Cryptocurrency Guide for Beginners [2021]
Updated: Dec 7, 2022
A beginners’ guide for 2021 cryptocurrency enthusiasts, investors and traders.
If you are a beginner and you are looking for a guide to know more about cryptocurrencies, this article will give you a basic knowledge about cryptocurrencies.
Knowledge and experience will lead you to be a successful trader and investor, but you need to understand the basics to know why cryptocurrencies differ from traditional currencies.
Table of Contents
What is a Cryptocurrency?
A cryptocurrency is a digital currency created using the blockchain technology through a process that we call ‘mining’.
Basically, skilled people around the world create cryptocurrencies solving complex problems thanks to their devices.
This happens with Bitcoin and many other cryptocurrencies.
You need to know that not all cryptocurrencies can be mined by people: after Bitcoin, several cryptos were born - we call them ‘altcoins’, that stand for ‘alternative coins’ - and some of them can only be bought, without having the opportunity to mine them.
Being this a cryptocurrency guide for beginners, this is not the right place to deepen topics such as blockchain technology or mining.
Related article: Blockchain Basics
For now, you need to know that when you read ‘altcoin’ you’re reading about a coin that differs from Bitcoin. When you read ‘blockchain’ you’re reading about the technology thanks to which cryptocurrencies are created and stored. When you read ‘mining’ you’re reading about the process that allows creating cryptocurrencies, a process that isn’t necessarily the same for any crypto.
Cryptocurrencies and traditional currencies share some characteristics:
You can use them to buy stuff;
You can exchange them for other currencies;
You can store them.
Among the differences between cryptocurrencies and cash, there is one that needs your most complete attention:
Cryptocurrencies are decentralized: there are no states or central banks that control cryptocurrencies.
This last point is fundamental if you want to understand why people are so interested in crypto, why cryptocurrencies are so popular. Keep this in mind while you read the rest of the article.
Before moving on, let’s recap what we’ve read so far:
A cryptocurrency is a digital and decentralized currency created and stored using blockchain technology through a process called mining.
Why are Cryptocurrencies so Popular?
I think this is not the first time you face a crypto-related piece of content.
But I want to be clear about EduCrypto’s identity: here you won’t read about lambos or stuff like that.
Being this a beginners’ guide, you need to know that we need to treat cryptocurrencies seriously in 2021, twelve years after the birth of the first cryptocurrency: today, there are derivatives, credit cards, and loans based on cryptocurrencies.
It’s not the time to treat cryptocurrencies just as something that can make you rich, but as financial instruments that have the same dignity of traditional financial instruments.
So, what you need is education and, even more important, the right mindset: being disciplined and prepared will avoid you becoming another crypto loser.
If you are asking why cryptocurrencies are so popular, my answer is that they are popular in the etymological sense of the word: they pertain to people.
Understanding this will make you treat them with the respect they deserve.
Do you think I’m exaggerating? Keep going and read about why Bitcoin was born.
Bitcoin’s History
Everyone knows what happened in 2008: a huge financial crisis destroyed many lives, along with our trust in institutions.
But not all know why that financial crisis happened. It was not the result of a war, a pandemic, or any other natural or social catastrophe: it resulted from the greed of a tiny group of people that controlled the financial destiny of billions of people.
It all began with Lewis Ranieri and his ‘mortgage-backed securities’ in 1977.
Until then, banks tried to hold as few mortgages as possible, since they were a combination of long-term and low-interest products - not good for banks.
Since having a mortgage was too hard, the housing market wasn’t so flourishing.
Lewis Ranieri came up with an idea: creating mortgage-backed securities.
In a nutshell, the bank granted mortgages to people, while investors bought the securities: in doing this, the bank always had liquidity to issue new mortgages and additional securities. It was pretty easy to sell these financial products, because investors saw them as secure investments: everyone should be able to pay the mortgage if it was granted. And no one expected that the value of houses wouldn’t increase consistently.
The system was secure.
But at some point, derivatives’ value was higher than the value of mortgages.
It became necessary to sell more securities. To do this, banks needed a larger pool of people: they began to grant mortgages to people who had not the possibility to be solvent, people who cannot give any guarantee to bankers.
Banks didn’t do that ‘out in the open’, but inserting these mortgage-backed securities into more reliable financial products, creating a sort of packages. These packages were the subprime.
Like any market, also the housing market had a hard time. And when this time arrived, all those derivatives were worth nothing.
I suggest you watch ‘The Big Short’, because there they explain the complete story very well.
The moral of the story is that many people lost their houses, their jobs and their money.
And since we live in a globalized world, the crisis had a domino effect, and became global.
In 2008, someone had the idea to change the financial environment: a global crisis had begun because of the greed of a small group of bankers. It wasn’t unacceptable that the entire world would suffer the consequences of this greed.
