What is cryptocurrency? A beginner's guide

This post was originally published by Deriv on 13 Jan 2022

Most of us are familiar with the digital currency concept without realising it. We pay without seeing a single coin or banknote when we use our bank cards to buy goods and services. So, the money we use daily is digital, in a way. Cryptocurrency is also a form of digital money, and it's becoming increasingly popular, capturing more and more headlines. However, it's an entirely different concept.

Before diving into trading, let's explore basic information about this new virtual currency.

What does cryptocurrency mean?

Cryptocurrency is a digital currency with no physical form and is entirely independent of the traditional banking system. It's an exciting technological breakthrough that has revolutionised how we use money. Having payments handled between people without any involvement of a third party (like banks) is entirely different from how we used to deal with money.

Cryptocurrency isn't issued by any government; it uses blockchain technology that keeps records of all transactions within a decentralised global network of computers. The data verifying these transactions is cryptographically encoded, which means one party transforms it into a code in a way that only the intended party can decode it and view, and that's where the "crypto" part comes from.

What is cryptocurrency mining?

Mining is a process of verifying cryptocurrency transactions. Miners encrypt every transaction and collect them together in groups that are called blocks. These blocks are later chained together, which is called the blockchain. 

Once a block is thoroughly verified and added to the blockchain, it generates new coins. As a result, a miner is rewarded with newly generated coins and transaction fees that are paid for all the transactions in the block. It's a way of earning crypto without buying it and the most appealing reason to become a miner.

Is cryptocurrency safe?

The complexity of blockchain technology makes cryptocurrencies highly resistant to hacking. 

First, it's decentralised – the data is shared with the entire network instead of being kept in one place, making it harder for hackers to find the source.

And most importantly, having all the transactions and internal information cryptographically secure makes it almost impossible to access or change the data. 

Why trade crypto?

Now that we know how cryptocurrency works, let's find out how you can trade it. But first of all, why is crypto trading such a hot topic? More and more traders get involved in crypto trading daily for different reasons. It may be just a curiosity for some of them, but there are undeniable benefits to it, too:

• Round-the-clock trading.
• High volatility – prices change rapidly, giving traders a range of opportunities, not eliminating the risk. 
• High liquidity makes it easy to convert the most popular cryptocurrencies into cash. 

Let's see how you can take advantage of these benefits.

Where do beginners start with cryptocurrency trading?

The starting point depends on the type of trading you choose. The first option is to own the cryptocurrency you are going to trade. In this case, you need to exchange fiat money for the cryptocurrency of your choice on an exchange platform.

You also need to create a digital wallet to keep your cryptocurrency safe. It basically means just creating an account on a website or app. There are plenty of options available on the crypto market. It's always good to compare a few options to determine what works better for you.

Most of the wallets serve as exchange services, too, to make this process easier. It means you can buy, sell and hold your cryptocurrency in the same place.

The other way to trade cryptocurrency is to speculate on its price movement without buying it. This type of trading can be done with Multipliers digital options or CFDs. Check the Cryptocurrency Trading for Beginners blog to find out more about how you can trade crypto with these trade types.

Which cryptocurrency should you choose for trading?

As of February 2022, there are around 10,000 cryptocurrencies listed. Most cryptocurrency trading platforms offer quite a few options to choose from. The top 10 are measured by market capitalisation, according to CoinMarketCap.

1) Bitcoin ($827.9 billion) 

2) Ethereum ($367.1 billion) 

3) Tether ($78.6 billion) 

4) Binance Coin ($70 billion) 

5) USD coin ($52.6 billion)

6) Ripple ($39.3 billion)

7) Cardano ($35.9 billion)

8) Solana ($31.8 billion)

9) Avalanche ($23 billion)

10) Terra ($22 billion)

But what are other substantial differences between these virtual currencies, apart from the market capitalisation? In a nutshell, the main differences lie in technical characteristics. Here is an example of a brief comparison of the current three largest cryptocurrencies. 

If you are new to cryptocurrency trading, starting with Bitcoin – the biggest and most well-known digital coin is a good idea. And once you get more comfortable, you can always expand and upgrade your trading strategy, adding other cryptocurrencies to your portfolio. 

Is cryptocurrency the future of money?

It's hard to predict if cryptocurrencies are here to stay. Some consider them the future of all transactions and potentially the main form of currency in years to come, while others predict an inevitable crash. But regardless of the future outcome, you can ride the wave of its popularity and try to make some extra income while it lasts.

If you have more questions, in our next blog, we have prepared a few more examples of how you can benefit when you get in on the cryptocurrency action now.