Cryptocurrency is already over a decade old, but it can still feel very new. That’s because it really is still in its infancy, or at least the toddler stage. When cryptocurrency first came onto the scene in 2009, it took several years to really take off beyond very niche communities. Bitcoin was the first publicly accessible cryptocurrency, released in January of 2009. At first Bitcoin was worth essentially nothing, but as usage slowly grew the price fluctuated below $1. In 2011, Bitcoin hit a high of $29.60 but closed out the year at $4.70. Today, however, the price of a single Bitcoin is tens of thousands of dollars. And Bitcoin isn’t the only player in the game. The cryptocurrency world has exploded with other “coins” and even a plethora of blockchain uses and technologies, such as NFTs.
All this can be overwhelming for those unfamiliar with cryptocurrency, or even people who only have a casual interest in it. So we’d like to simplify the basics of cryptocurrency to give our readers a good, fundamental understanding of crypto. What is it? How does it work? And what else is there to know about the “blockchain”?
Let’s start with some terminology
Cryptocurrency comes with its own lingo, and that can make reading even a beginner’s guide like this one a challenge for many people. Once you know of the basic terms, though, it’ll be much easier to follow along and understand what is being said. We’ll start off with just a few quintessential that are used broadly when discussing cryptocurrency, and keep in mind that the crypto community has its own subcultures full of even more niche slang.
- Cryptocurrency – This is an obvious one, but it’s more than just “digital currency”. The “crypto” in cryptocurrency specifically refers to how cryptocurrencies are encrypted in the age of computers, using advanced security systems that are operated in a decentralized fashion, meaning the network itself is able to manage and verify every single asset or transaction on “the blockchain”. (We’ll get to that later.) “Crypto” is also used interchangeably as shorthand for “cryptocurrency”. So while you may have forms of digital currency such as premium currency in a video game, Google store credits or even an Amazon digital gift card, these aren’t cryptocurrency because they don’t rely on cryptography for security and verification, and they are not decentralized. Amazon could always step in and change your digital balance at any moment, but with cryptocurrency, the system regulates itself through complex authorization processes.
- Blockchain – The blockchain is the backbone of all cryptocurrency and serves as a ledger of every transaction on the network. Because these ledgers are blockchain-specific, different networks may be referred to as different blockchains. The Bitcoin blockchain will have all the information about Bitcoin, while the Ethereum blockchain will have all the information about Ethereum. Generally, blockchains don’t usually interact with other blockchains, but some modern blockchains are being designed with this capability in mind. The blockchain is the ultimate balance sheet that keeps everything correctly sorted, and it’s what makes decentralization possible because no single person or group has authority over what goes into the ledger.
- Coins and altcoins – While a single Bitcoin might be referred to as cryptocurrency, there’s also the capital C version of Cryptocurrency referring to the system as a whole. Just like you may have actual money in your pocket, the idea of money encompasses more than what you have on hand. So people will often refer to specific units of cryptocurrency as “coins” or sometimes tokens. Cryptocurrencies are also often represented as coins visually for this reason. “Altcoins” (sometimes “alt coins”) is a term that came about to refer to “alternative coins”, or cryptocurrencies that aren’t Bitcoin. Some people may consider popular and mainstream altcoins such as Ethereum or Litecoin to no longer be altcoins and instead would prefer them to be placed on the same stage as Bitcoin when discussing cryptocurrency, and that might happen at some point, but right now “altcoins” generally still refers to anything other than Bitcoin.
- Wallet – A cryptocurrency wallet is a unique ID that serves as the address for where cryptocurrency can be stored. Wallet addresses are publicly available on the blockchain, so you can look up any wallet to see how much cryptocurrency or other blockchain assets it holds. Typically cryptocurrency users will have multiple wallets, sometimes for specific purposes. Combinations or substitutes of wallets may also be referred to as a “wallet”. For example, mobile wallets may have a specific wallet address for depositing cryptocurrency, but the provider may hold that cryptocurrency in a variety of wallets on your behalf. The app itself would still be called a “wallet” even though it may be a collection of wallets, or even just a placeholder for your current balance. A cryptocurrency transaction will need to have a sending wallet address and a receiving wallet address.
