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A beginners guide to cryptocurrency

9th February 2019

What Is Cryptocurrency  

For those new to the world of cryptocurrency imagining a whole new meaning to the word ‘money’ can be fairly mind blowing. If a definition is what you’re after, the Oxford Dictionary says Cryptocurrency is: “A digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank” For an even simpler explanation you can breakdown the word cryptocurrency into its two parts: firstly, ‘crypto’ coming from ‘cryptography’ which is encrypting something (usually data or plain text) into something completely unrecognisable to anyone except the intended recipient, making the exchange of information completely secure. Secondly, ‘currency’, a slightly better known term meaning quite simply a system whereby something considered (and agreed) to be a form of tender is used to exchange value. From this, it becomes a little clearer that cryptocurrency is primarily centred around the extremely secure, digital,  transfer of a currency holding monetary value.

Where Did Cryptocurrency Come From?

Many people assume that cryptocurrency is just a form of digital money, but there’s a lot more to it than meets the eye. Despite what some might believe, the idea of digital money in itself is not a new thing having thought to originate back in 1989 with David Chaum’s ‘digicash’. With ecommerce not really existent to the masses at that time, this form of currency didn’t have much luck. It wasn’t until just over 10 years ago that Satoshi Nakamoto (of anonymous identity) suggested the reason for this failure is due to the way in which the financial system works, primarily in terms of its dependence on trust. In this sense, the value of money today is no longer determined by a commodity (i.e. gold) like it had been in the distant past. Instead, the value of the money we commonly exchange and we now refer to as ‘fiat currency’ (i.e. GBP or USD) is determined by governments, and can fluctuate with the decision making power of a small group of people. This fiat currency is then stored in centralised systems such as banks, which are again, based on trust.

The emergence of cryptocurrency was sparked by a recognition of these flaws and was created to encompass three unique characteristics:  
  • Firstly it is a trustless entity, by this we mean there is no third party (i.e. government or bank) involved in its transfer, only those individuals making the exchange.
  • Secondly they are considered immutable and therefore completely transparent in the way they work, as there is no room for ‘undoing’ of transactions or covering-up of any mistakes.
  • Lastly, cryptocurrency is very much decentralised. Where governments can change the value of currencies by injecting more into the system or tweaking interest rates, crypto currencies cannot alter the number of ‘coins’ or ‘units’ in their systems. (The only way to introduce new ones is through cryptomining, which is very simplistic terms is a mean of adding new transactions to the blockchain through the completion of an extremely intricate mathematical equation). Therefore without a centralised body taking control over it, there is no room for alterations in value or distrust in any information being shared.

The Inner Workings Of Cryptocurrency

Where governments and financial institutions are the backbone of most fiat currencies, the big driver behind cryptocurrency is a technology known as blockchain. If this term is not yet part of your vocabulary, a blockchain is none other than a network of many (we’re talking thousands) of computers (also known as nodes) that serve as something known as a ‘distributed ledger’ based on the shared information they hold. These computers then take part in a process known as cryptomining

In very simple terms, the way in which a blockchain works is that when a transaction takes place, there must be a majority vote of confidence amongst the nodes that this transaction is completely sound. Each block within the chain is effectively ‘sealed’ with a carefully crafted equation and ‘linked’ to the next block. As long as just over 50% of these computers or nodes are considered legitimate, the end result is completely secure system that records transactions with complete trust.

Within these blockchains lie the cryptocurrencies themselves, which are essentially the means of carrying out these transactions. Just like fiat currencies, there is certainly more than one and Bitcoin was the first currency to hit the ground running. There are now many cryptocurrencies, all competing against one another and each quite different to the next. To very simply compare two of the leading cryptocurrencies, the idea behind bitcoin was to create a way in which value can be both stored and exchanged. Whereas Ethereum was specifically built to allow almost anyone build their own decentralised apps (which exist only on blockchains) and carry out their own smart contracts within the platform.

Keeping On Top Of Cryptocurrency

Following the well documented rise of Bitcoin in 2017, the challenges facing cryptocurrencies today has certainly been a hot topic in last year’s press. But if the hope of another potential surge in value for cryptocurrency is something that lights your fire, you’re not alone. It is thought that  popularity of cryptocurrency with millennials in particular seems to be at an all time high, primarily down to the appealing way it challenges capitalism.  But when it comes to cryptocurrency, the very nature of the beast can make it a near-on full time job to keep afloat of all the updates and transformations that are continuously occurring. So we would suggest that educating yourself in the subject over time,  is one of the best things to do before making any big jumps into the cryptoworld.

A good starting point is to become familiar with some credible sources of what some term ‘crypto news’, something like ‘Coinzy’ could be a great place to begin your education as this newsletter-style offering claims you can learn all you need to know in just 8 minutes per day. If you don’t quite have the time to read then a podcast could be more beneficial for you. Despite what the name might suggest, ‘The Bad Crypto Podcast’ has received some pretty impressive reviews and has totted up over 4 million downloads. But there are of course many sources of information for you to discover, and whilst you may need a little time and patience to get up to scratch it will be worth it in the end.

This is of course just a very simple introduction to the exciting world of cryptocurrency, and a starting point from which to start your own research and form your own opinions on the subject. Please note that this article does not constitute investment advice. All financial investments carry risk. Potential investors should therefore seek independent financial advice before making any investment For more information please visit PNG Formations or contact the team directly.

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