Beginner's Guide

And what problems are solved by CryptoCurrencies?

The aim of CryptoCurrency is to store and transfer values without the need for the services of a third party (like a bank). Previously, we were only able to send money if it was validated by a money-institute or a company that dealt with financial transactions - like PayPal. We needed them to solve the problem of "double spending", i.e. making records of the amount of money someone has on their account and guaranteeing that you can't spend more than you actually have.

Bitcoin was born

In 2008, Satoshi Nakamoto, whose identity is still unknown today, invented Bitcoin. Satoshi might have been one person, or a whole group - one thing is certain though: in 2008 they published the description of Bitcoin, effectively solving the above mentioned problem of double spending.

The problem with digital currencies is that just like a computer file, they can be copied. Just as someone makes a copy of a digital photo and publishes them to any of the social media sites, you could do the same with digital currencies if there is no central agency that oversees digital money. As we already know, however, these agencies are untrustworthy, expensive and slow. The technology behind Bitcoin, called blockchain helps solve these issues.

By solving these accountancy issues, Bitcoin and all the other CryptoCurrencies were good to go and people could send money to each other directly all over the world, no matter where they were and without having to worry about being conned by someone. Blockchain allows you to stay anonymous, however, all transactions have been and will be recorded so you can find out easily if a certain transaction as really gone through. The system is much faster than a bank transaction as well, and it is not tied to working hours or days.

The first altcoins are introduced

Following Bitcoin, a number of other CryptoCurrencies have emerged. These can be different in how they work, e.g. can not be considered money per se, but fulfill other functions. A common feature is that they do not need a third party as an intermediary. For example, if you wanted to email someone, you would need to use a service like Gmail. The blockchain behind CryptoCurrencies can make Gmail obsolete as well. If you needed a ride, you would call a taxi-company or an Uber - with blockchain and smart contracts these companies will one day be a thing of the past.

CryptoCurrencies are different from traditional money in many respects. For one thing, they are global, i.e. you can use them anywhere. There is no Bitcoin Dollar or Bitcoin Euro, there is just Bitcoin. CryptoCurrencies have no physical form, there are no bills or coins we could put in our pockets - they exist in digital form only, and we can use them with our smartphone or computer. This might seem like a novelty, but the 90% of the world's current money in circulation exists only on the banks' servers as 1s and 0s. From a certain point, CryptoCurrency is the natural evolution of money - it is faster, cheaper and more efficient than its predecessor.

The beginnings

The block part in the blockchain name refers to data packages that follow each other in a chronological order. The most important feature of the blockchain is that it is virtually impossible to change the data we store in them. Let's see how this is possible.

The origins of the technology date back to 1991. This was the years where they started using it for timestamping digital documents to prevent anyone from falsifying their date of origin. You had to wait for its widespread use until 2009, the year when Bitcoin was created.

The most important property of the blockchain is that the data we store in them is virtually impossible to change. How is something like this possible? First, let's see what a block is.

The easiest way to imagine the blocks is to view them as pages of a notebook. You can write any data into each block - in the case of Bitcoin, these are transaction date (the amount, the bitcoin address of the person its being sent to, the date of transfer), but other blockchain may contain medical records or audio files as well. Each block, in addition to the data stored in them, contains two hash codes - the first one is the data's has code, the other one is the hash code of the previous block. Hash codes are like digital footprints: all of them are unique so it makes the blocks easily identifiable.

When a block is created, the algorithm defines the hash value that belongs to it. After this, if anything is changed in the block's data, the hash value will change as well, so it is a very useful tool to see if someone has tampered with the data that was already there.

Introducing the consensus called PoW

Each block is referencing the previous block and if someone tried to falsify the data, it would have a completely different has code due to these modifications. The old code, that is referenced by the next member of the chain, will yield invalid values and therefore all the subsequent data will become undecipherable.

So, we have a properly working system to see if someone wanted to modify the data stored in the blockchain. Still, this would not be enough to actually stop them from doing so, since a computer that is fast enough could rewrite the block's data and recalculate the hashes of the subsequent blocks as well.

Therefore, the consensus called PoW (Proof of Work) has been introduced - this procedure provides and enforces a timeframe to create new blocks. For example, in the case of Bitcoins, it's around 10 minutes. If the computers do this task faster, the algorithm makes itself "more complex" and slows down the procedure, or, if it takes too long, then speeds up the same procedure.