- Mining – For Proof of Work blockchains, tokens on the network have to be “mined” before they are available. This typically requires an immense amount of computing power and can take a long time to mine a single block. Once a block is mined, the tokens within it are distributed out to whoever successfully mined it. Because of the computing power involved, mining is usually done in “mining pools” where many users combine their efforts together in hopes of being the first to crack the code and reap the rewards.
What even is cryptocurrency exactly?
There are really two parts to this question. First, there is the technological side, or the “physical” part of cryptocurrency, in as much as something virtual can be physical. Then there’s the economic side, what a cryptocurrency token represents and how it functions in society.
The technical underpinnings of cryptocurrency is what makes it cryptocurrency in the first place. Digital currency has long existed, and people have been able to send money virtually since long before the Internet ever existed. The idea of keeping a ledger that abstracts a financial reality is nothing new and even dates back to when people used to claim ownership of giant rocks and trade them through word of mouth. The innovation with cryptocurrency is the “crypto” part of its name. The use of modern cryptography, made possible with advanced computer systems, allows for the ledger to be secured in a decentralized way. With an 8,000-pound Rai stone, if someone forgot or made a mistake when passing along balance sheet information, that error would become reality. Or if you were popular and charming enough, maybe you could convince people that your version of the ledger is more accurate than someone else’s. With cryptocurrency, the ledger is the blockchain which is controlled by the networks programming. The act of “mining” in cryptocurrency puts your computer power, or your crypto assets, to work updating and verifying the ledger. Essentially what goes into maintaining the network is distributed across users, giving no single user the authority to control the network, and this keeps the blockchain up-to-date and accurate.
The “coins” or units of cryptocurrency are themselves merely transactions on the ledger. A single Bitcoin has to be mined before it can come into existence. Once mined, through an enormous amount of combined computing power, the person (usually group) that successfully mines it receives ownership of that Bitcoin. A single miner might get a tiny tiny fraction of the coin, but all this would be recorded to the ledger so that at the end of the day, everyone can agree on how much Bitcoin a single wallet owns. There is no physical coin anywhere, though. It’s just the record of the transaction, written to the blockchain.
Because there is nothing tangible represented by cryptocurrency, it is essentially fiat currency like the U.S. dollar any many other world currencies. Your wallet simply says you own a certain amount of cryptocurrency.
Like the U.S. dollar then, cryptocurrency derives its value from the belief and demand of its users. Initially, cryptocurrency was very difficult to use, requiring putting together complicated transaction requests to send and sign through computer commands. Back in those days, Bitcoin was worth well under $100, but as usage and adoption grew, the price skyrocketed. Today, cryptocurrency is very easy to use with a variety of apps and platforms that can manage crypto assets for you, and all you have to do is hit a button. This infrastructure more clearly resembles modern digital banking, and with that it has opened the doors to many more people.
The SEC approved the first Bitcoin spot ETF in January of 2024, and the IRS outlined tax guidance for cryptocurrency in 2014. These are just some of the big moments in the U.S. that have helped push cryptocurrency adoption. For the first few years, the establishment likely saw cryptocurrency as a fad or possibly a threat that would need to be outlawed. Today, though, we’re seeing acceptance by governments that cryptocurrency is here to stay, with some countries even adopting Bitcoin as legal tender and investing in it themselves.
At BitIRA, we’ve been providing our customers with tax-advantaged cryptocurrency IRAs for years, and it’s a market that continues to grow as more and more people come to see the benefits of cryptocurrency.
What cryptocurrencies are there?
Of course, the biggest and most popular cryptocurrency is Bitcoin, but there are actually thousands of cryptocurrencies in the world with many more being created all the time. Most of these don’t succeed though, or they have limited purposes in the first place. Because cryptocurrency is just a computer program, anyone can create their own cryptocurrency. However, what gives any currency value is its shared use and agreement on value among other people. Only a handful of cryptocurrencies have so far been able to prove themselves worthy.
