The Complete Guide to Crypto in 2023
Crypto can make or break you, and no one wants to be on the losing end. Read our complete guide to crypto for 2023 before diving too deep.
Crypto, also known as cryptocurrency, is a digital payment system that uses cryptography to verify and records transactions on a decentralized ledger, instead of using bank or other centralised intermediary.
This comprehensive guide will explore the world of crypto and provide an in-depth look at its workings, benefits, and risks. We’ll also look at the future of blockchain, decentralized finance (known as DeFi), and crypto and how these technologies can benefit you. So, if you’re curious about crypto and want to learn more, read on!
What is Cryptocurrency?
Cryptocurrency, or crypto as it's more commonly known, is a kind of digital asset that can be used as a store of value and as a means of peer-to-peer exchange. The first cryptocurrency was invented by Satoshi Nakamoto, who designed and wrote the Bitcoin Whitepaper in 2008. Since then, thousands of other cryptocurrencies have been created.
As a digital asset, it is (usually) not backed by any physical commodity. Instead, it's decentralized across the internet and runs on a distributed ledger technology called blockchain, which is used to verify and record transactions.
Digital currencies can be used to enable low-cost, fast, secure transactions, and interact with decentralised protocols such as Ethereum. In recent years, technological developments in cryptocurrency have led to regular spikes in user adoption and investor interest, resulting in volatile cryptocurrency prices.
One of the most appealing aspects of crypto assets is that they are exchanged on a peer-to-peer network, removing the need for a trusted third-party like a bank. This can help bypass the transactions fees financial companies such as Visa charge (typically 1-2%). However, some regulators worry that peer-to-peer transactions reduce consumer protection, and could be used to fund criminal activities, although there is limited real-world evidence for the latter.
Whilst new use-cases are always emerging, many people believe that crypto will be used in most financial transactions in future, including digitised assets, bonds, payments, cross-border settlements, decentralised finance (DeFi) and more.
How does Crypto Work?
Blockchain Technology
There are many different types of cryptocurrencies, but they all work on a decentralized system of computers known as a blockchain.
Blockchains are a type of distributed ledger technology - in other words, a single source of cryptographically verified truth, spread across a decentralised network of computers on the internet, which can be used to verify transactions anywhere in the world. Blockchain transactions can either be private, pseudonymous, or completely transparent, depending on the technical implementation.
Ultimately, blockchain technology works through two main mechanisms.
Firstly, blockchains work by securing transaction data into "blocks". Whenever a new block is added to the chain, the previous block is cryptographically locked forever, ensuring that transactions are secure, immutable, and censorship resistant. This is what enables peer-to-peer transaction systems to work without any kind of centralized control. The reason we call it crypto, is because each block is cryptographically secured by the chain.
Secondly, blockchains work through "consensus". Whenever a member ("node") of a blockchain wants to make changes to the blockchain, for example, to write new transactions, or mint new coins, every other node needs to agree first. The blockchain needs to achieve consensus. This is the second reason why blockchains are so secure. Whilst one malicious node could change its version of the blockchain, no other nodes would agree with its version of the chain.
Put together, this means that as long as 51% of the node power acts honestly, then a blockchain is functionally impossible to hack. You can think of this almost as a democracy. As long as the majority of actors are honest, then a blockchain is secure.
There are two ways in which blockchains achieve this consensus and write new transactions.
Proof of Work
Proof-of-Work (PoW) is the oldest consensus mechanism and is most famously used by Bitcoin, the world's biggest cryptocurrency. Nodes in PoW must compete with each other to solve computationally expensive mathematical problems in a process called "mining". Whichever node solves the problem first gets to write the next transaction, mint a small amount of cryptocurrency, and in many cases, receive a portion of transaction fees from the network. By incentivising nodes financially, blockchains can attract more miners to help secure the network.
The energy cost of mining, as well as buying the necessary equipment, make attacks on PoW networks cost-prohibitive.
However, PoW has certain drawbacks. Most notably, there is considerable debate over the environmental impact of Bitcoin and other PoW blockchains. This is because of the high energy costs involved in crypto mining, where energy may often come from unclean energy sources such as fossil fuels.