Proof of security

When a new block is created, each participant of the network gets a copy. The participants agree that they consider this form of the block to be valid and everybody adds it their copy of the chain. If anyone wanted to modify the data on the already authenticated block, they would simultaneously need to rewrite that block on 51% of the network computers; otherwise, the system would reject the rewriting attempt.

So, in order to change even only one character in the blockchain, you would need to change all the blocks, calculate the new hashes that belong to them and take over at least 51 percent of the network.

Therefore, it is easy to see that the system of blockchain works in a highly secure and trustworthy manner. At its core there is an encryption that allows to move values, i.e. CryptoCurrency and protect both parties at the same time.

Origin

Cryptography is the science of encryption, decryption and ciphering, among others. We usually use the means of cryptography when we want to hide something.

From cryptography to blockchain

One big step to cryptography was came in the form of AES (Advanced Encryption Standard). The U.S. National Institute of Standards and Technology saw that they were ready to update encryptions so they called a competition that was one by Vincent Rijmen and Joan Daemen with an encryption called Rijndael - AES was born out of this product. AES is an encryption that uses symmetric keys, has great speeds, but it had to be modified occasionally because there had been successful attempt to break it.

In addition to encryption, there is another part of cryptography that needed attention - let's say we receive an encoded message from X that only we can read. The message is successfully decrypted, however:

• how do we know that it was really sent by X?
• what happens if X denies having sent the message?
• what happens if X claims that they sent something else?

In the world of business, none of this is acceptable. So, in addition to encryption, we also need to be able to verify the item - the solution for this is called digital signature, that lets you sign documents with our private keys.

We bet a sequence of bytes that we call digital signature and we can attach that to the document. When someone receives this message, they are able to verify it with our public key so they can be sure of the identity of the sender and the content of the message.

If a document was signed by our private key, we are the senders and there is no way to deny it, since we are the only ones who have it and we cannot say its content was modified, either, because the signature would be invalid in that case.

This solved many of the problems, but in the case of large messages, they needed a lot of computing power to sign or verify a message. The solution for this was called a message digest or hash, which served as a digital seal. The point of the hash is what it is shorter than the message itself - around 128-256 bits and it can be calculated quickly.

There are a few basic requirements for hash:

• the hash shouldn't be able to decrypt the whole message
• it should be nearly impossible to find to messages with different content but the same hash value
• the same message should have the same has value each time

We don't need to sign, therefore, the whole message, but calculate the value of the hash and sign that. The other party calculated the hash as well, and sees if the signature is valid - this saves us time and resources as well. Blockchain uses these procedures as well. When we are mining, we calculate hashes like this for the blocks.

Transactions on blockchain

When we start a transaction (wire something), we sign it with our private key. The private key is not actually needed to access our wallet, but to spend the content of it. The nodes and the miners accept the transaction and put it in a block when the transaction has a valid digital signature.

BlockChain, however, gives answer to the problem of subsequent exchange of items as well. In the blockchain, each block contains the hash of the previous block, so we can see if the specific block was modified. In order to modify a block, you would need to modify all the subsequent blocks as well. You can only do this if you have 51% of the total computing capacity of the network. This is such a high value that even if we managed to achieve it, it wouldn't be sensible from a financial standpoint.

Basics

The basic notion of cryptocurrencies is that they can be used to transfer value, so we can send and receive money if we have our own address and know that other party's address we are sending to. When you press send, the network tries to verify if we have enough currency to send the amount, or, whether we are trying to initiate an unverified and invalid transaction.

One of the founding notions of blockchain technology is that the pieces of the chain - blocks - cannot be deleted, so they can only contain transactions that adhere to a specific set of rules. They way, however, through which each CryptoCurrencies nodes in the network decide whether our transaction is valid can be substantially different with each currency's system.

We differentiate between networks that use PoW (Proof of Work) and PoS (Proof of Stake) consensus algorithms. The majority of CryptoCurrencies use these one of two consensus-mechanisms or a modification of it.

Mining is an essential part of the PoW version; networks that are based purely on PoS do not need mining. The PoS model allows you to use your funds in a deposit-like manner - if you verify a legitimate transaction, the system rewards you with further CryptoCurrencies, and, if the transaction is not legitimate, it will be deducted from your "supply" of currency.

Without mining, there is no Bitcoin network

If blockchain is the golden eggs then Bitcoin itself is the goose that lays them, since the blockchain technology was created for Bitcoin's features to become viable in real life. As long as we don't reach the 21.000.000 pieces, the rules in the code allows to make new bitcoins in approximately every ten minutes (currently 12.5 pieces) that will be distributed among miners.