Bitcoin (BTC) was the first cryptocurrency, and it is still immensely popular despite some significant advancements in blockchain technology that leaves it looking outdated. One of the largest concerns when Bitcoin came out was the power usage required to sustain the network. Computers require electricity, and Bitcoin requires computers, lots of them. The power usage of the Bitcoin network has been growing exponentially since its inception, and as a “Proof of Work” cryptocurrency, it will always require more and more power to continue. Modern blockchains typically rely on a “Proof of Stake” concept which require far, far less power to maintain.
Ethereum (ETH) is currently the #2 cryptocurrency behind Bitcoin. It is a “Proof of Stake” blockchain and has propelled the NFT market by having a much more versatile network than what had come before. If you’ve heard of NFTs (you know, the pictures of monkeys and other stuff), then chances are they were on the Ethereum network.
Litecoin (LTC) had been the biggest altcoin in Bitcoin’s shadow for much of the early days of cryptocurrency. It’s still widely popular, but has been eclipsed by more recently developed cryptocurrencies. It was developed by a former Google employee and operates very similarly to Bitcoin, but boasting a faster, leaner network.
Dogecoin (DOGE) is one of the first and most well-known “memecoins”. During the early rise of cryptocurrency, lots of gimmicky cryptocurrencies were created and dogecoin was one of them, basing its design and culture off of Shiba Inu dog memes from Reddit and 4chan. Somehow, perhaps miraculously, a thriving community grew around this coin, propelling it to top dog status among the “just for the laughs” cryptocurrencies. Because of it’s consistently low value (in its early days, it was worth several fractions of a cent), dogecoin was often touted as the ideal cryptocurrency for micro-transactions. Today the price has risen to well above a cent.
Binance Coin (BNB) is a cryptocurrency created for the Binance exchange. Its original purpose was to pay transaction fees on Binance, which would be discounted when paying in BNB versus paying in other currencies. Its value largely grew in line with the popularity of Binance.
Tether (USDT) is a “stable coin”, meaning that its value is intended to be tied to a specific value in U.S. dollars. In the case of Tether, it is tied directly to one U.S. dollar, so if all goes well the price of Tether should always be $1.00. The name refers to how the coin is “tethered” to the value of the dollar. Of course, with the U.S. dollar value quickly declining, this is probably not much of an accomplishment.
How can cryptocurrencies be used?
Most people getting into cryptocurrency want something out of it beyond just collecting. Like with any currency, usage is the main concern and benefit when it comes to cryptocurrencies. Bitcoins early success was largely around how useful it was in trading online and across borders. While this did mean it was often used in illegal activities, it wasn’t exclusively used for criminal purposes despite media tending to prefer those stories at the time. In reality, traditional finance had a lot of roadblocks making it difficult for people to conduct simple purchases (and some of those roadblocks still exist today). Anyone who has ever needed to send money back home to family in a foreign country knows the pitfalls and difficulty involved. So with cryptocurrency, people were able to find a monetary system that worked better in our modern, digital age. The anonymity also helped, and not just because people were looking to buy illegal goods or services. There are many perfectly legitimate reasons you wouldn’t want your purchase behavior tracked, including for the simple sake of privacy.
Today cryptocurrencies are far more convenient to use as actual currency with many mobile wallets allowing you to quickly send and receive crypto with no hassle whatsoever. Crypto ATM machines have popped up around the world, and there are several merchant solutions available for accepting cryptocurrency as payment in your retail establishment. It’s still not as ubiquitous as cash or even credit cards in the physical world, but there has certainly been tremendous growth in this area since cryptocurrency first began.
Accepting donations is also a popular use of cryptocurrency, especially online. For freeware developers and artists, you’ll often find their crypto wallet address alongside their work so you can easily send them a donation for their hard work. Some websites are entirely funded by donations and users are encouraged to send Bitcoin or other cryptocurrency to support them.