This was the beginning of the revolution. A person - or group of people - we know by the name of Satoshi Nakamoto wrote a piece of code including a specific message: ‘Chancellor on brink of second bailout for banks’, a title appeared on The Times.
Bankers had caused the crisis, and now states - that is, people - had to save banks.
Nakamoto must have thought that people needed a financial means not controlled by institutions. That’s why Bitcoin was born.
The idea behind Bitcoin is revolutionary.
Are cryptocurrencies the currency of the future?
To become the currency of the future, cryptocurrencies should be less volatile.
But let me deepen this answer.
Not all cryptocurrencies are equal, and not all have the same volatility.
First, if the crypto market is more volatile than the stock market, it is because there are fewer participants.
According to a study published by Chappuis Halder, there were around 43 million active crypto traders around the globe in 2019.
An article published by the Pew Research Center assessed that "More than half of U.S. households have some investment in the stock market". According to the United States Census Bureau, there were around 120 million households in 2019. And this is in the United States only.
Things are already changing: according to Crypto.com’s report, Measuring Global Crypto Users, “The number of global crypto users reached 106 million in January 2021”.
But in the crypto market, there are cryptos that are less volatile than others.
If you are used to the stock market, think of what occurs with blue chips and penny stocks.
Blue chips are liquid, since daily trading volume is high although they are more expensive: this causes a lower spread.
Penny stocks are illiquid, since daily volume is lower, although they are less expensive: this causes a higher spread.
Now, change your mindset, because cryptocurrencies are different. If we want to make a comparison with cryptocurrencies, we could say that Bitcoin is the blue chip, while a crypto like Polygon is the penny stock. But...
Consider that there is not a large “general” exchange for cryptos: there are several minor exchanges. You can choose to trade on one or many, and each one has unique characteristics: different fees, different payment methods, different currencies, and so on. So, every time you choose an exchange, you will need to consider it like a different portfolio.
Let’s get back to volatility.
I’m going to compare two cryptocurrencies: Bitcoin (BTC) and Polygon (MATIC).
To understand better the concept of volatility, it is useful to introduce the concept of volume: volume is the quantity of shares - or coins, with cryptocurrencies - during a specific period.
The higher the volume, the higher the liquidity of the market, the lower the spread.
Let’s have a look at the volatility of Bitcoin and Polygon, considering the largest crypto exchange, Binance.
We will use standard deviation as an indicator of volatility. As a definition of standard deviation, I will use the one shared by Crypto Hopper:
This indicator measures how widely prices move from their average price. It is plotted by a line that remains stable (unless the market is volatile) and close to 0. When the volatility increases these levels can rise to around 20, which implies a lot of volume and volatility in the market.
A simple definition of volatility could be that the higher the volatility, the higher the instability of the market, the higher the risk.
But Investopedia offers a good technical definition of volatility:
Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured as either the standard deviation or variance between returns from that same security or market index.
I will use the standard deviation graph created on TradingView.
Look at the images below.
TradingView: BTC/USD - Binance - Standard Deviation
TradingView: MATIC/USD - Binance - Standard Deviation
The standard deviation of Bitcoin is just below 2000. The standard deviation of Polygon is just below 0.2.
The average daily volume of Bitcoin on Binance is 2.35K BTC. The average volume of Polygon on Binance is 13.08M MATIC.
Can you see it? The higher the volume, the lower the volatility.
This happen on Binance. But if you look at the overall situation, you can easily find on CoinMarketCap that the total daily volume of Bitcoin is far higher than the volume of Polygon, and the number of participants in the BTC market is huge if compared to that of MATIC: CoinMarketCap registers 38,397,603 total addresses for Bitcoin, 132,309 total addresses for MATIC.
In fact, if you search for the volatility of these two cryptocurrencies online, everyone will tell you that even if Bitcoin is a volatile currency, Polygon is far more volatile. This is true in general. But you have to consider the specific exchange you’re working with, because it is where you trade. You should care about the overall situation if you are investing in some crypto-backed institution, but being this a guide for beginners, we shouldn’t take it into account right now.
So, this is my tip: do your research and analysis depending on the platform you are using.
If cryptocurrencies will reach a good level of institutionalization, they can become the currency of the future. But this would mean that they should lose their original nature.
Cryptocurrencies are already here.
In fact, another difference between cryptocurrencies and cash is that many coins are born to fill a specific need and buy a specific product. Think of MANA: you can use it only to buy products on Decentraland. Or to UPX, that allows you to buy houses on Upland.
As you can see, many of these cryptos have to do with the virtual world. And this is not bad, since the virtual world market has a size of $21 billion in 2021.
Are cryptocurrencies a good investment?
To answer this question, I would like to share with you my strategy. It has to do with supply.