Proof of Stake
Most modern blockchains, including Ethereum, no longer use PoW. Instead, they use proof-of-stake (PoS). In PoS, nodes don't compete with each other by mining, but rather by "staking" a certain amount of the blockchain's native cryptocurrency. The more crypto a node stakes, the higher its odds of being selected to write the next block and earning rewards.
If the other nodes detect dishonest behaviour, then the node will lose its stake, with the stake acting as a non-refundable deposit against dishonest behaviour. The main advantages of PoS include reduced energy consumption and lower technical barriers to entry, making it easier for everyday users to take part in consensus and earn staking rewards.
What Can You Use Cryptocurrency For?
- Online Payments - Whilst El Salvador is the only country that currently supports a cryptocurrency (Bitcoin) as legal tender, many retailers, including Microsoft, are already accepting payments in various virtual currencies. Crypto payments are most widely adopted in the tech sector, but are also commonly found in insurance, automobiles, luxury goods, and various e-commerce sites.
- DeFi and dApps - Cryptocurrency is needed to interact with various DeFi and other decentralized applications (dApps) running on blockchains such as Ethereum. In these cases, cryptocurrency can be used as a type of transaction fee, or to interact with smart contracts for another purpose, e.g. crypto staking.
- NFTs - Cryptocurrency can also be used to purchase digital assets, most notably, NFTs.
- Investing - Finally, cryptocurrency can be used as an investment vehicle. Many people believe that Bitcoin's fixed supply makes it a store of value, akin to 'digital gold'.
The Top 5 Benefits of Crypto
CCrypto offers a whole host of benefits for users to enjoy. Some of the most important include:
- Low Fees. Thanks to its peer-to-peer nature, crypto transactions typically have much lower fees than traditional methods, making them popular for international remittances. Although fees can vary from chain to chain.
- Speed. Whilst bank transfers can often take days to complete, crypto transactions are much faster, making them ideal for those who need to send or receive money quickly.
- Security. Crypto transactions are secured on the blockchain through decentralized, cryptographic techniques, which, as we've already discovered, means they're immutable and much more secure than traditional payment methods.
- Privacy. Crypto transactions can be private and anonymous, so users never need to reveal their identity to third-parties while making payments. Nevertheless, most cryptocurrencies like Bitcoin are actually pseudonymous, meaning that anyone can see transactions between wallets, but that the wallets themselves can't be tied directly to any person.
- Decentralization. Crypto is decentralized, with no single entity to control or regulate it, therefore it is much more resistant to centralization risks, censorship, or manipulation than traditional currencies.
Many of the other benefits of cryptocurrency depend on their individual design, meaning crypto can have many different benefits depending on the individual cryptocurrency in question.
What Are the Top 5 Risks of Investing in Crypto?
With all these benefits and the potential for future growth that brings, crypto has inevitably attracted the attention of investors. However, crypto investing comes with its own set of risks. Here are some of the top risks to consider before investing:
- Volatility. Cryptocurrency markets are still relatively new and lack the stability of traditional markets, meaning cryptocurrency prices often fluctuate significantly over a short period of time.
- Security. Though cryptocurrency payments themselves are incredibly secure, cryptocurrency exchanges, and smart contracts which use cryptocurrencies, are potentially vulnerable to hacking and other security threats.
- Lack of Regulation. Cryptocurrency markets are still largely unregulated, meaning that there is little to no government oversight. As such, there simply isn't the same level of certainty as you get with traditional investments, which can make investing in crypto risky. Indeed, many countries have outright banned forms of cryptocurrency.
- Lack of Protection. There is no government protection in place for crypto investments as things stand. That means if something goes wrong, it's the investor that will be left to foot the bill. In contrast, most existing financial institutions have various consumer protection laws in place.
- Fraud. Given their anonymous nature, and a lack of reversible transactions, cryptocurrency markets are a hotbed for fraud and scams. This means it's absolutely imperative to do your own research and always stay vigilant.
Is Crypto a Good Investment?
