If you do a little searching online, you will find no shortage of definitions for cryptocurrency. Some of these definitions are quite straightforward, but unfortunately, due to the technical nature of the asset itself, many of these definitions can go into far more mechanical detail than is necessary. The goal of this article is to give you a simple definition of cryptocurrency that will introduce you to the concept, as well as introduce you to some of the key terms associated with the asset.
Basic Concept (Definition) of Cryptocurrency
A cryptocurrency is a form of currency that exists entirely in digital form. With only a few rare exceptions, you will never hold a unit of cryptocurrency in your hands like you do a metal coin or a paper bill.
All of your cryptocurrency is kept in a digital wallet1 and with this wallet you can send cryptocurrency to, and receive cryptocurrency from, a wide range different people and businesses. People quite often transfer cryptocurrencies on an individual level in order to settle debts or pay for local services, but it is becoming more and more common for large business entities to accept different cryptocurrencies as payment methods. Some of these larger retailers/forums that have begun accepting different cryptocurrencies include Microsoft, Expedia, Reddit, Virgin Atlantic, Shopify, Overstock, and Newegg. Even many land-based organizations have followed suit, including KFC Canada, Subway, and a plethora of bars in Canada, Europe, and the United States.
The next important thing you need to know in order to understand the basic concept of cryptocurrencies is that they are not issued by governments and that no intermediaries exist in the processing of transactions. With the type of money that most people are familiar with, an intermediary, like a bank or credit union, needs to exist in order to mediate the transfer of money between two entities. With cryptocurrencies, software manages the transfer of funds. When both parties hold up their part of the transfer, the software makes the exchange2.
Key Concept Review – Digital currency. Kept in a digital wallet. Can be transferred to businesses and people. No government or banking intermediaries. Software and encryption protocols do the intermediary and asset protection work.
Advantages of using a Cryptocurrency
There are a lot of different advantages to using cryptocurrencies, but two of the main advantages are low fees and anonymity. Fees will vary when you make cryptocurrency transfers so there’s no way to provide a solid and consistent number, but in general, a fee of less than 0.3% is paid on any transaction under $200. In many cases, the buyer pays this fee, but this is not consistent across all platforms. Even with this single example, it can be seen that a lot of money can be saved in fees by holding and transferring cryptocurrencies rather than government-backed notes. Just think of all of the transaction fees that you pay when you go over that pesky monthly debit transaction limit.
In terms of anonymity, since you use a digital address (see 1) to make transactions, your name and personal information are not associated with any of the transfers you make. If you do eventually transfer that cryptocurrency back into a government-backed note via an exchange, you will often need to give your personal information, but transfers of currency between individuals is entirely anonymous.
Key Concept Review – Cryptocurrency transfer fees are very low. All of your inter-cryptocurrency transactions are anonymous.
How Do I Get Started with Cryptocurrencies?
The first thing that you need to do is find a cryptocurrency that you would like to purchase. There is a never-ending list of cryptocurrencies these days, but you can find a nice list of the most popular ones on our Coin Info page. Some digital wallets will support more than one cryptocurrency, but this is an important step so that you don’t end up spending a whole lot of time creating a digital wallet account that you won’t actually be able to use.
The next step is to find a trustworthy digital wallet. A simple Google search should bring you to where you need to be, but we will also have our own list for you quite soon. If you are going with something as popular as Bitcoin, Coinbase, is a popular exchange/wallet provider.
The next step is either to get someone to send you some cryptocurrency or to fund your wallet through government-backed notes. Most wallets will let you link up your debit card, credit card, or bank account to your wallet so that you can use your more literal cash to purchase the digital version. When it comes to actually buying and selling cryptocurrency, the majority of wallets are associated with cryptocurrency exchanges and they will allow you to start trading immediately.
Key Concept Review – Research and find a cryptocurrency that you want to purchase. Find a wallet that supports your desired cryptocurrency.
There is, of course, a lot more that you will need to know about cryptocurrencies if you want to utilize them on a regular basis or use them as investment tools, but this guide should be enough to get you into the wonderful world of digital currencies.
1. Your digital currency isn’t actually kept in the wallet. What is kept in the wallet is an address that is unique to you. The software used by your specific cryptocurrency can use your address to check your transaction record. With this transaction record, a determination of your current balance can be calculated.
2. People have some involvement in this process and these people are typically referred to as miners. They add the transactions to a ledger which holds every single transaction of the cryptocurrency which has ever made. All of these transactions are encrypted, however, so keep in mind that these miners don’t actually see the details of transactions. They simply confirm them by solving math problems which verify the validity of transactions.