Beginner’s Guide to “Investing in Cryptocurrencies”

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What is cryptocurrency?

A digital currency in which code based on cryptography controls the generation of units of currency and verification of transactions for transfer of funds. A cryptocurrency is not backed by a government or a central bank of any country/countries. The account keeping is done in a distributed manner. Think of it as a distributed ledger one in which you can’t alter the order of transactions.

In short you can call it people’s money. Money created by the masses, for the masses and controlled by the masses.

Such money has various advantages compared to FIAT currency. That is the whole reason many banks and governments are opposing the adoption of cryptocurrencies. Cryptocurrencies takes the power out of centralised power centers, whether they are governments or central banks.

What is FIAT currency?

Currencies that are backed by a government are called FIAT currencies. So most of the currencies we are accustomed to like USD(United States Dollar), GBP(Great Britain Pound or Sterling Pound), AUD(Australian Dollar), CNY(Chinese Yen), JPY(Japanese Yen), INR(Indian Rupee) etc are all examples of FIAT currency. I had never heard of the term FIAT before learning about cryptocurrencies.

FIAT currencies have many disadvantages. They are centralised. These centralised agencies can make the existing money invalid just by a stroke of pen. Recently India carried out a massive demonetisation drive. They can print currency at will, leading to inflation. Inflation is stealing from the poor and gullible without their knowledge. You need agencies like Visa and Master-card to perform exchanges in business outlets. To store your own money you need to pay fees to banks while they make money in interests by lending out your money. If you want to transfer money across borders you need permissions from governments and pay huge fees to companies like Western Union. You pay your fees in percentages whereas it should have been only fee per transaction. The amount shouldn’t really matter.

FIAT lacks the characteristics of sound money. Cryptocurrencies fill most of these gaps. In addition to all these advantages it it also distributed which is a great advantage in itself, as we don’t need to trust any third party. All thanks to blockchains we are able to use this form of money called cryptocurrencies.

What is a blockchain?

Blockchain is the technology behind cryptocurrencies. To be fair cryptocurrencies are one of the use-cases of blockchain. Blockchain is an irreversible(chain of order), incorruptible and distributed ledger of transactions. Incorruptible ledgers forms the basis of many valuable transactions. They might be in the field finance, record keeping in governments, international diplomacy or any record keeping of importance for that matter.

If you want to know the details of how a blockchain works in layman terms checkout WTF is Blockchain? by Mohit Mamoria.

What is bitcoin?

Bitcoin is the first peer to peer electronic cash. Bitcoin solved a major problem in electronic cash called “double spending”. While there are many resources you can read about bitcoin, you should definitely start by reading the bitcoin whitepaper. Bitcoin is the torch bearer for cryptocurrencies. Most of the other cryptocurrencies owe it to bitcoin which proved that it was possible to build a secure, decentralised mechanism for storing and transferring value using internet.

For now just know that double spending is the risk that a digital currency can be spent twice. If the same money can be spent twice the currency will loose its value as it is not secure. Bitcoin addressed this problem and opened hence opened the flood gates of a completely new world order.

Who invented Bitcoin or who is Satoshi Nakamoto?

Satoshi Nakamoto is the inventor Bitcoin. But who is Satoshi Nakamoto? This has been a long standing mystery and a very important one as well.

There are many people who believe that Satoshi Nakamoto should get a Nobel prize in both finance and computers for the same invention that is Bitcoin. This should highlight the potential of blockchains and cryptocurrencies for you.

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