Crypto can be a good investment, potentially generating very high returns, but they also come with its fair share of risks.
To decide if crypto is a good investment for you, you'll need to assess your individual needs and risk tolerance. Think carefully about the amount of risk you feel comfortable taking and the degree of uncertainty you can handle. This can often vary depending on your age, income, and particular financial goals. And always, always do your own research to properly understand the exact risks associated with any crypto investing before you get started.
One golden rule of cryptocurrency investing we recommend to everyone is: never invest more than you can afford to lose.
Whilst, crypto has a reputation as a place to make a fast buck, it's important to think of crypto as a long-term investment. Although the prices of cryptocurrencies can fluctuate significantly in a short period of time, it's the long-term investment strategy that will bring success and turn it into a 'good investment' in the end.
Top Tips for Investing in Crypto
As we've already seen, investing in crypto carries risks. If you'd like to get started and own cryptocurrency yourself, here are some top tips to help protect yourself:
- Do Your Own Research (DYOR). It's incredibly important to do your own research when investing in crypto. Make sure that you understand the risks associated with any given crypto investment. When doing your own research, don't just blindly trust the words of others. Verify first!
- Always Have a Plan. It pays to be prepared, and cryptocurrency investing is no different. A good plan should outline your investment objectives, your targets and methods to achieve them, and give you a clear plan of action in case things go south. If you often feel FOMO or struggle to keep your emotions in check when investing, this step is doubly important.
- Use Reputable Exchanges. There are many exchanges out there, so it's important to do the proper research. As a start, always make sure to use crypto exchanges with strong security, including two-factor authentication or biometric login, for example. If you don't want to use a centralized crypto exchange, you can also get exposure to some cryptocurrencies through ETFs on traditional exchanges, or by using a decentralized exchange (DEX).
- Use a Wallet. Once you've got some crypto, the safest place to store it is in your own crypto wallet. There are many different types of wallets available, including hot vs cold, and hardware vs software. Generally, the more convenient a wallet is, the less secure it is. Most importantly, make sure that you always keep your private keys safe and secure.
- Diversify Your Portfolio. As we've established, crypto markets can be highly volatile. One of the best ways to guard against this is to diversify your portfolio across several investments, ensuring that you're not completely at the whim of one specific asset or market. This will not only help reduce your risk, but likely maximize your returns over the long run as well.
- Monitor Your Investments. Knowledge is a powerful thing, so it's important to monitor your investments and stay up to date on all the latest news and trends in the crypto industry. This will help you make informed decisions and maximize your returns. And always remember to keep on top of your transactions and capital gains in case the taxman ever comes knocking.
The Future of Blockchain, DeFi and Crypto
Gazing into the metaphorical crystal ball, the future of blockchain, DeFi, and crypto looks very promising. Blockchain technology is quickly revolutionizing the world of finance and making it easier and more secure for individuals and businesses to transact.
The emergence of DeFi (Decentralized Finance) has introduced a new way for users to access financial services without the need for a central authority. Today, DeFi covers a whole wealth of financial services involving lending, borrowing, trading, and more that can help democratize finance and open it up to the masses, especially in emerging markets. Perhaps unsurprisingly then, DeFi is quickly becoming a popular alternative to traditional banking.
Blockchain technology has many other potential uses too, with its true economic value coming from its ability to verify and secure information. If an industry relies on the verification of important data, then blockchain could be a useful tool. For example, in supply chain management, professional certificates, or even financial auditing.
Conclusion
Crypto is quickly becoming a popular alternative to traditional currencies and the cryptocurrency market is a viable option for investors. This guide has provided an in-depth look at the world of crypto and explored its workings, benefits, and risks.
Crypto can provide many benefits for users, including low fees, speed, security, privacy, and decentralization. However, it is important to remember that crypto investing carries a certain level of risk and it is important to do your research and understand the risks before investing.
Crypto and DeFi are quickly revolutionizing the world of finance and are paving the way for a new, more secure, and private financial system. Crypto and DeFi can provide a number of benefits for users, investors, and businesses alike.
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Toby Bromet