You will find three types of supply related to cryptocurrencies:
Circulating supply: circulating supply is the currently available amount of a coin;
Total supply: total supply is the amount of coins that have been already created. This number represents the amount of coins after deduction of burned coins. In fact, sometimes certain coins are burned to adjust prices:
Maximum supply: maximum supply is the total amount of coins that will ever exist.
Cryptocurrencies are a good investment if you know the maximum supply and it is not too large - to me, “not too large” means that it doesn’t comprise billions of coins.
Let’s consider Bitcoin: the circulating supply is 18,760,831 - it corresponds to the total supply, no coins were burned. The maximum supply is 21,000,000. Right now, 89% of the maximum supply is circulating.
Knowing this data will help you make some forecasts. You can evaluate inflation, you can reasonably expect that it will reach certain values, you know that its value will rise.
In these cases, we should consider cryptocurrencies as long-term investments, because we are sure of their scarcity.
When we don’t know the maximum supply, it is better to consider cryptocurrencies as short-term investments or just use them for speculation.
You can easily find all this data on CoinMarketCap.
How to buy cryptocurrencies?
You can buy cryptocurrencies on several exchanges. Usually, you can buy cryptocurrencies using traditional currencies through your debit, credit cards, or bank account. But some cryptocurrencies can be bought only with Bitcoin - usually this happens with recently born cryptos or with presales. In those cases, you will need to make transactions through your wallet.
As a physical wallet, crypto wallets are used to store your currencies. And also with cryptocurrencies, there are hardware wallets - the most secure to store your cryptos.
Wallets are associated with unique addresses, and you can use your public address to make transactions - not your private key, your public address!
For exchanges, you will need to fund your account.
Then, you can start trading. Exchanges will give you many options to make your tradel, I will list here the most common:
Market: using this option, your order will be filled at market price;
Limit: this option allows you to set a specific price for your order to be filled;
Stop loss: you can set a price that, when touched, will trigger your order. Your order will be filled at market price;
Stop loss limit: similar to the stop loss order, but in this case, your order will be filled at a specific price;
Take profit: this option allows you to set a profit level at which you want your position to be closed. Your order will be filled at market price;
Take profit limit: similar to the take profit order, but it will be filled at a specific limit price;
Post only: this option works only with limit orders. When you select the post only, you are sure that your offer is unique. Otherwise, the system will reject your order and you will choose another price.
The utility of this option is that when you are making an offer at the price that no one has used, you will take advantage of maker fees.
Maker fees are lower than taker fees.
A taker is someone who “takes” the prices imposed by other traders - when you set your order at market price you are a taker, as well as when you buy or sell at a price that someone else has already imposed.
A maker is someone who “makes” the price.
Traders and investors don’t use the terms “buy” and “sell” very often. We use “long” and “short” to replace those terms.
“Going long” means that you’re opening a buying position or a buy order; “going short” means the opposite.
There is also a slight variation of these terms, and often they refer to leveraged position.
Leverage means that you’re doing something similar to a loan to open your order - “position” in this case: it’s like you’re borrowing money from the exchange to increase your capital. Of course, this multiplies your profits, but also your losses. When you open a short or long position, your real capital will be used as a collateral.
How can you invest in cryptocurrencies safely?
Being almost everything related to cryptocurrencies online, security concerns arise.
To trade, store and invest in cryptocurrencies safely, there are a couple of things you should know. I took some of the following suggestions from Nik Patel’s An Altcoin Trader’s Handbook.
The first rule might seem quite obvious, but not all use it: use a different and strong password for each exchange you used to buy and trade cryptocurrencies.
Almost all exchanges have multiple levels of security and authentication. Use them all. Download Google Authenticator to set your Two Factor Authentication keys, and store them on paper.
Never take screenshots or pictures of your sensitive data. Never. Hackers can hack your devices. If remote control is active on your devices, disable it.
I know that it's cool to be an influencer on social media and trading platforms and forums, but please, try not to share too much info. Most of the time, those who are hacked are found on these platforms, maybe because they wrote that they have $1 million in Bitcoin.
When possible, try to use a hardware wallet to store your cryptocurrencies.
Use a VPN that stands for Virtual Private Network. Basically, every time you use it, the web sees your devices as if they have different identities each time. For example, it can produce a different IP address each time you browse the web. This makes it harder to find and hack a specific device. If you are using Norton, a VPN should be already included. Otherwise, there are many solutions online, even for free.
Of course, it is fundamental to have a good antivirus software to scan any page you browse online, especially when you are browsing them to invest or trade.
Start your journey
For now, this is everything you need to know: this info will guide you while you begin your journey with cryptos.
We’ve covered many topics related to cryptos, but this is not enough: education, discipline and experience will lead you to make the right choices with cryptocurrencies.
EduCrypto will help you with the educational part.