Pool is the name of a model that allows multiple miners to form a group and the rewards they get after finding the blocks are distributed in the proportion they have contributed to the process with their resources.

The complexity of the network is, as of yet, unfortunately, slowly adopting to the full computing capacity of the network. Whenever the exchange rates go up, many people start minding, but they usually discontinue that after the surge in mining-complexity.

So, can you be rewarded with 12.5 BTC if you start mining? Not anymore. The computers doing the Bitcoin mining form pools to be able to compete in this huge, resource intensive process. As soon as a pool finished mining the next block, the block will be distributed in the proportion they have contributed to the process with their resources.

Huge mining farms

The first, purely business-oriented mining farms have been operating since 2011. Today, each farm has a tremendous amount of investment behind them, multiple thousand pieces of custom hardware, cooling and permanent staff is on the clock 24/7. The biggest farms are located in China, Iceland and the USA, and their operations are based on cheap electricity. It is starting to become a question of national policy whether a country would allow these huge, energy-consuming monstrosities and maybe soon they will be taxed in CryptoCurrencies.

The biggest installations are owned by Bitmain in China and they are the biggest curators of AntPool, the biggest BTC pool. Due to the increase in the rate of exchange of Bitcoin, they managed to generate a profit of several billions of dollars, elevating them to the levels of the biggest hardware manufacturers.

How do I start mining?

At home, with your own network of electricity and with a few graphics cards it is probably not worth your time and money.

Is it worth to invest in online mining-platforms (Cloud Mining)?

You nee d to be very careful with these services. They usually ask for BTC for their services and they receive a lot of complaints from users. Always do your homework and check them out in advance and read the users' comments on their services.

Getting to know the technology

Those who follow the technology that is related to CryptoCurrencies are convinced that the technology of blockchain will change the world and remain with us forever. Its significance is often compared to that of the internet itself - the technology, they say, will provide and endless number of second layer applications that use the network of Bitcoin. In the early days, the internet was thought to be the same as e-mail only; now, of course, we know that it was the foundation of solutions that turned our previous world and economy upside down.

Stock exchanges, brokers

In order to buy CryptoCurrency, you need to, at least on a basic level, become familar with how the stock exchange works and what the roles of the brokers are. Unless you have someone you trust with up-to-date, working knowledge of this topic, you should take the time and get to know this topic as well in order to use it successfully.

Avoiding frauds

Since this is a new area, many frauds try to make money on people gullibility and greed. It is essential to be able to differentiate between a legitimate crypto-project and a simple con. Therefore, we need to know some basic concepts and be able to use the tools that rank CryptoCurrencies according to their different features. Also, you need to recognize when someone wants to scam you before investing in a project. If the people that want to do business with you are rarely available and you find no information on them, their introductory materials are full of empty phrases without any substance.

Movements of the market

While this is not closely related to the technology itself, this may be one of the most crucial elements of your knowledge. When do people buy? When do they sell? What is it like when the market panics, how do you recognize when it is happening?

Does who have prior experience with stock exchange definitely have and advantage - no wonder that many veterans of the exchange switched to dealing with CryptoCurrencies in the past years. Also, it is worth mentioning that although CryptoCurrencies and the way the move have many common features with the classic stock exchange, dealing with CryptoCurrency is still a completely new are and it is hard to see in advance what will happen in a few years' time.

Long term investment

The first time people buy Bitcoin they usually do it with the aim of leaving their investment alone for a couple of years. They later realize, that no matter where the market moves, they can't not deal with their investment, since more often than not, they put more into it than they should have. Basically, you should never put more into it than what you don't care if you lose, without getting worked up about it.

You can buy CryptoCurrencies from different platforms, brokers and exchanges. You can store them in a specialized electronic wallets or on paper. - we are dealing with how to buy and store them later.

Trading

Using the shifting of the exchange rates, most beginners start with this area with altcoins (everything other than Bitcoin). Due to the (seemingly) easy profit, they jump into different deals without thinking them over. Trading goes through CryptoCurrency exchanges like the traditional Forex platform, but we trade with CryptoCurrency instead of USD or EUR. Some exchanges allow you to trade with USD as well, like Kraken. Getting profit from the shifting of exchange ratio is an interesting question - our portfolio might shrink in dollar value, but grow in BTC.

