Crypto Explained: A Beginner's Guide

Published on: January 29, 2025

What is cryptocurrency? What is blockchain technology? How do they work together? These are questions that are becoming more common as the use of digital currency and blockchain technology grows.

Here is a brief overview of these concepts:

Cryptocurrency

Cryptocurrencies (also known as crypto), like Bitcoin or Ethereum, are digital currencies that use cryptography to secure transactions and control the creation of new coins. They are decentralized, and not controlled by a central authority like a bank or government. Cryptocurrencies are stored in digital ledgers called blockchains, and you access and spend them using digital wallets. Cryptocurrencies can be used to buy goods and services or traded for other currencies. The value of cryptocurrencies can be volatile, and they are not backed by any physical asset.

Blockchain technology

Blockchain technology is not just for cryptocurrencies; it's being used in a variety of industries for its security, transparency, and efficiency:

  • Finance: Make Cross-border payments, create smart contracts (digital agreements), and tokenize assets (create digital representation).

  • Healthcare: Store and share patient data, improve data security, reduce fraud, and streamline data sharing.

  • Supply Chain Management: Track products, create smart contracts, and streamline payments.

When you buy cryptocurrency, you are buying a digital asset that is stored on a blockchain. A blockchain is a secure, decentralized database that stores and records transactions across a network. Each node of the network acts as a small server within the decentralized system. All nodes in the network have a complete copy of the blockchain database. Transactions cannot be added without consensus from the network. There are different consensus mechanisms, some in which nodes are rewarded for transaction verification and others that are not. A majority of nodes must verify a transaction before it is confirmed and added to the blockchain.

Blocks

A block is a collection of transactions that are bundled together and added to the blockchain. Each block contains a reference to the previous block, creating a chain of blocks. This is why it is called a blockchain. The blocks are linked together using cryptographic hashes (unique identifiers) for each block. This makes it difficult to alter the data in a block without changing all the blocks that come after it. This is what makes the blockchain secure and tamper-proof.

Nodes

Nodes are computers with the blockchain's software installed and connected to the network. Participating in the network, the node maintains the ledger, validates transactions, enforces consensus, and communicates with other nodes to share information about new transactions and blocks.

How to use cryptocurrency

To buy or receive cryptocurrency you need a cryptocurrency wallet. The wallet generates your private and public keys. You use your private key to access and spend your crypto and your public key to receive crypto.

There are different types of wallets: hot and cold wallets, and custodial and non-custodial. A cold wallet is not connected to the internet, while a hot wallet is. A custodial wallet is managed by a third party, like an exchange, and a non-custodial wallet is managed by you. There are differences in security and convenience between the different types of wallets. Hot wallets are more convenient (often provided for free by exchanges), but less secure. Cold wallets are more secure, but less convenient. Non-custodial wallets give you more control over your crypto, but custodial wallets are easier to use.

When you want to buy cryptocurrency, you can use a cryptocurrency exchange. An exchange is a platform that allows you to buy, sell, and trade cryptocurrencies. You can use fiat currency, like US dollars, to buy cryptocurrency, or you can exchange one cryptocurrency for another. Some popular exchanges are Coinbase, Binance, and Kraken.

When you want to spend cryptocurrency, you open your wallet and enter the recipient's public key and the amount you want to send. The transaction is verified by the network and added to the blockchain. The recipient can then access the cryptocurrency using their private key.

When you want to receive cryptocurrency, you give the sender your public key. The sender enters your public key and the amount they want to send into their wallet. The transaction is verified by the network and added to the blockchain. You can then access the cryptocurrency using your private key.

Conclusion

As the use of cryptocurrencies and blockchain technology grows, it is important to understand the basics of how they work and how they can be used. By learning about these concepts, you can take advantage of the opportunities they offer and make informed decisions about how to use them in your own life and business.

For more information about cryptocurrencies and blockchain technology, check out the resources below: