Cryptocurrency is a much hyped topic in the present days and there are thousands of posts on the internet that talk about cryptocurrency. This is intended to be one of the easier and more comprehensive introductions to cryptocurrency, hence the name “an idiot’s guide...”. It is also intended to be a brain dump of what I have learnt about cryptocurrency so far so if you find something inaccurate or something that I should have covered but I didn’t, please let me know in a comment.

To understand what cryptocurrency is and why it is needed, we must first understand how traditional currency works. Currency is the money that is used in exchange for real-world goods and services and is issued by central authorities (governments and the banks controlled by them). Having a central authority control the issuance of currency leads to many problems including:

Governments can print money whenever they need, without real world assets to back this money, which leads to the devaluation of the currency, high inflation rates and people losing the value of their savings.

The value of a currency is highly affected by the success/failure and the honesty of the governments and their political decisions. A short-term unreliable government can cause very long-term losses to the value of the currency. Look at Venezuela and Egypt now for example.

Also to transfer money, people usually need to use trusted authorities such as banks or other services to do this simple task of moving money between people, these trusted authorities usually charge a lot in fees, especially if you are transferring money overseas 😱.

Wouldn’t it be nice if people didn’t need a central authority to print money nor a central authority to transfer money and charge an arm and a leg for it? And wouldn’t it be nice if there was a limit on the money that can exist in circulation to stop any fraudulent authority from issuing money whenever they want to and hence preserving the value of peoples’ hard-earned savings? 🤔

A cryptocurrency is a type of digital currency that is based on modern cryptography to guarantee the security of transactions. In 2009, Bitcoin appeared as the first decentralised cryptocurrency, when an anonymous person with the name of Satoshi Nakamoto published a whitepaper on the internet along with this github repository. Bitcoin is a decentralised peer to peer (p2p) cash system in which there is no need for governments to issue the money nor for any central authority to transfer it! Accounts in the cryptocurrency realm are called wallets. These wallets have an address (a public key) and a private key. The public key is known to everyone and is used to send money and verify transactions, while the private key is used to unlock the wallet and spend the bitcoins in the wallet. Anyone connected to the internet can choose to setup his computer as a full bitcoin node which can help issue new bitcoins and verify bitcoin transactions, all without providing any sort of identity. In 2010, a guy bought a couple of pizzas for 10,000 bitcoins and in October 2017 at the time of this writing, one bitcoin is worth $5,589.02 USD!

When anyone wants to send bitcoins to someone they broadcast the request (the transaction) to the nodes in the bitcoin network. Nodes who choose to verify transactions then group these transactions in blocks and compete with each other to verify the validity of these blocks. The node that successfully validates a block gets to put it in a long list of blocks (the blockchain). A process called mining.

Mining

All the wallets and nodes in the bitcoin network are anonymous and untrusted. What stops any node from acting maliciously? Couldn’t an adversary in the network spend bitcoins that they don’t own? Couldn’t they send the same bitcoins more than once? Couldn’t the nodes that verify the transactions conspire to steal money off the bitcoin network? The answer to all these questions is No.

Bitcoin price chart on 14-Oct-2017

The Bitcoin network uses a distributed consensus algorithm called Proof of Work (PoW) which requires miners to solve a very complex mathematical puzzle in order to get to put the next block in the blockchain (Find a nonce that when added to the block hashes to a certain SHA-256 value) then all nodes must accept the block and update their local ledgers to accept it. An adversary who wants to place a rogue transaction or block in the network must be able to fool 50% + 1 of the nodes in the network in order to be successful. A new block is put in the blockchain every 10 minutes and the node that solves the puzzle first and puts the next block in the blockchain gets to put the following block as well, which is some newly created bitcoins and gives it to itself. And this is the sort of incentive that motivates nodes to behave honestly. At the present time, the amount of bitcoins that a node claims is 25 bitcoins, at the time of this writing, this is around $139,725 USD. This amount was 50 when Bitcoin first started and halves every 4 years. This is the only way new bitcoins can be created, and that’s why only 21 million bitcoins can ever be created. If you want to see the bitcoin transactions in action take a look at blockexplorer. I told you it’s all public!

Total number of bitcoins that can ever exist

Altcoins

Bitcoin is the first and the most famous cryptocurrency, but it’s not the only one. In July 2015, another project called Ethereum was published, which is a smart contracts platform, which has its own blockchain and uses different algorithms for distributed consensus. Ethereum has its own programming language called Solidity and allows for other cryptocurrencies to use its blockchain (ERC-20 tokens). Because Bitcoin is the biggest cryptocurrency, all other cryptocurrencies are called “Altcoins”. Each of those altcoins has its own algorithms and its own incentives for nodes to behave nicely in the network. Some of those currencies use Proof of Work (PoW) like Bitcoin and some use Proof of Stake (PoS) or Delegated Proof of Stake (DPoS) which incentivises holders of the coin for holding them for a long time.

Most of the times, when a new cryptocurrency is developed, the developers hold an Initial Coin Offering (ICO), which is similar to the Initial Public Offering (IPO) in the traditional stock market. Normally the team releases a white paper outlining the value proposition of their system and a road map of how they are planning to get things done. Usually you can participate in the ICO by using Ethereum, Bitcoin, fiat money or any other cryptocurrency mentioned in the ICO. Now there is 150 billion dollars in cryptocurrency.

All money in cryptocurrency

Forks

When someone wants to make a new cryptocurrency, they can either start from scratch or clone (fork) another cryptocurrency to start off of. An example of this is Litecoin which was forked from Bitcoin and since then kept developing different features and had its own blockchain, this is called a code fork. Another type of cryptocurrency forks is blockchain fork, i.e. a snapshot is taken of the blockchain after which the blockchain splits into two chains. There are two types of blockchain forks, Soft fork and Hard fork. read more here

An example of a hard fork is what happened in June 2016 when about $50 Million USD were stolen from the Ethereum blockchain and the community voted to hard fork the Ethereum blockchain to the version prior to the attack. After this happened a group in the Ethereum community argued that this action is against the philosophy of the blockchain technology, which enforces that the blockchain should never be altered or reverted. Therefore they continued with the un-forked version of the blockchain and called it Ethereum Classic. Now we have Ethereum and Ethereum Classic.

Another example is what happens with Bitcoin. There has been a debate about Bitcoin scaling for a while and many teams have different visions on how to solve this problem. Due to conflicts and different points of view, in August 1st 2017, the Bitcoin blockchain was forked and Bitcoin Cash was born. In October 25th 2017 the blockchain is bound to fork again bringing another newborn Bitcoin Gold and some day in November 2017 it will fork yet again and we will have Bitcoin 2x. During a blockchain fork, if you happen to have x Bitcoin you will have the same amount of the new coin as well. That is, if you have 1 bitcoin in 25th October you will get 1 bitcoin gold for free, and if you have 1 bitcoin when it’s time for Bitcoin 2x, you will get 1 bitcoin 2x for free. And the market will decide how much the new coins are worth at the time. That’s why Bitcoin price is soaring so hard at the time of this writing, because a lot of people buying heavily into Bitcoin to get the free money when the forks happen!

(Some) Bitcoin blockchain forks

Remarkable Altcoins

The list can go on and on forever, some other cool projects are Stratis, Dash, Monero, Lisk, OmiseGo, TenX.

A TenX card that you can use to buy a burger or anything you can buy with a credit card

How to get and store cryptocurrency

Ok I’m sold, where do I get myself some of these? There are services online from which you can buy cryptocurrency. (Disclaimer: Some of the following are referral links) For example Coinbase is one of the easiest, at the time of this writing, you can buy Bitcoin, Ethereum and Litecoin from Coinbase via credit/debit card. There is also Coinspot, Bitstamp and Independent Reserve and many more. For all these websites you have to go through a tedious verification process and some times you have to pay a lot in fees to get your coins. Alternatively you can use a website called Localbitcoins, where you can find people like yourself buying and selling bitcoins whom you can contact and buy directly from them, or use a decentralised exchange like Bitsquare, which is similar in principle to localbitcoins. Alternatively, if you provide a service you can demand payment in bitcoin, if your service is an online service you can use a third party service like Bitpay to facilitate the process of accepting bitcoin payments.

Another alternative is to mine your own crypto, but that usually requires buying expensive equipment (GPUs, mining rigs or ASIC miners) or buying a contract in a cloud mining service like Genesis mining. To find out how much money you can make from mining go to this link. Mining is not recommended for someone reading an idiot’s guide but it’s here for completeness’ sake.

A nice image I found online

After you have bought any type of cryptocurrency, you are now in the crypto realm and you can transfer your coins to a cryptocurrency exchange and start trading. My favourite exchange is Bittrex because it has most of the good coins and has a very big volume every day. Other exchanges exist like Poloniex, Kraken and smaller ones like Coinexchange and Hitbtc etc (Beware of phishing dude!). Start with Bittrex and then you will know when you need to use another exchange.

To store your money and keep it safe you have a handful of options:

Leave your money on the exchange — In which case, your money is as secure as the exchange and your account. This is generally not advised because if the exchange goes haywire, gets hacked or your password gets stolen then may mercy be on your soul, there’s no way you can get your money back.

Store your coins locally, download a wallet software, open a wallet on your computer and send your money to it. One good wallet software that I used is jaxx because it supports many different cryptocurrency and of course you can do some research to find a good alternative. If you do that, you must backup your private keys and your mnemonic words (used to regenerate the private keys) so that if you laptop dies, your hard disk gets corrupted or lost, you can recover your money.

Use a paper wallet — i.e. print your keys on a paper (and make some copies of it) then send the money to it and store it in the most safe and secure place in the world, the following is a paper wallet generated by bitaddress.org.

Get a hardware wallet — A hardware device that stores your private keys, e.g ledger or trezor etc... and send your cryptocurrency to them. These devices never connect to the internet and never reveal your private keys (they only use them to sign your transactions). Now your money is as secure as your hardware wallet is.

Use a brain wallet — protect your private keys with complex passwords that are not saved anywhere and only you remember, or remember the mnemonic words. The problem with this is that if you get kidnapped and tortured to death, you may expose your passwords and lose your money and if you die, your family will not have access to your crypto (No bank or government can help, sorry)!

Some wallet software support Multi-sig, i.e. requiring more than one signature to unlock the funds. Based on the secret sharing algorithm, the wallet software will require a minimum of k out of n keys where k ≤ n to unlock the wallet’s private key. In that case, if an attacker wants to steal the money, they will have to compromise at least k keys (presumably they are very secure). Having k < n also means that, if (n-k) of the keys get lost or the people who own them get run over by a bus, we can still unlock the funds with the k keys that we have.

Challenges and Caveats

If you decide to enter the cryptocurrency world you may want to know the following:

The Cryptocurrency market is extremely volatile and what happens in a year in the stock market may happen in a day in the cryptocurrency market. If you trade on emotions, you will lose a lot of money.

volatile and what happens in a year in the stock market may happen in a day in the cryptocurrency market. If you trade on emotions, you will lose a lot of money. Cryptocurrency is anti-authority, which means if someone steals your money or you accidentally send your money to the wrong address then it’s lost forever, there’s no government or bank to appeal to (In most cases).

Cryptocurrency’s anonymity is very attractive for criminals and hackers. It’s used heavily on illegal dark web marketplaces like Alpha bay and Silkroad (they just keep coming back). And if you remember the WannaCry ransomware, they demanded payment in Bitcoin to unlock the victims’ data because it’s not possible to trace in comparison to fiat currency.

Cryptocurrency is against centralisation and censorship, a.k.a against governments. which means governments are against cryptocurrency and they keep fighting it, in order not to lose their firm grip on peoples’ lives. That’s one of the reasons of the fluctuations in cryptocurrency prices. But it only fluctuates on the way up.

The biggest threat to cryptocurrency is Quantum Computers. You can refer to Grover’s algorithm and Shor’s algorithm to learn more about this threat. Quantum computers, however are not a threat to cryptocurrency alone but to everything on the internet. Having said that, there are many coins that are quantum resistant (e.g Iota) and are able to survive the quantum computer apocalypse (somehow), but that’s a story for another decade (or two).

If you start trading cryptocurrency you will be like Ricky

HODL — Hold On for Dear Life (When you have a coin that is going down for some reason, you are always advised to never sell and hold on for dear life)

Gollum Holding onto bitcoin for dear life

2. Lambo — Lamborghini (We are all getting Lambos when we become crypto-millionaires)

3. Going to the moon — When some coin’s price goes really up, it goes to the moon, and if you have a significant amount of this coin, you go to the moon with it.

4. 1000% — Some coins increase by 1000% and even 2000% in a day. If you are from the lucky bunch, you will buy some and go to sleep then wake up in the morning to find yourself a millionaire! Oh dear oh dear! 🤑🤑🤑.