Cryptocurrency Bitcoin Ethereum Explained for Beginners

Bitcoin is a digital currency that allows for peer-to-peer transactions without the need for intermediaries like banks. It was created in 2009 by an individual or group using the pseudonym Satoshi Nakamoto.

The total supply of Bitcoin is capped at 21 million, which helps to prevent inflation and maintain the value of each coin. This scarcity is one of the key factors that contributes to Bitcoin's value.

Ethereum, on the other hand, is not just a digital currency but also a platform that enables the creation of smart contracts and decentralized applications. It was founded in 2014 by Vitalik Buterin.

Bitcoin is the first and most well-known cryptocurrency, introduced in 2009 by its mysterious creator, Satoshi Nakamoto. Its price is currently $0.9999, and it has a market capitalization of $42.2 billion.

Bitcoin is a digital currency that exists only in the network, has no physical form, and is not redeemable for another commodity. Its supply is determined by the protocol, not a central bank, and the network is completely decentralized.

The Securities and Exchange Commission (SEC) approved the trading of ETFs that invest directly in Bitcoin in 2024, giving investors an easy way to bet on the cryptocurrency.

Bitcoin and Ethereum are two of the most well-known cryptocurrencies, but what exactly is cryptocurrency? In short, it's a digital payment system that doesn't rely on banks to verify transactions.

Cryptocurrency is a system that meets six conditions, including not requiring a central authority and using distributed consensus to maintain its state. The system also keeps an overview of cryptocurrency units and their ownership, and defines whether new units can be created.

Cryptocurrency has no intrinsic value and is not redeemable for another commodity, such as gold. It exists only in the network and has no physical form.

The supply of cryptocurrency is determined by the protocol, not a central bank, and the network is completely decentralized. This means that transactions are recorded in a public ledger, providing a transparent and secure way to transfer funds.

Here are some key characteristics of cryptocurrency:

Cryptocurrency uses encryption to verify transactions, providing security and safety. It's stored in digital wallets and transferred between wallets and public ledgers.

Bitcoin is the harbinger of the cryptocurrency era. It's still the coin people generally reference when they talk about digital currency. Its mysterious creator, allegedly Satoshi Nakamoto, introduced the currency in 2009.

Bitcoin has been on a roller-coaster ride since then, but it wasn't until 2017 that the cryptocurrency broke into broader popular consciousness. In 2024, the Securities and Exchange Commission (SEC) approved the trading of ETFs that invest directly in Bitcoin, giving investors an easy way to bet on Bitcoin.

As of the latest data, Bitcoin's price is $0.9999 and its market cap is $42.2 billion.

Here are some key stats about Bitcoin:

Ethereum is the second most recognizable name in the crypto space, and for good reason. The system allows you to use ether, the currency, to perform a number of functions. Ethereum's smart contract aspect helps make it a popular currency.

Blockchain technology is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block contains a hash pointer as a link to a previous block, a timestamp, and transaction data.

This decentralized system is inherently resistant to modification of the data, making it a secure way to record transactions between two parties. By design, blockchains are an open, distributed ledger that can record transactions efficiently and in a verifiable and permanent way.

Blockchains are managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks, which requires collusion of the network majority to alter the data.

Blockchain technology is a type of distributed ledger that records transactions between two parties efficiently and in a verifiable and permanent way. It's an open, distributed ledger that's inherently resistant to modification of the data.

A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a hash pointer as a link to a previous block, a timestamp, and transaction data.

Blockchains are secure by design and are an example of a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been achieved with a blockchain.

Nodes are computers that connect to a cryptocurrency network, supporting the network through either relaying transactions, validation, or hosting a copy of the blockchain. Node owners can be volunteers, those hosted by the organization or body responsible for developing the cryptocurrency blockchain network technology, or those who are enticed to host a node to receive rewards from hosting the node network.

Mining is the validation of transactions on a blockchain, and successful miners obtain new cryptocurrency as a reward. The reward decreases transaction fees by creating a complementary incentive to contribute to the processing power of the network.

Timestamping schemes are used to "prove" the validity of transactions added to the blockchain ledger without the need for a trusted third party. The most widely used proof-of-work schemes are based on SHA-256 and scrypt.

Some popular regions for mining include those with inexpensive electricity, a cold climate, and jurisdictions with clear and conducive regulations.

Atomic swaps allow for direct cryptocurrency exchanges without the need for a trusted third party, such as an exchange.

This mechanism provides a secure and decentralized way to exchange one cryptocurrency for another, eliminating the risk of being hacked or having funds stolen.

Atomic swaps enable users to trade cryptocurrencies directly with each other, without the involvement of a central authority.

This approach is particularly useful for cryptocurrencies that don't have a large user base or liquidity, as it allows for more flexibility and accessibility.

By utilizing atomic swaps, users can exchange cryptocurrencies in a trustless and permissionless manner, without having to rely on a third party to facilitate the transaction.

Blockchain technology has the potential to improve the management of resources by collecting decentralized data and distributing it to system participants. This can lead to improved efficiency and transparency in various industries.

Blockchain can also provide access to capital that was previously unavailable for the average consumer, enabling funding for projects that can power the future economy. For instance, collaborative technology like blockchain can improve business processes between companies, radically lowering the "cost of trust".

Here are some potential applications of blockchain beyond digital assets:

Blockchain technology is secure by design and is an example of a distributed computing system with high Byzantine fault tolerance, making it inherently resistant to modification of the data.

Blockchain can be used to improve the management of resources by collecting decentralized data and distributing it to system participants. This can lead to more efficient and transparent business operations.

From a business perspective, blockchain technology can offer significantly higher returns for each investment dollar spent than most traditional internal investments. This is because it can radically lower the "cost of trust" between companies.

Some potential applications of blockchain beyond digital assets include:

Blockchain technology has the potential to result in a radically different competitive future. It can be used to improve the business processes between companies, leading to more efficient and transparent operations.

Blockchain is a secure and decentralized system that is inherently resistant to modification of the data. It's an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.

Cryptocurrencies have been compared to Ponzi schemes and economic bubbles, such as the tulip mania and dot-com bubble, which all experienced profound price booms and busts.

Regulators in several countries have warned against cryptocurrency, but research in 2021 suggests that such warnings were largely ignored. Fewer than one in 10 potential cryptocurrency buyers were aware of consumer warnings on the FCA website.

Many banks do not offer virtual currency services themselves and can refuse to do business with virtual currency companies. This lack of regulation can lead to a lack of consumer protection, making it difficult for users to recover losses if their bitcoins are lost or stolen.

The French regulator AMF lists 16 websites of companies that solicit investment in cryptocurrency without being authorized to do so in France, highlighting the risks of investing in unregulated markets.

The top 10,000 addresses control about one-third of all bitcoin in circulation, and miners are even more concentrated, with 0.01% controlling 50% of the capacity. This level of concentration is considered risky as a great deal of the market is in the hands of a few entities.

The price of bitcoin has been substantially inflated using another cryptocurrency, Tether, and some investors have lost millions due to these scams.

Cryptocurrency trading involves speculating on the price movements of cryptocurrencies without taking ownership of the underlying coins. You can use CFDs (Contracts for Difference) to trade cryptocurrencies, which allow you to speculate on whether the price will rise or fall in value.

CFDs are leveraged products, meaning you only need to put up a small deposit, known as margin, to gain full exposure to the underlying market. This can magnify both profits and losses.

There are two main types of CFDs: going long (buying) and going short (selling). If you think a cryptocurrency will rise in value, you can go long, and if you think it will fall, you can go short.

To trade cryptocurrencies, you can also use an exchange, where you purchase the coins themselves. However, this requires creating an exchange account, putting up the full value of the asset, and storing the cryptocurrency tokens in your own wallet.

Here are the main differences between trading with CFDs and buying/selling on an exchange:

Keep in mind that trading with CFDs can be riskier than buying/selling on an exchange, as it involves leverage and potential losses.

CFD trading on cryptocurrencies is a way to speculate on price movements without taking ownership of the underlying coins. You can go long (‘buy’) or short (‘sell’) on cryptocurrencies, and both are leveraged products that require a small deposit, known as margin.

CFDs are derivatives that enable you to speculate on cryptocurrency price movements. This means you can open a position for a fraction of the full value of the trade.

Leverage is the means of gaining exposure to large amounts of cryptocurrency without paying the full value upfront. Instead, you put down a small deposit, known as margin.

Leveraged trading can magnify both profits and losses, so it's essential to learn how to manage your risk. This includes understanding how your margin requirement will change depending on your broker and trade size.

You only need to put up a small deposit – margin – to gain full exposure to the underlying market. Your profit or loss is still calculated according to the full size of your position, so leverage will magnify both profits and losses.

A trade on bitcoin (BTC), for instance, might require 10% of the total value of the position to be paid for it to be opened. So instead of depositing $5000, you’d only need to deposit $500.

The spread in cryptocurrency trading is the difference between the buy and sell prices quoted for a cryptocurrency.

You'll often see two prices when opening a position on a cryptocurrency market, and the spread is the gap between them.

To open a long position, you trade at the buy price, which is slightly above the market price, while to open a short position, you trade at the sell price, which is slightly below the market price.

A lot in cryptocurrency trading is a batch of cryptocurrency tokens used to standardize the size of trades.

Cryptocurrencies are often traded in very small lots due to their volatility.

Most lots are just one unit of the base cryptocurrency.

Some cryptocurrencies are traded in bigger lots, although this is less common.

