WHAT ARE BITCOINS AND HOW DO CRYPTOCURRENCIES WORK

03, February, 2022
By: Carl Iyke

Photo: Forbes

WHAT ARE BITCOINS AND HOW DO CRYPTOCURRENCIES WORK

Bitcoin has been popular online for some months now, and although some understand why, others do not. Therefore, we must first go back to the beginning to comprehend Bitcoin truly.

To begin, what exactly is Bitcoin?

Bitcoin is a type of decentralized digital money/currency. It is digital because it cannot be handled or felt; it exists entirely on the internet and cannot be printed. Digital currencies are tokens created by computer networks to replace traditional money. It is decentralized because it is not governed or regulated by any agency or government.

 Bitcoin was the first cryptocurrency, founded in 2009, and is now the most widely traded cryptocurrency. The currency was created by Satoshi Nakamoto, who many believe is the name of an individual or company, but his exact identity is unknown.

Photo: Javapoint

WHAT IS CRYPTOCURRENCY?

In layman's terms, cryptocurrency is a digital kind of money that only exists electronically. It is a digital payment system that does not rely on banks for transaction verification. Unlike a naira, dollar, or euro, a cryptocurrency cannot be minted into actual cash. It is a peer-to-peer system that allows anywhere to send and receive payments digitally rather than the old approach of carrying real currency around.

Cryptocurrency exists only online and is based on a technology known as Blockchain. Whenever a transaction is done on the Blockchain, it is recorded in a public ledger for all to see and verify, unlike the traditional banking system, where clients have no idea what is going on behind the scenes. Also, unlike the conventional banking system, where money is kept in bank accounts, cryptocurrencies are kept in digital wallets.

The term "cryptocurrency" refers to encryption to verify transactions. This implies that complex programming is used to store and send bitcoin data between wallets and public ledgers. Encryption's goal is to ensure security and safety.

Bitcoin was the first cryptocurrency, and it is still the most well-known today. Cryptocurrency exists in the form of coins and tokens.

Photo: Medium

COIN AND TOKEN:

Coins have their Blockchain and function independently. E.g., Ethereum, Tron, Polkadot, etc., tokens don’t have their Blockchain. Instead, they are built on the Blockchain of a coin. Tokens cannot be made on Bitcoin Blockchain because it does not support intelligent contract functionalities.

Ethereum Blockchain is called ERC20. Hence tokens built on ERC20 are called ERC20 tokens. Similarly, the Tron Blockchain network is referred to as TRC20 and Binance Blockchain as BEP20. Coins and Token are represented with symbols and sometimes a dollar sign $.

SOME EXAMPLES OF COINS, TOKENS, AND THEIR SYMBOL

Photo: Genesis Mining

HOW CRYPTOCURRENCY WORK

Cryptocurrencies are based on Blockchain, a distributed public ledger that keeps track of all updated and maintained transactions by currency holders. Cryptocurrency units are formed through a process known as mining, which involves employing computer power to solve complex mathematical problems that result in coins.

Users may also purchase the currencies from brokers and store and spend them via encrypted wallets. Cryptocurrencies have no physical existence. Instead, it is a key that enables you to transfer a record or a unit of measurement from one person to another without the assistance of a responsible third party.

Photo: Investorplace 

TYPES OF CRYPTOCURRENCY

There are many different cryptocurrencies available. Some of the most well-known are:

1: Bitcoin: Bitcoin was the first cryptocurrency, and it is still the most regularly traded and well-known cryptocurrency today. Satoshi Nakamoto, a human or an organization, developed the currency, but their identity is unknown.

2: Ethereum: Ethereum, created in 2015, is a blockchain platform with its cryptocurrency, Ether (ETH) or Ethereum. After Bitcoin, it is the second most popular cryptocurrency.

3: Litecoin: This cryptocurrency is the most comparable to bitcoin and has moved quickly to create innovations, such as speedier payments and processes to allow for more transactions.

COINS OF OTHER TYPES:

Stable coins: A stable coin is tied to a fiat currency and does not fluctuate in value. Crypto traders typically keep their profits in regular currencies to preserve the value of their earnings, while investing in other Digital assets may result in a loss if the asset's price falls.

It's steady since the value doesn't change. USDT, for example, is a stable token tied to the value of the US dollar. As a result, one USDT equals one dollar. Other stable coins include BUSD, DAi, and USDC, which are all tethered to the value of a dollar.

 Among the mix is the most recent signee into the digital asset space known as Non- Fungible tokens - best referred to as NFTs. 

Click the link if you wish to learn more about NFTs>>

HOW TO KEEP CRYPTOCURRENCY SAFE

Safekeeping of your coins and tokens is an essential aspect of cryptocurrency. You are responsible for the security of your cryptocurrency, unlike traditional banking, where the protection of your money lies with the financial institution. Cryptocurrencies are kept in what is known as digital wallets.

WALLET

As the name implies, a wallet is a digital platform where cryptocurrencies are kept. Mobile wallets - and even exchange platforms -automatically assign wallet addresses of several coins to token holders such as Trust wallet, Metamask, Safepal, etc.

A wallet allows you to:

Keep your Crypto safe, receive Crypto from anyone, swap one coin/token for another on DAPPs, so if I say I want to send Bitcoin to you, all you have to do is go to your wallet app, search for Bitcoin and copy the address of your Bitcoin wallet correctly. Note that you don't have to copy your address individually; all you have to do is click on copy and then paste to the sender to avoid mistakes.

Imagine my phone number is 090815012, and you dial 080234567 instead; you'd be calling someone else instead of me because of the error, the same way when copying your address.

Let's say I want to send BNB to you, and your address is 0x0abcdefgh, but you sent 0x0abcdefgz mistakenly adding a different alphabet, the funds will be transferred to another person wallet address, and there's no way to retrieve it because there’s no way to know who owns the address.

So to avoid making this mistake, click on the copy icon whenever you want to copy your address and ensure it is correct before sending funds to prevent loss.

Also, note that when you install an exchange app on your phone like Binance, Kucoin, and PrimeXBT, you automatically get wallets of every coin on that exchange.

Note: Exchanges provide wallets for you, but wallets are not exchanges.

Photo: Universe 

SECURING YOUR MOBILE WALLET

After installing a mobile wallet, ensure to write down your recovery phrase. Recovery phrases are 12 or sometimes 24 letters that you are needed in other to access your wallet. It is best to write down your recovery phrase, save it with your documents, and have an online copy held with your email account.

This way, you are sure that you can log into your mobile wallet even when you lose your phone. If you have not saved your recovery phrase, do it now. If you lose your phone or mistakenly delete your mobile wallet app, there's no way you can ever access that wallet, even if you have 10 million worth of Bitcoin inside.

HOW TO PROTECT FUNDS IN YOUR MOBILE WALLET

Sometimes, we permit some sites to spend our funds without knowing. Most of these sites were created by Hackers. Most of them come in the form of fake Airdrop. This is why it is terrible to participate in every Airdrop we see without researching first. To find out the sites you've permitted to spend your funds

Follow the steps below;

1. Open your trust wallet

2. Click on DAPPS

3. Copy the link below and paste it on your search bar

https://allowance.beefy.finance/

4. Once done. Change the network to a Smart chain

5. The sites you've permitted to access your funds will appear. Then click on revoke to revoke them.

6. Once done, change the network to Ethereum to see the site you've permitted on the ERC20 network and revoke them.

Photo: TechBullion

CRYPTO EXCHANGES

You cannot buy Crypto from the bank. Which brings us to the topic:

 What is a crypto exchange?

A crypto exchange is simply a platform/marketplace where you buy and sell Cryptocurrencies. You can trade one currency with another on a business, e.g., BTC/SOL. This means you can use Btc to buy Solana and vice versa, so when you see two coins paired like this, what it means is that you can exchange one of that currency with the other.

Types of Exchanges

There are two types of Exchanges

1. Centralized exchange (CEX)

2. Decentralized exchanges (DEX)

 1: CENTRALIZED EXCHANGE (CEX):

Your funds are kept on the exchange in a centralized exchange, and everything is retained on a central server. A Centralized exchange is an official company with a CEO and Employees, Offices, shareholders.

A central exchange has strict regulations and policies. For example, a significant exchange automatically provides wallets for you on the exchange.

 2. DECENTRALIZED EXCHANGE (DEX):

Decentralized exchange is the opposite of central exchange; it has no honest company, no offices, just a team of developers who have built a protocol for the exchange. It operates on what is called Smart Contracts on different blockchains.

CRYPTO TERMINOLOGIES

Cryptocurrency is a world on its own, languages, slang, and way of life. Below are common crypto terminologies.

1. Altcoins/Alt: Any other coin/token that is not Bitcoin

2. HODL: Hold on for dear life. The act of Holding on to a coin for the long term instead of selling it.

3. FOMO: Fear of Missing Out. This is when a coin rises in value and price, and everyone talks about it. You don't have the coin, but you're considering buying it even at a high price. So you don't miss out when it goes high.

4. FUD: Fear, Uncertainty, and Doubt.

5. JOMO: Joy of missing out. When you're happy, you didn't buy a coin. It happens when you miss a stray Bullet

6. MOON: when a coin appreciates significantly at a price. You know, going high out of space

7. WHALE: A person has many particular coins to affect the overall price of the currency when they sell their holdings.

8. MCAP: Market capitalization. This is the current price of a coin multiplied by the number of that coin in circulation

9. DYOR: Do your research

10. DUMP: Downward price movement.

11. REKT: When a coin goes down sharply, you're in a bad loss.

12. FIAT: Any currency that the government issues.

13. Bear market: A period when the sentiments on the MarkMarket are negative.

14. Bull Market: A period when the sentiments on the mark market are positive.

15. ATH: All-time high. This is the highest a coin has reached a price.

16. ATL: All-time low. This is the Lowest q coin that has ever reached a price.

17. Presale: this is a process before a coin is listed publicly. Here early investors get to buy cryptocurrency before it gets listed on exchanges. The benefit is you get the Token cheaper, and the profits are usually significant.

18. Whitelist: this is a security measure that is usually carried out before public sale for persons who are willing to invest in a coin so that only the safelist addresses will participate in the presale

 19. Total supply: This is the total number of coins/tokens in existence.

20. Circulating Supply: The number of coins in circulation and currently traded.

CONCLUSION

Cryptocurrencies are called money of the future. Even though Bitcoin has been around for 13 years, its adoption recently started about five years ago. As more and more people become aware of the incredible possibilities of cryptocurrencies, we will see more innovation in every area of our lives, especially the financial sector.