Registration on the site of a broker or a stock exchange

When you decide to buy CryptoCurrencies, you need to create an account on a site that makes buying and selling them possible. Whether its a simple broker or a stock exchange, due to security concerns you will need to go through a somewhat thorough authentication procedure. There are pages where you only need an email address, but on other sites (like, e.g., Coinbase) you may need one of the following:

• a picture of both sides of your ID
• your residency card
• a photo of your passport where your face is visible
• a profile image

If they require a photo that is older than six month, they usually provide the means to take a photo with your computer's webcam.

It is important to adhere to the security measures of the site and use two-factor authentication (2FA). You'll get a code in text message to your phone when you want to login to the site. Your login will only be successful if you provide the right code.

Choosing CryptoCurrencies

If you already have access to the exchange or broker, you need to select which CryptoCurrency you want to buy from. As a rule of thumb, you should buy when it is low or going down and not when it is high or rising. Choosing the CryptoCurrency you want to buy is always a complex process, so you need to decide first whether you are in for the long run or want to trade. If you want to trade, you'll need to dive into the specifics of trading.

If you "only" wish to buy it and at some point in the future, sell it, and realize some profit, you need to examine the following.

• How popular is the coin? You need to look through the social media platforms - if you see a small(er) community around a specific coin, it is usually a good sign.
• Who are behind the coin? It is important to see who started the project. If there is no information available, it is a sign to consider - maybe it is not a serious and trustworthy piece of work.
• Is that coin trying to solve real problems or is it just a new player in the large field of CryptoCurrencies? If the answer is the former, and you see a down-to-earth approach to a solution, you have every reason to presume that it has a future.
• What does "the internet" say about this specific currency? Do some searching to find out how people on the internet relate to this product.

If you decide that you want to take part in the financial revolution that is about to unfold and would like to buy some CryptoCurrency, you have different possibilities at your disposal. There are faster, but more expensive means; and more tedious, but cheaper solutions. Additional factors impacting your decision might include security and transparency as well.

Buying and selling

The oldest and most common means is that you buy from a person who deals with CryptoCurrencies. The most common currencies can be found easily, and usually you can manage a good deal on the exchange ratio. However, if you want to get a hold of a larger amount, it could take multiple meetings and more time, not to mention that the rare CryptoCurrencies are harder to come buy.

If you buy CryptoCurrency for cash and store it in an anonymous wallet instead of an exchange site, you can be sure that your investment is safe from all prying eyes.

ATMs

An expensive, but fast way of buying Bitcoins. There aren't that many ATMs that are equipped with CryptoCurrencies. All you need to do is scan the QR code of your wallet, insert the banknotes and within 10-20 minutes, the amount you deposited will be balanced on your account. However, the exchange ratio is usually not the best, and there is an additional 5% of costs as well, but you don't need to have a bank account or any other personal data for the transaction.

Mining

This one is not recommended for complete beginners, because it needs lots of preparation in advance. You can get most of the CryptoCurrencies through mining - in a nutshell, it means that if you verify and forward transactions through the internet with a high performance computer, you get CryptoCurrency as a reward.

Newest mineable CryptoCurrencies can be mined with high performance GPU’s, but the older ones, like Bitcoin, can only be mined with specialized hardware, the ASIC miners, unless you want an electricity bill that costs more than the value of the CryptoCurrency you mine.

The more popular a coin becomes, the more advanced machines you need to be a part of its mining, since the verification of the blocks are done by the computers on the network and its requirements are adjusted depending on how much performance the computers of the network has.

If you are interested in this method and have a good graphics card, choose a smaller coin - maybe it will become the next big thing, and the few coins you managed to main will be worth a lot more.

Debit / credit card

There are numerous possibilities to buy online with your card. Most beginners prefer this method due to its simplicity and comfortable nature. You can choose between the ratios of different brokers. The most trustworthy company where you can buy CryptoCurrency is Coinbase. You can send, with a SEPA transfer fiat currency and exchange it for Bitcoin, Litecoin, Ethereum or Bitcoin Cash. The currencies bought here can be transferred to other exchanges or exchange it for any coins. This is the easiest, though the least anonymous solution. Not only is your bank information required, but they often ask you for photos or scanned version of you IDs.

If you don't want Bitcoin

Let's say you managed to gather, using the above means, BTC, ETH or other, more common CryptoCurrency, but you want to exchange it for a completely different kind of currency. 99% of the CryptoCurrencies cannot be bought for fiat currencies and are not directly in contact with the traditional monetary system.

Therefore, if you want to go a step further, you will need to register to one of the bigger CryptoCurrency exchanges.