For some, cryptocurrency is all about investing and potential value. These people are less likely to use cryptocurrency in everyday transactions, but may still hold a substantial amount for those purposes when the need arises. Most investors prefer to hold (or “hodl” as some hardcore crypto-enthusiasts prefer to spell it). There are a variety of ways people invest in cryptocurrency. Most people likely just hold it in their wallets, and for Proof of Stake networks, they may hold their assets with a “validator” which will earn them commission over time for helping with the blockchain validation process. Daytrading is also a common activity with crypto because of its volatility, but longterm investors are more likely intersted in recently approved Bitcoin ETFs, which would come with a management fee, or a self-directed crypto IRA that comes with the same tax advantages you’d get with typical IRAs.
Some cryptocurrencies and related assets like NFTs might be part of building or managing a community. DAOs (decentralized autonomous organizations) are typically created for this purpose and voting or management may be done through owning the networks tokens or through specific NFTs on the network. This is often coupled with fundraising, using the cryptocurrency or NFTs themselves to raise funds to help reach a shared goal.
Since cryptocurrency is still relatively new in terms of money throughout human history, it’s possible there will be future uses we can’t even imagine today. Many companies and organizations are already looking into new and innovative ways of using blockchain technology beyond cryptocurrency. The decentralized process of providing verification and autonomous decision-making could easily revolutionize entire industries or even governments.
How do I get started with cryptocurrency?
If you’ve never owned cryptocurrency before, then the prospect of jumping in could be daunting. There are many marketplaces and wallet apps out there after all, and so many cryptocurrencies to choose from. Plus with bad actors out there, you want to make sure you’re signing on with an organization you can trust. You can also buy/sell directly on your own, but that can be difficult for regular people to figure out and your personal security precautions probably pale in comparison to some of the bigger institutions. For example, at BitIRA we partner with Ledger Enterprise to ensure our customer’s assets are safe. They are leading experts in digital security and hold SOC 2 Type II certification, an industry standard that far exceeds how most people handle their personal crypto wallets at home.
The first step is really deciding what you want out of cryptocurrency and which cryptocurrencies you’re interested in. If you’re looking for buying and selling goods and services, then Bitcoin is probably going to be most appealing to you as it is the most widely accepted around the world. If your interest is in NFTs, then you’ll want a blockchain like Ethereum that allows for NFTs and smart contracts. Investors typically diversify their holdings, and may look for a mix of low and high risk cryptocurrencies.
Once you have a cryptocurrency or two in mind, you just need to get yourself a wallet and some tokens from that network. That means you’ll need to convince someone to send you some crypto tokens. Usually that is done by offering them some government-backed fiat money or selling them something. Create a wallet and give that person the public wallet address (be careful not to give them your private key!) and they can send you cryptocurrency. In most cases transactions happen very quickly, so you can immediately verify that payment was sent, but sometimes, depending on the network, transactions could take hours or even days to validate. Keep this in mind when trading and ensure transactions are validated before you hand over whatever you had promised in return.
If the DIY method isn’t for you, there are plenty of apps and platforms that can get you started. Binance, Coinbase and Kraken are all popular markets for cryptocurrency, and make it fairly easy for average users to buy, trade and sell crypto. Other cash apps like Venmo and Cash App offer some cryptocurrency options too.
You may also be able to get into cryptocurrency through your financial advisor. If they don’t provide a service themselves, they can likely point you in the right direction. This method usually means you’ll be paying management fees, but the trade off is you don’t have to get your own hands dirty with the nitty gritty of blockchain transactions.
Many of our customers appreciate the ease of which they can invest in cryptocurrency through BitIRA. Aside from getting the tax benefits of an IRA, you don’t have to be a crypto expert to invest. Our specialists will discuss your particular needs and wishes with you directly, and set up the orders for your account through our exchange partner.
In this basic guide, we wanted to give our readers a good fundamental understanding of the world of cryptocurrency. There is a lot more to learn, and how knowledgeable you really want to be about it is entirely up to you. You don’t have to be an expert to use cryptocurrency or benefit from investing in it, just as it doesn’t take a degree in economics to use a dollar bill. Here we’ve compiled a list of additional resources you may find helpful in learning about and understanding cryptocurrency: