What is blockchain technology?
The Bitcoin Network is the first successful implementation of blockchain technology.
The term “blockchain technology” typically refers to the transparent, trustless, publicly accessible ledger that allows us to securely transfer the ownership of units of value using public key encryption and proof of work methods.
The technology uses decentralized consensus to maintain the network, which means it is not centrally controlled by a bank, corporation, or government. In fact, the larger the network grows and becomes increasingly decentralized, the more secure it becomes.
The potential for blockchain technology is not limited to bitcoin. As such, it has gained a lot of attention in a variety of industries including: financial services, charities and nonprofits, the arts, and e-commerce.
What is Bitcoin?
Bitcoin can often refer to two things. First, the Bitcoin network that keeps track of our transactions and balances, and second, the currency that we use as the unit of value when we transact. We’ll cover both here.
The Bitcoin Network
Bitcoin’s payment network (also called the bitcoin blockchain) is what makes it possible for us to transact with one another. The network uses distributed consensus to verify and confirm transactions, and consensus is reached via a large global network of high-performance computers (called miners) running the bitcoin software.
Whenever someone sends a transaction it is broadcast instantly to the network and verified by the miners. Miners are constantly working to confirm individual transactions and include them in the next block of transactions in the chain. Once a new block is verified, all the transactions within it are permanently recorded on the blockchain. Rewards are paid out in bitcoin to miners who confirm transactions and verify the next block as a way to incentivize productivity on the network.
Each party who participates in the mining process has an identical up-to-date copy of the blockchain or public ledger, which is a record of all the transactions in bitcoin history. Each party’s copy of the ledger is updated every time a new block is found.
The unit of value that we send and receive on the Bitcoin network is also referred to as bitcoin, or bitcoins. Bitcoin is completely digital, meaning we can’t physically hold it in our hand. It’s also portable, divisible, fungible, and irreversible.
Public and private keys
Bitcoin, as well as all other major cryptocurrencies that came after it, is built upon public-key cryptography, a cryptographic system that uses pairs of keys: public keys, which are publicly known and essential for identification, and private keys, which are kept secret and are used for authentication and encryption.
Major cryptocurrencies like Bitcoin, Ethereum, and Bitcoin Cash function using three fundamental pieces of information: the address, associated with a balance and used for sending and receiving funds, and the address’ corresponding public and private keys. The generation of a bitcoin address begins with the generation of a private key. From there, its corresponding public key can be derived using a known algorithm. The address, which can then be used in transactions, is a shorter, representative form of the public key.
The private key is what grants a cryptocurrency user ownership of the funds on a given address. The Blockchain wallet automatically generates and stores private keys for you. When you send from a Blockchain wallet, the software signs the transaction with your private key (without actually disclosing it), which indicates to the entire network that you have the authority to transfer the funds on the address you’re sending from.
The security of this system comes from the one-way street that is getting from the private key to the public address. It is not possible to derive the public key from the address; likewise, it is impossible to derive the private key from the public key. In the Blockchain.com Wallet, your 12-word Secret Private Key Recovery Phrase is a seed of all the private keys of all the addresses generated within the wallet. This is what allows you to restore access to your funds even if you lose access to your original wallet. Using the recovery phrase will allow you to recover your crypto.
How is crypto stored?
Let’s look at a national currency like the rupee. It can be deposited in your name at a bank, or privately stuffed into a mattress at home far away from anyone’s eyes. Similarly, a cryptocurrency can be held on your behalf by a company, usually in your wallet at a crypto exchange online. You could also hold it in without being affiliated to anybody, in a private cryptocurrency wallet.
What is the purpose of cryptocurrency?
As indicated by ‘currency’, they were originally intended to be used in the same way as rupees and dollars are, as a medium of payment between people for products and services purchased.
Consider store reward cards, an alternative physical payment method that is denominated in their own units, and not in national currency. Similarly, cryptocurrency with its own units was meant to enable easy digital transactions online, at lower costs than what conventional banks charged.
How does supply and demand work in the cryptocurrency market?
Some cryptocurrencies like Bitcoin and Ether are designed to have a limited supply. By comparison, real-world currencies like the US Dollar do not have a hard limit on supply. When demand increases, the value of a supply-limited item is expected to increase.
That difference in supply, a high demand for crypto and new ways to profit from rising crypto, have led to a self-perpetuating cycle that drives up the exchange value of major cryptocurrencies.
How to start trading in cryptocurrencies?
Fundamentally, a seller sells their currency to gain cash and a buyer buys expecting to hold the currency until its value increases in dollar/rupee terms.
In mid-August 2021, the total market value of all cryptocurrency exceeded $2 trillion, with Bitcoin alone making up 44% of that. As the graph above shows, a currency can start small and reach very high – but with a number of bumps along the way.
People with a lot of faith in the future of cryptocurrencies subscribe to a ‘HODL’ mindset, meaning ‘hold on for dear life’ to the roller-coaster they expect to ride. They buy and do not intend to sell anytime soon, even claiming that the value of one Bitcoin could rise from $50,000 today to $288,000 in a few years.
Others choose the day trading route – buy a currency, target a profit percentage as low as 2% and sell as soon as that target is reached – sometimes within hours.
What questions should I be asking about crypto?
The first question one may have to address is which currency to buy. The biggest one, Bitcoin, would be a good starting point to begin investing right away.
One could later branch into other coins and tokens as per observations/confidence. As with stocks, researching the cryptocurrency of choice is always helpful.
The second question is adopting a safe trading method. To begin with, a simple ‘buy and hold’ may be preferable. Long term investors could carry over the ‘rupee cost averaging’ (RCA) low-risk strategy from the stock market.
