Cryptocurrency All-in-One For Dummies. Peter Kent
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Making a Plan Before You Jump In
If you’re interested in cryptocurrency investing, you may just want to buy some cryptocurrencies and save them for their potential growth in the future. Or you may want to become more of an active investor and buy or sell cryptocurrencies more regularly to maximize profit and revenue. As discussed in Book 5, Chapter 4, you can select cryptocurrencies based on factors like category, popularity, ideology, the management behind the blockchain, and its economic model.
Even if your transaction is a one-time event and you don’t want to hear anything about your crypto assets for the next ten years, you still must gain the knowledge necessary to make the following decisions:
What to buy
When to buy
How much to buy
When to sell
Over 5,000 cryptocurrencies are out there at the time of writing, and the number is growing. Some of these cryptos may vanish in five years. Others may explode to over 1,000 percent of their present value and may even replace traditional cash. Chapter 4 of this minibook covers all different types of cryptocurrencies, including Ethereum, Ripple, Litecoin, Bitcoin Cash, and Stellar Lumens.
Chapter 2
How Cryptocurrencies Work
IN THIS CHAPTER
Cryptocurrencies, and more specifically Bitcoin, have been one of the first use cases for blockchain technology (covered in detail in Book 2). That’s why most people may have heard about Bitcoin more than they have about the underlying blockchain technology.
This chapter gets into more detail about how cryptocurrencies use blockchain technology, how they operate, and how they’re generated, as well as some crypto geek terms you can impress your dates with.
Explaining Basic Terms in the Cryptocurrency Process
Cryptocurrencies are also known as digital coins, but they’re quite different from the coins in your piggy bank. For one thing, they aren’t attached to a central bank, a country, or a regulatory body.
Here’s an example. Say you want to buy the latest version of Cryptocurrency All-in-One For Dummies from your local bookstore. Using your normal debit card, this is what happens:
1 You give your card details to the cashier or the store’s point-of-sale system.
2 The store runs the information through, essentially asking your bank whether you have enough money in your bank account to buy the book.
3 The bank checks its records to confirm whether you do.
4 If you do have enough, the bank gives a thumbs-up to the bookstore.
5 The bank then updates its records to show the movement of the money from your account to the bookstore’s account.
6 The bank gets a little cut for the trouble of being the middleman.
Now if you wanted to remove the bank from this entire process, who else would you trust to keep all these records without altering them or cheating in any way? Your best friend? Your dog walker? In fact, you may not trust any single person. But how about trusting everyone in the network?
Here’s what happens if you want to buy this book using a cryptocurrency:
1 You give your crypto details to the cashier.
2 The shop asks everyone in the network to see whether you have enough coins to buy the book.
3 All the record holders in the network check their records to see whether you do. (These record holders are called nodes, and are explained later in this chapter.)
4 If you do have enough, each node gives the thumbs-up to the cashier.
5 The nodes all update their records to show the transfer.
6 At random, a node gets a reward for the work.
That means no organization is keeping track of where your coins are or investigating fraud. In fact, cryptocurrencies such as Bitcoin wouldn’t exist without a whole network of bookkeepers (nodes) and a little thing known as cryptography. The following sections explain that and some other important terms related to the workings of cryptocurrencies.
Cryptography
Shhh. Don’t tell anyone. That’s the crypto in cryptography and cryptocurrency. It means “secret.”