How Cryptocurrency works – A Complete Beginner's Guide

For the past couple of months, the rise of blockchains, Bitcoin, Cardano, Shiba Inu, Ethereum, NFTs, have been gaining a lot of attention in the crypto market, which has led everyone to tweet and make posts about the crypto technology. But what does all of it mean?

Hello there, and welcome to HotNaija, your one-stop destination for the latest entertainment news, celebrity gossips and stories, lifestyle content, and cryptocurrency news. Today you'll discover what crypto is, why it's gaining more mainstream, which are best to invest in, and the dark side of it. Oh yes! We're going to be plain all through this guide. We'll be taking you from crypto noob to crypto genius. So without any further ado, let's get started.

What is cryptocurrency?

In the early stages of society, there was no such thing as money. Let's call this stage – Stage 1. The only possible way to buy something off someone was to go up to them and be like, 'oh I really like your horse, I'll trade you my cat.' But the issue with such a system is that even though you might be thrilled to give up your horse, you might not actually want a mere cat. So, such a trade won't happen. Now, this is where the use of currency came in.

Stage 2 – Because they were made from precious materials like gold and silver, everyone just accepted that they were worth something. You've heard of the British Pound (£), right? Well, they're called pounds because 1 pound literally just used to be 1 pound of silver (£1 = 1LBS of silver). And so, suddenly, in a trade, it doesn't matter if you don't want my cat. As long as I have coins, we can still trade for your horse.

Even if you have no use for the silver (because it's a precious material), you have that reassurance that you can take that coin, give it to someone else, and trade for something that you want. Convenient right? But then, this evolved to stage 3.

Stage 3 – As banks became established and the government had control, we realized that as long as there was trust in the system, we could move away from carrying blocks of precious metals towards something even more convenient – Paper money.

Although it pretty much does the same thing, now the money doesn't have value because it's made of pure silver; it now has value simply because the government says it has value. But, as technology improved further, we found even more convenient ways of storing and trading our personal belongings.

Stage 4 – This is where more people now buy things online more than ever, using bank-issued credit cards. At this stage, we don't see our money anymore. It's no longer about coins, notes, or even cats. It's just entries on a spreadsheet. For example, when I shop on Jumia, what happens is that my bank adds an entry in my spreadsheet that says I now have ₦50k less, and then my Jumia wallet adds an entry that says they have ₦50k more.

So, the reason for all this entire intro is to give you context on where cryptocurrency sits, as it's seen by many people as the most convenient era of exchange ever. 

Stage 5 – The cryptocurrency stage is 100% virtual. I know the Bitcoin logo looks a bit like a physical coin. It really isn't. In crypto, there is no gold, silver, or any form of paper. It's just a transfer of digital assets (with a similar core concept).

Think of cryptocurrency as literally just running spreadsheets of who's paid what to who. So instead of multiple banks keeping their own separate records with crypto, there is just one enormous spreadsheet of every transaction made, using that currency (BTC, ETH, LTC, SHIB, XRP, BCH, etc.). This is called a ledger. Okay, I know we all have an excellent personal spreadsheet, but what's all the fuss about? Why is everyone going crypto crazy? Well, there are some distinct advantages to a currency system like this.

Why is cryptocurrency gaining momentum and becoming important?

1. It's decentralized:

While every cryptocurrency is recorded on the same ledger, there are many more copies of that ledger, and anyone who is a part of the network has one. You might have heard of cryptocurrency mining or Bitcoin mining. All that is simply someone who set up a computer to crunch through transactions on their copy of this ledger or spreadsheet. There are already about a million Bitcoin miners around the world.

Many people are mining because when they dedicate their computer's power to mining Ethereum, Bitcoin, or any other type of cryptocurrency, they earn some amount of crypto coins (the one they mined) as compensation. The result of this is that, if you go into a store (that accepts Bitcoin as a form of payment) and end up spending 3 Bitcoins on a purchase, instead of checking with one bank's records, the shop checks with every single computer on the network (crypto) if you have enough. Assuming you do, each computer will give the go-ahead. Then, everyone will update their records independently without a third party interfering in the transactions.

So, when you end up having this many copies of exactly the same ledger, it becomes easy to tell if anyone's trying anything fishy. For example, if you try to hack into someone's computer that's on the network and give yourself more money by adjusting figures on their copy of the ledger, it won't get through! The system will realize that 99.9% of the copies on record say one thing, but one of them is saying something else, so it must have been tampered with.

There's an apparent organization in the system which people believe in because they see the future as 'Open Traceable Transactions' instead of having some bits of the record here and other bits over there. I know it's beginning to seem complex at this point, but as we go through this, you'll realize that for a lot of people, in a way, it's simpler.

(2). You don't need banks:

There are many areas in the world with access to the internet (which is basically what you need for crypto) but lack access to traditional banks, which requires a lot of paperwork and documentation. I know I've implied this already, but the main perk of crypto is that – you don't need banks anymore.

Since everything is stored by the people on this ledger, you can make international payments almost instantly instead of taking half a day with spending limits. Plus, you don't need to worry about exchange rates, interest rates, and even transactions fees. All these fees are close to zero for some cryptocurrencies.

Now, this is where the real fun begins. The reason that cryptocurrencies are called "Cryptocurrency" is that they are secured by "Cryptography." An example of this, which many major cryptocurrencies like Bitcoin use, is "Blockchain." Blockchain is not Bitcoin, neither is it a currency itself! This is a mistake which a lot of people make.

Blockchain is simply a secured digital type of ledger. It's just like that big spreadsheet everyone has that's recording transactions. Blockchain is just a way of organizing it. Funny enough, it does that into a series of blocks.

So every time I pay for something with Bitcoin, that transaction is recorded as a block. Each block contains transaction data like – who has paid? And how much?

Also, I know cryptocurrencies have their issues, I'm going to get to them in a minute, but hopefully, you can already see why some people are excited about them.

Which cryptocurrencies are best to invest in?

This brings us down to investments. You've probably heard of people putting money into cryptocurrencies, and all that means is that they're exchanging regular currencies like naira for cryptos like Bitcoin. They're hoping that those cryptocurrencies become the next big thing and therefore suddenly shoot up in value, at which point they can spend them or just exchange them back for more dollars than they bought them for.

A term for cryptocurrencies that skyrocket is called "Mooning." But at this point, many are asking, which cryptocurrency should they buy? Although we've talked about Bitcoin, it's just 1 of over 4000 different cryptos already in existence, each having different properties.

For example, Ethereum (ETH), the second most invested crypto, can process transactions faster than Bitcoin. There's one called Cardano (ADA), which is considered to be technologically superior. And another is called Litecoin (LTC), with an entirely new algorithm.

Disclaimer: This is not in any way at all financial advice. I'm not recommending this, and I've literally only put in a small amount of money that I'm comfortable losing. I only see them as an optimistic gamble as opposed to a strategic investment.

So here's my portfolio for 2021:
40% – Ethereum
20% – Polygon
20% – Cardano
10% – Cartesi and
10% – Litecoin

These coins have not been stable since the beginning of this year, but since I only have plans in holding long-term, I don't have any worry if the coins crash or take a dip.

Moving on, it's no longer news crypto is in a pretty weird place right now; this brings me onto its problems – the dark side.

What are the dark sides of crypto?

(1). Volatility:

Personally, I think people don't take crypto seriously because of its Volatility. Just because these currencies are still new and digital, no one really knows what they should be worth, unlike the gold market. 

With this, you find that crypto prices are quite heavily speculative and are tied to the news cycle. Like when a glowing article comes out about them, costs spiral upwards, but when Elon Musk (the richest man in the world) posts a negative tweet about them, they go down.

(2). Usage:

This has to do with the fact that they're not really accepted as a form of payment in most places. Although you can now book holidays to travel to different destinations with crypto, donate to Wikipedia with crypto, there's been a lot of companies -- Burger King, Microsoft, Tesla -- who are pretty back and forth with accepting Bitcoin as a payment exchange. 

(3). Environmental concern:

The whole reason why a lot of these cryptos are so secure is because of this concept of transactions being verified numerous times by countless computers. So, I think it's a fair criticism that – that in itself creates a fundamental inefficiency. Because that much computing power requires a lot of electricity.

Although, at the same time, you could counter this by saying that traditional banking uses more electricity, that there are newer coins with better technology that are more efficient, and that one day, we'll be able to get that electricity from renewable sources.

(4). Criminals:

There's a pretty strong sentiment that it's like the perfect currency for criminals because there's no policing or regulation on crypto right now. But to be honest, I think the data speaks for itself on that one.

According to "Chain Analysis," – "0.34% of crypto transactions are criminal-related and up to 5.00% of regular cash transactions are made by criminals. I think that's because it's a bit of a misconception that currencies like Bitcoin are anonymous instead of pseudonymous.  This means that even though your actual details aren't visible to everyone, your public keys (your unique identifier – 686B7A0627D12FEE6618D) will be permanently baked into the blockchain upon making transactions with it.

So, cash is a better currency for most types of criminal activity,  because by its nature – it's untraceable.

Also, as well as the negatives, some straight-up odd things have come about because of crypto. For example, you might have heard of an NFT (Non-Fungible Token). If you haven't, you might want to make a tea for this one and check out a post we made on it. We made an entire explanation of how it works, why it was created, and how to get started on it. Check it out here.

I don't want to call it stupid, but it's a bit of a head-scratcher. Do you know how you can just go to an art gallery and simply pay to purchase a painting all to yourself? Now, thanks to blockchain technology, you can pay just to have digital ownership over something.

However, it doesn't stop anyone from sharing or using that thing, but all it means is that you'd eventually be the owner of the original, and they'd all be sharing copies of it. Even if, for most intents and purposes, they look and behave identically. Like, a lot of these NFTs are literally just 'JPEG images.'

The main reason why many people find this funny is that there's a distinct difference between buying an NFT and buying the rights over something. So if you buy something, that's a very legitimate purchase because you have the power to create merch or sell licenses, but with an NFT, you can't.

The original owner still has all the reproduction rights over that piece. It means you're using the blockchain to prove that you have some ownership over that asset. But clearly, just being able to say that has some value.

For example, the Gucci ghost NFT above sold for $3,600, while the CEO of Twitter – Jack Dorsey, sold the first-ever tweet he made for $2.9 million. Shocking right? Just 5 words!

This one literally just blows my mind. The photo above is basically an overview of a random guy's pieces of art sold for $69 million. Amazing!

To clarify, this literally just gives the buyer some digital ownership over a JPEG image.

Finally, you might have heard of Dogecoin. It's based on the same tech as Litecoin, but would you believe it if I told you it was created as a mere joke? Not until people started sharing it and putting a bit of money into it, simply because they thought it was funny. Subsequently, its value propelled us to the point where some people are millionaires just because they bought Dogecoin in its early stage (when it was cheap). It's an exciting world there, right?

If you find this piece useful, then do consider sharing it with a friend or family member who could benefit from the knowledge you've just gained.

Make sure you check out our other blog posts for more information about the crypto market and trending entertainment headlines. Thanks for reading!
Alade Habeeb

I am a writer with a sense of creativity to write on multiple topics. I create engaging, thrilling and entertaining contents and I always take the time to edit my work well before publishing. I follow all the latest trends and read about recent happenings in the entertainment industry to always update my readers.

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