currency and process transactions.

"Blockchain"

Blockchain is essentially a digital ledger, or record, of all the transactions (ie, money moving around such as buying and selling) of a certain cryptocurrency. This record is distributed across a huge number of separate computers and each cryptocurrency has its own record, or ‘blockchain’.

"Mining"

The blockchain, or record, is maintained and updated by computers solving complex mathematical problems. People with these computers, known as ‘miners‘, compete to see who can solve these problems the fastest. The winner is rewarded with new coins of that cryptocurrency. These are brand new coins that never existed before, hence being referred to as being ‘mined‘.

"Proof of Work"

Proof of Work (PoW) is where a miner ‘proves’ that their computers spent a certain amount of effort to solve these complex mathematical problems. By this method, they validate their transactions on the blockchain. It is heavily used by Bitcoin and is a way to ensure the mining system is not abused. However, the amount of power used by computers to solve these problems raises concerns about the impact on the environment.

"Proof of Stake"

Proof of Stake (PoS) is an alternative to PoW. It differs in that a miner can validate their block transactions according to how many coins they hold. So, because it doesn’t use lots of computer power and therefore electricity, it is considered a more environmentally friendly and sustainable method. Whereas Bitcoin uses PoW, coins such as Cardano and Ethereum 2.0 use Proof of Stake.

"Decentralised"

Traditional, or ‘fiat’ currencies, are usually managed and controlled by a single financial entity. In the case of Sterling, the English pound, this would be the Bank of England. Cryptocurrencies, on the other hand, the ledger, or blockchain, is distributed across a large network of individual computers. In this sense, the control is decentralised and not in the hands of any single institute or organisation.

"Defi"

‘Defi’, or Decentralised Finance, refers to the concept of cryptocurrencies not requiring any third parties, such as brokerages, exchanges or banks to offer financial products. Alternatively, applications such as smart contracts, as found on Ethereum, enable individuals to transact and even borrow cryptocurrencies without having to go through an approval or credit check process. As a result, many believe such technology will deliver greater financial equality across the globe.

"Alt Coins"

Alt Coins refer to any ‘alternative’ coin other than Bitcoin. Examples include Ethereum, Cardano, Litecoin and Dogecoin.

"Market cap"

In cryptocurrency terms, the market cap refers to the current total market value of all of a particular cryptocurrencies coins. Fundamentally, it is the total value of all the coins that have been mined (so far). It is often seen as a measure of the popularity and dominance of that coin.

"Halving"

Halving is where the reward for mining a new coin is halved. So the next time someone mines a new Bitcoin for verifying a transaction, for example, they’ll get 50% less as a reward. It is linked to the finite supply of a coin (in Bitcoin’s case, this is 21 million coins). In the example of Bitcoin, this halving happens every 4 years. The last Bitcoin halving happened in 2020.

"Wallets"

In the world of crypto, a wallet is needed to store your digital assets (or crypto passwords). There are soft wallets that are secure online apps, or there are hardware wallets. These are physical devices not connected to the Internet and therefore offer greater security from hackers.

For more information on crypto wallets, check out
How to buy Bitcoin safely.

History of cryptocurrency

OK, so you may only just have heard about cryptocurrency within the last few years. However, the history of crypto stretches back as far as the late 90s. Broadly speaking, it even goes as far back as the early 80s. Although they weren’t known as cryptocurrencies at the time.

In fact, virtual currencies have been around since 1983, when American cryptographer David Chaum first developed a cryptographic system he named eCash.

After eCash failed to achieve the levels of success that hoped for, Chaum tried again in 1995 by creating DigiCash. Fundamentally, DigiCash was a system that harnessed the powers of cryptography to make financial transactions confidential.

By the late 90s, another system had been developed as a security measure against theft at petrol stations in the Netherlands. Crucially, this new system shared underlying principles similar to the idea of cryptocurrencies as we know them today.

A new dawn

Then, in 1998, the term “cryptocurrency” was first coined by an author named Wei Dai. He created the name while working on creating a decentralised payment method that was built on a cryptographic system.

Finally, in 2009, the first cryptocurrency as we know it today was born into existence – Bitcoin. This evolutionary digital coin was built on a technology known as blockchain. Simply put, this is a digital record of every transaction carried out with a cryptocurrency.

Because this record is maintained by many separate computers, by its nature, blockchain is ‘decentralised’. This means it is not controlled by a central authority such as a bank or a single financial institution.

Ready to buy Bitcoin?
This mini-guide; how to buy Bitcoin safely will walk you through the basics. 

Where do cryptocurrencies come from?

Contrary to popular belief, cryptocurrencies don’t magically appear from the ether (we’re kidding, no one believes that – hopefully). Most cryptocurrencies are created through a process known as ‘mining’. Mining, within the context of cryptocurrency, is the process of extracting new units of a cryptocurrency by meeting the requirements set by that cryptocurrency’s blockchain for the creation of new units.

Fundamentally, Cryptocurrency mining is the development and maintenance of the blockchain transaction ledger, which records all transactions. This typically involves the use of extremely powerful computers that use incredible amounts of power to solve complex mathematical problems. Essentially, the “miners” compete among themselves for who can solve the maths problems the fastest. Those that succeed get rewarded with new units of the cryptocurrency. This method of mining cryptocurrencies is known as “proof of work”, as found with Bitcoin the best-known cryptocurrency.

Various developers of different coins are continually evolving and seeking new ways of mining more efficiently. Examples of this is Proof of Stake found in Cardano and Ethereum 2.0, which requires less computing power and therefore electricity.

Looking for free Bitcoin? Here’s a list of all the current offers.

Who created Bitcoin?

Mysteriously, Bitcoin was created by an unknown person or group of persons known by the pseudonym Satoshi Nakamoto. Way before the Bitcoin network came into existence in 2009, a whitepaper was released on October 31, 2008, titled, “Bitcoin: A Peer-to-Peer Electronic Cash System”. The author was Satoshi Nakamoto.

Nobody knows for sure who Satoshi Nakamoto is. Various people have made wild assertions about who they think is behind the cryptocurrency. Some have even speculated that Bitcoin was created by a group of people from the financial sector in Europe.

Crytpocurrencies and the environment

Cryptocurrencies often receive negative press about how much energy the mining process consumes and the environmental effects. In fact, Elon Musk infamously u-turned on Tesla accepting Bitcoin as payment, due to environmental concerns. Shortly after that tweet, Bitcoin value dropped by 10%.

Those who disagree with this argue that the energy that mining consumes in fact comes from renewable sources.

In response to the Musk tweet, however, a Bitcoin Mining Council was set up to improve the cryptocurrencies environmental footprint.

Furthermore, many project developers acknowledge environmental concerns. As a result, alternative mining methods such as Proof of Stake, which are more energy-efficient, are increasingly being developed.

Leafscore, a website that ranks eco-friendliness across a range of sectors, has a list of the most eco-friendly cryptocurrencies.

So, it seems that many stakeholders across the cryptocurrency world are determined not to let such concerns sabotage the rise of crypto.

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Why are cryptocurrencies valuable?

While some people believe that cryptocurrencies only get their value from pure speculation, this is not entirely true. In reality, many cryptocurrencies are valuable for the same reasons that traditional currencies (also known as “fiat” currencies).

These reasons are based on six key attributes that fiat currencies must have to be considered valuable. Bitcoin is a great example of a cryptocurrency that gets its value in this way. These six attributes are scarcity, divisibility, utility, transportability, durability, and counterfeitability.

Let take a closer look at each one of them:

1. Scarcity

As with fiat currencies, some cryptocurrencies are regulated and have a finite number of units that can be in circulation. For Bitcoin, that number is 21 million. This makes Bitcoin a scarce commodity which helps drive up its value.

2. Divisibility

Currencies such as the British Pound can be divided into smaller units called pence, which are 1/100 of a pound. Likewise, some cryptocurrencies can be broken down into smaller units. In Bitcoin’s case, these are called Satoshis (named after the mysterious inventor of the Bitcoin). They’re slightly smaller than one penny, though. A single satoshi is 1/100,000,000 of a Bitcoin, or 0.00000001 BTC.

3. Utility

Fiat currencies hold real-world utility (ie they can be traded for goods), which also drives their value. As such, they are primarily used as a means of exchange and to store value.

Cryptocurrencies also have such utility as they can in some cases be used as payment. Of course, this is fairly limited at the moment. However, many crypto enthusiasts believe that the amount of goods and services that will allow crypto payments is only set to increase.

Furthermore, the blockchain technology that birthed the era of cryptocurrencies has ‘outside utility’. It is essentially a digital database, which means it can be used for creating more than just cryptocurrencies. This may include securely sharing medical data, cross-border payments or tracking music royalties.

4. Transportability

Thankfully, in today’s world, cash can be represented digitally and transferred between parties quickly. However, depending on how much money you need to transfer, the fees for transferring fiat currencies can get outrageous. Plus, it can also be really slow.

While fiat currencies are mobile, they can very quickly become difficult to move around as you have more of them to handle. That is why, for example, bullion vans are needed to transport large amounts of cash. This is where most cryptocurrencies trump fiat currencies.

Fundamentally, cryptocurrencies are not hindered by such setbacks. Large amounts of cryptocurrency can be transferred across the blockchain within minutes between parties who are continents apart, and with reasonably low transaction costs.

5. Durability

This is another area where cryptocurrencies out-do fiat currencies. Because of the nature of the material fiat currencies are made from (ie, paper), they are susceptible to being damaged. A twenty-pound note can be torn, burnt, and completely destroyed, rendering it worthless.

In contrast, cryptocurrencies are much harder to destroy and there are only two main ways. First, they can be ‘lost’ in the network. Or secondly, they can be digitally burned (a far more complex process than lighting a match to a twenty-pound note).

6. Counterfeitability

A cryptocurrency is nearly impossible to counterfeit. This is because the decentralised blockchain validates the owner of each coin. Any transactions are recorded making it nearly impossible to introduce new or fake coins into the system.

By comparison, The Bank of England estimates that nearly 1 in 20,000 UK banknotes are forgeries. While this might seem low, it represents over 111,000 fake £20 notes alone (source).

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What are the benefits of cryptocurrency?

Cryptocurrencies offer many advantages over traditional banking. Some of these include:

1. More privacy & confidentiality

Traditional financial institutions are big on documentation. When a transaction is performed via a traditional financial institution, personal information is required and recorded. The banks then store these for security and legal reasons, and this potentially puts your privacy at risk.

With cryptocurrencies, you can choose the information you share with the person on the other end of the transaction. This protects your privacy and ensures that your transactions remain confidential.

However, remember all your transactions are recorded on the blockchain and you’ll probably want to convert your crypto into fiat currency at some point. This means you’re going to need a bank account. If you’re thinking of using Bitcoin for something you’d rather keep quiet than think again.

2. Lower transaction fees

Importantly, cryptocurrency transactions do not require an intermediary institution to regulate transactions. Therefore, they typically have lower transaction fees than banks.

Other than very small network fees, cryptocurrency transactions completely eliminate the need for middlemen and their associated costs. As a result, cryptocurrency transactions can be significantly cheaper and faster.

This does however depend on how you transfer your coins. Most platforms or exchanges charge a transaction fee. If you are transferring small amounts of crypto then make sure you check your costs as you don’t want any surprises.

3. Universal access

Sadly, a large percentage of the world still doesn’t have or can’t get a bank account. This is because a single, centralised institution such as a bank has deemed they do not qualify. As a result, such people can’t access basic banking tools that we take for granted. This can range from digitally transferring money, accessing credit or sending money abroad.

With cryptocurrencies, there are no such third parties that get to make these autocratic decisions. All you need is an internet connection, a crypto ‘wallet’ and you can send and receive money to anyone in the world.

Furthermore, innovative cryptocurrency projects such as smart contracts are constantly developing. These allow you to trade money for goods anonymously with anyone, anywhere, and without the need for central authority or control. It is these types of empowering initiatives that get crypto-enthusiasts so excited.

4. Resistance to censorship

Due to the decentralised nature of cryptocurrencies, it is much harder for governments to censor cryptocurrency transactions. People are increasingly concerned about the extent of government interference in people’s personal lives. So, for many, cryptocurrency has been a driving force in putting the power of economic control back in the hands of the people.

Peer-to-peer networks, facilitated by cryptocurrency transactions, mean people can transact without having to worry about having their assets getting frozen or restricted by government agencies.

As cryptocurrencies grow in popularity we may see this change. In fact, China has already started by banning financial transactions using cryptocurrencies (source). It’s unknown how western governments will respond but you can bet that they will want some cut of the action.

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How many cryptocurrencies are there?

According to CoinMarketCap.com, one of the world’s largest repositories of data on cryptocurrencies, there are almost 10,000 cryptocurrencies in the world.

Today, these cryptocurrencies can be traded on nearly 400 exchanges, which are platforms for buying, selling, and storing commodities. In fact, the total value of all the cryptocurrencies in the world is estimated to be approximately $2.4 trillion!

What are the most popular cryptocurrencies?

As we now know, there are literally thousands of coins with more being created all the time. Some, however, receive more attention than others. Here are some of the best-known.

1. Bitcoin (BTC)

Bitcoin is the grandfather of all cryptocurrencies, giving rise to all the other forms. It’s the original and the most valuable in terms of market cap. For many, Bitcoin is the gold standard. However, it is based on the Proof of Work algorithm, which has come under heavy criticism due to its high energy consumption and environmental impact.

2. Ethereum (ETH)

Ethereum was launched in 2015 and has the second largest cryptocurrency market cap. Etherum is more than just a currency, it’s a platform to create apps, smart contracts and other software-based services.

The plan for 2021 is for Ethereum to change how coins are acquired which would lower energy consumption significantly, something cypto has generally been criticised for.

3. Litecoin (LTC)

Litecoin was launched in 2011 as a Bitcoin spin-off and boasts the largest global scrypt-based network of all the cryptocurrencies. It has been referred to as the “silver to Bitcoin’s gold.”

4. Cardano (ADA)

Considered by many as the most environmentally sustainable coin, Cardano is based on the Proof of Stake algorithm. Now in its third generation, applications for Cardano include Smart Contracts, identity management and product traceability.

5. Dogecoin (DOGE)

Dogecoin was originally created as a joke (or meme-crypto) to satirically mock cryptocurrencies’ volatility. Since then, it has become one of the best-known coins due to the press it receives thanks to Elon Musk.

How do I buy cryptocurrencies?

Cryptocurrencies are traded on ‘exchanges’. These are platforms where you can buy and sell cryptocurrencies. Currently, there are over 400 of them, though they are not equal. Fees will vary, as will the friendliness of the interface and not all platforms support all cryptocurrencies. Here’s a rundown of the most popular exchange.

For more information on buying Bitcoin and comparing UK exchanges including fees, check out
How to buy Bitcoin safely.

Coinbase

The most popular crypto exchange in the UK is Coinbase and boasts 43 million users globally. It went public and floated in April 2021 which for many, cemented cryptocurrency as being legitimate and here to stay. It supports a huge range of cryptocurrencies, including Dogecoin, which was recently added.
Eat Sleep Money readers can get $10 of free crypto when you deposit $100 by signing up here.

Binance

Binance is another popular UK crypto exchange. Plus, it has the lowest fees of the three here, though the user interface is certainly not as friendly as Coinbase.

Important – Binance Markets Limited is not permitted by the FCA to undertake any regulated activity in the UK. This does not necessarily services on the Binance.com website are affected. Make sure you do your research. Read more here and in the FCA link above.

Kraken

Kraken offers a user-friendly interface and mobile app to buy a wide range of cryptocurrencies. With 27/7 support on tap, it is another popular exchange for buying crypto. However, it currently doesn’t offer a wallet service, so you’ll need to buy your own hardware wallet if holding for the long term.

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Is investing in cryptocurrency a good idea?

There is a huge amount of debate on this one. Dive into any personal finance forum or Facebook group and you’ll see hundreds of comments fervently disagreeing with each other.

"No - it is simply gambling"

Those in the ‘No’ camp argue that cryptocurrencies are not really an ‘investment’, but merely speculation. Many, in fact, see it simply as gambling.

In their view, unlike businesses that build their value through profit, assets and cash flow, cryptocurrencies only derive their value from speculation.

Essentially, a cryptocurrency only becomes valuable when a large enough number of people expect it to become valuable. They then pump money in, which in turn increases its value.

In fact, many cryptocurrency sceptics believe that cryptocurrencies do not qualify as actual currency. One of the defining characteristics of currencies is that they are stable. It is this stability that makes them a valuable means of exchange.

So, people who use that currency must be sure that its value will not suddenly and dramatically change. Stability is what ensures a currency can be used as a means of charging a fair price for any commodity.

Stability trumps volatility

Cryptocurrencies, on the other hand, are volatile. One unit of a cryptocurrency may be worth much more tomorrow than it is today. In fact, pricing can change by as much as 10% within the hour. As a result, people are less likely to spend it because they believe the value will rise in future.

So it is this volatility that makes it difficult for cryptocurrencies to be a viable and trusted means of exchange. Therefore, a currency that people are unable to spend is not really valuable as a currency in the long run.

"Yes - it is the future of mankind"

On the other hand, many investing in crypto long-term genuinely believe it will bring good to the world. They point to the ever-increasing relevance of decentralised finance and blockchain technology. They predict that these ideas and innovations, like traditional companies, will eventually provide real-world utility and benefits. And as a result, they believe their monetary value will also increase.

Take Binance Coin (BNB), for example. It was created by Binance, one of the world’s leading cryptocurrency exchanges, and built on the Binance Smart Chain network. Fundamentally, it allows developers to build full-fledged, high-performance and decentralised apps directly on its platform. So in this case, cryptocurrency platforms can be businesses in themselves, create value for people and have ‘customers’.

Do I invest in Crypto?

Yes, I do, but only a very small percentage of my portfolio. Did I get my head turned by the headlines? Yes, but I spent time doing research so I had a decent grasp of the coins/projects I was investing in. Plus, I’m in it for the long haul, so I’m prepared to weather the impending rollercoaster.

I don’t believe investing in crypto is pure gambling. if you’ve done your research. But I am prepared to lose it all, and I think that’s the sensible money mindset to have on this one.

Cryptocurrency beginner's guide - summary

In reality, it doesn’t matter whatever you decide or think. The important phrase here is ‘you do you’. Either way, what’s critical, is to do your research. Read this cryptocurrency beginner’s guide and other blogs.

Do not be one of those investors that blindly invest in an asset they do not understand, just because they see headline-grabbing returns on the news.

Investing in cryptocurrencies is not like index funds. You are seriously exposed to whichever single cryptocurrency you invest in. And each one is different. In its technology, development structure and future utility. The carpet can be pulled from beneath your feet at any time. 

The cryptocurrency market is highly volatile. If you do choose to invest please don’t yolo your life savings. Take a considered approach and don’t risk more than you can afford to lose.

If you’d like to learn more about investing then why not read our Beginners Guide to Investing – How to bankroll your financial future. It’s a great guide to get you started and to make sure you don’t fall for the most common mistakes.

If you’d like to chat or learn more about crypto, investing and finances then come join our free UK Personal Finance Group. It’s a group of like-minded people all with the same goal of improving our personal finance game. I’d love to see you there.

And finally, if you’d want to kick start your crypto journey then check out our How to Get Free Bitcoin article.

Here’s to financial fitness.

EatSleepMoney.co.uk does not offer financial advice and is intended for reference/information only. Remember, you should always carry out your own research and/or take specific professional advice before choosing any financial products or services or undertaking any business or financial venture. If you need financial advice Unbiased can connect you with a suitable professional for free. Investments may go up as well as down and you may get back less than you put in.