An example of RCA would be setting a budget of ₹1000 a month, and buying crypto for exactly that much regularly each month, regardless of price dips or peaks. After gaining confidence, many more strategies could be used.
The third question would be choosing a crypto exchange. Picking a well-known exchange backed by big names internationally, one that is likely to still be growing 2-3 years later could allow peace of mind that one’s investment is safe. CoinDCX and WazirX are both good starting points for Indian investors.
After gaining confidence, one could consider comparing exchanges on factors such as currency pairs offered, transaction costs, ease of transaction, security, leverage availability, futures, NFT purchases, earnings from DeFi lending, and so on.
What are the reasons for the popularity of cryptocurrencies?
The reasons for popularity of cryptocurrencies also set the foundation for some frequently asked questions about cryptocurrencies. Interestingly, you can find various reasons for the popularity of cryptocurrencies. One of the most common reasons for popularity of cryptocurrencies refers to the assumptions suggesting that cryptocurrencies are the currency of the future. In addition, cryptocurrencies also remove banks and other financial intermediaries from focusing on reducing the value of money.
Most important of all, the technology behind cryptocurrencies, i.e., blockchain, is the biggest draw for the future of crypto. Blockchain offers a decentralized system for processing and documenting transactions with better security in comparison to conventional payment systems. On top of it, the rising value of cryptocurrencies also encourages people to turn towards cryptocurrencies in large numbers.
Who controls cryptocurrencies?
The commonly asked cryptocurrency questions for beginners would also point towards the implication of control and ownership of cryptocurrencies. Blockchain does not allocate control to a single entity in the case of cryptocurrencies. However, the creators or developers of cryptocurrencies can set specific parameters such as rules for purchasing or selling cryptocurrency.
On the other hand, users get the privilege of controlling or managing the day-to-day operations of cryptocurrencies in a distributed manner. In addition, the identity of owners is anonymous, and you could not find any solid regulatory framework for verifying ownership of cryptocurrencies.
However, some countries are investing efforts in introducing some regulations in this area for countering illegal activities. The legal framework for cryptocurrencies could help governments in fighting off the concerns of terrorism financing and money laundering with cryptocurrencies. Furthermore, regulations could also strengthen control of governments over monetary policies with respect to cryptocurrencies.
What are cryptocurrency wallets?
The interest in purchasing cryptocurrencies would subsequently lead you to cryptocurrency FAQs related to crypto wallets. The crypto wallets are basically platforms for secure storage of digital assets in comparison to exchanges. Users could hold a wallet through an exchange account or a custody wallet and even from outside the exchange. As a matter of fact, cryptocurrency wallets help in storing the private keys to your cryptocurrency on the blockchain.
You can find two distinct variants of crypto wallets such as hot wallets and cold wallets. Users can access the hot wallets with connectivity to the internet through their desktops, mobile phones, or tablets. On the other hand, cold wallets store private keys to cryptocurrency of users in offline storage, thereby ensuring better security. However, you have to focus on the security of the cold wallet itself, which might be in the form of a USB device or paper.
What is ICO?
ICO is one of the important concepts you would come across in best questions about crypto. ICO or Initial Coin Offerings are basically a fundraising method used generally by startups and developers who want to launch new cryptocurrency tokens. Developers can collect money in crypto or fiat currency in return for the newly developed cryptocurrency. Buyers rely solely on the assumption that the new crypto token would be used on a large scale, thereby increasing its price. However, an ICO is different from IPOs, or Initial Public Offerings as investments in ICO do not guarantee an ownership stake in the company.
What is UTXO?
Speaking of Bitcoin transactions, you would come across another notable topic in frequently asked questions about cryptocurrency with UTXO. UTXO basically means unspent transaction output, which points to the amount of digital currency you have remaining after completing a cryptocurrency transaction. Every Bitcoin transaction starts with the use of some coins for balancing the ledger. It is important to note that UTXOs are subject to continuous processing.
In addition, UTXO also plays a crucial role in facilitating the beginning and completion of transactions on cryptocurrency networks. Upon confirmation of transaction results, the crypto network removes the spent coins from the UTXO database. However, you can still find details of the spent coins on the ledger. In simple words, one could think of UTXO is the change you would receive after conducting a cash transaction.
What is stablecoin?
Your search for the top cryptocurrency FAQs would also bring you to the topic of stablecoins. They are basically digital currency pegged against a stable reserve asset such as gold or fiat currency like the US dollar. The primary objective of stablecoins focuses on reducing volatility of cryptocurrencies in comparison to unpegged crypto such as Bitcoin.
As a matter of fact, stablecoins serve as a bridge between the worlds of fiat currency and cryptocurrency. The adoption of stablecoins depends largely on the distinct traits they offer apart from stability of investments. With the value of global accessibility, stablecoins also provide the benefits of speed, cost-effectiveness, and security.
What is Tether?
Tether is a popular example of stablecoin, and you could find beginners seeking its definition in frequently asked questions about cryptocurrency. Tether or USDT is a renowned stablecoin with its value pegged against the US dollar. By fixing a value at par with a popular fiat currency, Tether provides trustworthy protection from volatility in the crypto space. Interestingly, you should note that the original USDT implementation used the Bitcoin blockchain as foundation. However, there have been many other implementations of USDT on the Ethereum blockchain.
What are the best practices for investing in cryptocurrency?
The list of commonly asked cryptocurrency FAQs would also reflect on the apprehensions of beginners regarding investments in cryptocurrency. However, a selected set of best practices could help you in avoiding any unwanted circumstances. For example, you need to check the credibility of the developer or founding team behind a cryptocurrency before investing in it.
You could also check for any other major investors participating in the project. Beginners should also check whether they would own a stake in the project or just cryptocurrency and tokens. In addition, the stage in which the project is in also plays a crucial role in verifying whether it is a good choice for investment.