A pip is the unit used to measure movement in the price of a cryptocurrency.

In cryptocurrency trading, a pip is a one-digit movement in the price at a specific level. This means that if the price of a cryptocurrency moves from $190.00 to $191.00, it has moved a single pip.

Valuable cryptocurrencies are often traded at the 'dollar' level, where a pip is a whole number. However, some lower-value cryptocurrencies are traded at different scales, where a pip can be a cent or even a fraction of a cent.

It's essential to understand the level at which price movements will be measured before you place a trade, so be sure to read the details on your chosen trading platform.

Wash trades are a major concern in the crypto-trading world, and they're often used to manipulate the price of a cryptocurrency or inflate volume artificially.

Up to 80% of trades on unregulated cryptocurrency exchanges can be wash trades, according to a 2019 study.

This means that even if you're trading on a reputable exchange, there's still a chance that some of the trades you see are fake.

The first bitcoin ATM was launched in the United States on February 20, 2014, by Jordan Kelley, the founder of Robocoin. This innovative kiosk was installed in Austin, Texas, and is similar to traditional bank ATMs.

It's equipped with scanners to read government-issued identification, such as a driver's license or a passport, to confirm users' identities.

Block rewards are a crucial aspect of cryptocurrency mining, and it's essential to understand how they work. Cryptocurrencies like Bitcoin offer block rewards as incentives for miners to verify transactions and add them to the blockchain.

These rewards increase the supply of the cryptocurrency, making it more widely available. However, this also means that miners must factor in the costs associated with expensive equipment and significant amounts of electrical power.

The current value of a cryptocurrency supports the reward scheme to incentivize miners to engage in costly mining activities. But, as a study suggests, this may not always be the case, and the efficiency of the system can be improved.

The current block reward system causes a 1.4% welfare loss compared to an efficient cash system, with a large mining cost estimated to be around $360 million per year. This translates into users being willing to accept a cash system with an inflation rate of 230% before being better off using Bitcoin as a means of payment.

By optimizing the rate of coin creation and minimizing transaction fees, the efficiency of the bitcoin system can be significantly improved.

Transaction fees for cryptocurrency depend mainly on the supply of network capacity versus the demand from the currency holder for a faster transaction.

Some exchanges, like LiteBit, have allowed users to choose between different presets of transaction fee values during the currency conversion, but this feature is no longer available due to market changes and regulatory pressure.

Transaction fees can be adjusted manually, but this often depends on the wallet software used. For example, Coinbase Wallet might support adjusting the fee.

The recommended fee suggested by the network will often depend on the time of day, due to varying network load.

For Ethereum, transaction fees differ by computational complexity, bandwidth use, and storage needs, while bitcoin transaction fees differ by transaction size and whether the transaction uses SegWit.

In February 2023, the median transaction fee for Ether corresponded to $2.2845, while for bitcoin it corresponded to $0.659.

Some cryptocurrencies have no transaction fees, the most well-known example being Nano (XNO), which relies on client-side proof-of-work as the transaction prioritization and anti-spam mechanism.

Cryptocurrency prices are much more volatile than established financial assets such as stocks.

In just one week in May 2022, bitcoin lost 20% of its value and Ethereum lost 26%. The falls were attributed to warnings about inflation.

The Nasdaq tech stock index, on the other hand, fell a relatively modest 7.6% in the same week.

Over the longer term, only four out of the 10 leading cryptocurrencies identified in January 2018 were still in that position in early 2022.

The total value of all cryptocurrencies halved from $2 trillion at the end of 2021 to just half that amount nine months later.

The crypto sector has become "intertwined" with the rest of the capital markets, making it sensitive to the same forces that drive tech stocks and other risk assets, such as inflation forecasts.

To start buying cryptocurrency, you'll need to choose a platform. You can opt for a traditional broker or a dedicated cryptocurrency exchange, each with its own pros and cons.

Traditional brokers offer lower trading costs but fewer crypto features, while cryptocurrency exchanges provide more crypto options but charge asset-based fees.

When comparing platforms, consider which cryptocurrencies are on offer, what fees they charge, their security features, storage and withdrawal options, and any educational resources.

To fund your account, you'll need to deposit fiat currency, such as the US Dollar, the British Pound, or the Euro, using a debit or credit card, although this varies by platform.

Some platforms accept ACH transfers and wire transfers, with different payment methods and times for deposits or withdrawals.

Fees will vary by payment method and platform, so it's essential to research them at the outset.

You can place an order via your broker's or exchange's web or mobile platform, selecting "buy" or "sell", choosing the order type, entering the amount of cryptocurrencies you want to purchase, and confirming the order.

Some platforms also offer alternative ways to invest in crypto, including payment services like PayPal, Cash App, and Venmo, which allow users to buy, sell, or hold cryptocurrencies.

Here are some other investment vehicles to consider: