I wanted to create a basic FAQ for friends who are completely new to cryptocurrency. I will continue to update this post as I make time and as more questions are frequently asked.
What is a cryptocurrency?
Cryptocurrency is a peer to peer digital currency which is based on blockchain technology.
Bitcoin (BTC) is by far the most famous cryptocurrency because it’s many features which include immutability, assured authenticity, ease of transfer, robustness, and transparency.
What is a blockchain?
Blockchain technology is an encrypted “digital ledger.” In other words, it is a digital record of transactions which can have mathematically proven security features which vary depending on cryptocurrency. It’s also decentralized, which takes power from the central banks and gives it to anyone who can afford computing power
What is the difference between Bitcoin and Ethereum?
After “we” realized that blockchain technology “is a thing” and the Bitcoin Network was developed in order to revolutionize money exchange, the Ethereum network was developed to turn blockchain technology into a decentralized computing network.
The Ethereum Blockchain built to support a “turing complete” programing language which can in essence do anything which a computer can do on it’s distributed cryptographic network.
There is also a currency used on the Ethereum Network called Ether (ETH). Ether is used to pay for the operations of the Ethereum Network and is different than Bitcoin in many ways.
The most important distinction to understand is that Bitcoin was designed to create a “digital store of value” like “digital gold”, and Ethereum is made to be more like a pinball machine token. For this reason there is a finite number of total Bitcoin and not a finite number of total possible Ether.
How many cryptocurrencies are there?
Last time I checked there were over 200 which seemed to be pretty legitimate projects, but there are only a few major players. These can be organized by what kind of problems they are solving. More on this later.
Why do people pay so much money for Bitcoin?
People pay lots of money because they believe bitcoin will come to replace fiat currency. If it does, then $4500 is insanely low for what it would be worth as a global currency given that there’s only 21 million coins to divide amongst 8 billion people. Whether or not that is actually true is immaterial. The belief is enough to create high prices. Aditionally, it is intended to be a non-inflationary store of value, so it’s value should always apreciate favorably compared to fiat in the case of it not becoming the central world currency.
The technology has proven itself every moment of every day since 2009. Now that more and more applications are being designed to integrate with this technology the technology is becoming more valuable. Additionally, because Bitcoin is a limited resource people ascribe to it a higher value as the total number of “mined coins” being released quickly approaches.
What are mined coins?
Coin Mining is a clever way of incentivizing people to spend the immense resources necessary for the maintenance of a blockchain. Miners, or computers computing a complex math problem, spend a lot of money on specialized equipment and electricity this is paid for by a fee charged as coins are exchanged. This miner’s fee is effectively destroyed, but is somewhat offset by the creation of new coin which is distributed among the pool of computers securing the blockchain.
How can I buy Bitcoin?
“On 22 May 2010, Laszlo Hanyecz made the first real-world transaction by buying two pizzas in Jacksonville, Florida for 10,000 BTC. In five days, the price grew 1000%, rising from $0.008 to $0.08 for 1 bitcoin.”
Shortly afterwards Bitcoin exchanges arose as a way for people to buy and sell Bitcoin into national currencies (fiat). Right now it is far more common for people to buy Bitcoin with fiat than to trade products. You can always sell goods for Bitcoin as well as buy it with fiat.
The Coinbase exchange is by far the most common way for people to make their first to cryptocurrency purchase.
What is an exchange? How many are there?
An exchange is a platform on which hundreds to many thousands of individuals use to trade cryptocurrency in and out of every other currency imaginable.
An exchange can be centralized or decentralized. It is important if they trade fiat, or not. And, there is also a wide variety of reputability among exchanges.
Where can I keep cryptocurrency?
Once you have bought some coin you are going to have to keep it somewhere. Most people don’t like keeping too much of their investment on the exchanges because if the exchange gets hacked they will lose money.
So, most people keep most of their assets on a wallet which is in their control.
Hardware, software, paper wallets? Oh my!
Hardware wallets are the most common way to store large amounts of coin. They offer the greatest balance between convenience and security. Software wallets are usually phone or browser based and are quite convenient, and usually free. Paper wallets are a way to put the coin into “cold storage” which does not require buying a hardware wallet.
What is cold storage?
Keeping the information required to alter assets held in a particular wallet offline is called “cold storage.” It is a safety precaution used to store very large amounts of cryptocurrency.
Can I make money with cryptocurrency?
Probably. It’s a commodities market.
Common ways to make money with cryptocurrency include trading, investing, and actually using the service in order to make work more efficient.
Can I use blockchain technology in my work?
Probably soon. Right now blockchain technology is still relatively underdeveloped, but because it promises to make all kinds of tasks more efficient it is quickly being used as a new lens with which to view all kinds of problems.
What are “Colored Coins”
Since you understand what a digital ledger is you now need to understand smart contracts and colored coins.
Colored Coins is a way of assigning complicated value to blockchain assets, mostly Bitcoin. This is done by creating a separate ledger which integrates with Bitcoin. In this way a “satoshi” or single Bitcoin unit could represent real world value, like say, a bag of tea, which can be redeemed for an actual bag of tea, or could be traded while the tea sits safely in an environmentally controlled storage unit owned by Immodestea. Or, an asset could be created with values which represent encoded instructions about how assets should be allocated in relationship to other variables.
The most common use cases include Issuing Shares, Smart property, Coupons, Community Money, Digital Collectibles, or an Indicator of Access.
What’s wrong with Colored Coins?
Ethereum was developed as an alternative to Bitcoin in order to handle complex tasks which are not accomplished well with the complicated multilayered system of Colored Coins. The most important impetus for this development was the desire to implement a comprehensive system of “Simple Payment Verification”. Simple Payment Verification is a mechanism in Bitcoin that allows lightweight clients to verify the state of the chain without having to inspect the entire history of the blockchain, which is generally not possible with colored coins.
Moreover, colored coins are an ad hoc solution to a problem which Bitcoin was not designed to address. Although efficient in their own way (in that they can be “merge mined”) their use inefficient in terms of code and is considered inelegant in the eyes of many programmers.
What are “Smart Contracts”?