The first and most popular CryptoCurrency is Bitcoin, so it is not surprising that novice users will turn to this at first. The following steps are, however, not that straightforward, since it heavily depends on personal preferences and the inclination for taking risks.

Taking risks

According to our experience so far, the market undergoes a cyclical period of consolidation, horizontal positioning and then an explosion of exchange ratios, then a collapse. That is what has been happening since 2011, the first rising period, and we have no reason to presume that this will be anything different in the future. Therefore, the 70% drop at the beginning of 2018 is, however big it might seem, normal. Bitcoin (BTC) hasn't, since its 2009 launch, had any hacks or shutdowns, so it is evident, that it's the most secure and least risky CryptoCurrency on the market.

In the long run, however, it seems that Bitcoin and Ethereum are the "secure" investments from 2018 and onward as well. Additionally, multinational companies may even start issuing them. Generally, it is safe to say, that the "smaller" a given CryptoCurrency is, the most risky should it be considered.

If the market is going down, no matter how careful we are in our selection, the value of our portfolio in dollar values will surely shrink - except for some special, unique case scenarios. When the market is rising, all sensible CryptoCurrency with a strong marketing behind it goes up. The difference lies in how much they go up and whether it will be able to retain its larger volume and market-share in the long run.

For beginners, the portfolio should consist of 45% BTC (depending on the current capitalization), and the rest should be divided among the 20 CryptoCurrencies with the largest capitalization. Here's an example:

• 45% BTC
• 20% ETH
• 15% NEO
• 5% LTC
• 5% BNB
• 5% XMR
• 5% for "betting games"

Altcoins

Altcoins are a term for all CryptoCurrencies other than Bitcoin. In order to make an informed starting decision, you will need to do a lot of research.

In the long run, you should invest your money into projects that are trying to solve real problems and has a team that is able to deal with the problems. How to look into this kind of information? Usually through the community of users, whose opinion will give you a good idea of what you are dealing with.

You should also check out the relevant channels of Reddit, Twitter and Telegram as well. How do they treat their users and how they communicate with the developers. A strong community, that is loyal to the projects in spite of a potential fall is a good sign, since it shows that at least some of them are there for the long run.

Only the altcoins that conform to the above criteria will be able to survive the following years and bring profit.

This is where we'll take a look at the fundamental differences between the CryptoCurrency exchanges and the brokers, so you may figure out what the ideal choice for you will be.

Cryptoexchanges

The point here is to enable users to buy different CryptoCurrencies in exchange for fiat money or Bitcoin and trade with them as you see fit. The fluctuations within even a day may be substantial in this field, so it may provide income in a manner that classic exchanges have been able to offer as well.

The year 2018 provided users with smaller and larger crypto-exchanges. Their aim is to provide CryptoCurrencies, that have less capital and are less known and, in turn, more opportunities for making profit.

It is essential that you look into an exchange before you register. There are many negative comments out there from users - it is not necessarily because of bad service or quality, but due to the fact that not all services or operating in a glitch-free manner, since every aspect of this field is so new.

Brokers

The main difference between brokers and exchanges are that you can buy a given amount of CryptoCurrency from a broker in exchange for fiat, but they do not allow you to trade with your newly-bought currency. Brokers basically follow a buy-and-sell logic, e.g. they buy Bitcoin and sell it to their users - for some profit, of course.

As far as brokers are concerned, it is even more important to do your homework here than with exchanges. You should definitely look into a broker, see what people are saying about them on forums and social media sites.

Whether you want to trade or keep a cryptocurrency (hodl), when you are buying from a broker, you can bring the coins to your exchange registration or your wallet. The disadvantages of brokers is usually the fact they only offer a few cryptocurrency for their users; the currencies are typically btc, ltc and eth on these sites.

Neither the exchanges nor the brokers are working for free; they instead make a living from their fees, i.e. their profits. Make sure you check these margins before you commit yourself to buying from either of them.

You can exchange CryptoCurrencies on pages specialized for such transactions. There are traditional ones where you can buy using fiat currencies (USD, EUR), and others that only accept CryptoCurrencies. All of them are referred to as exchanges, but there are basically three types of sites where you can buy and sell CryptoCurrencies.

Exchanges

Exchanges in the classic sense of the word. They connect prospective buyers and sellers and charge commissions.

Brokers

You can buy for a certain set of prices on pages, just like you would at a currency exchange place on the street.

Sites giving access to direct trading:

In this case, there are no set prices - it completely depends on the agreement between buyer and seller. One example for this is LocalBitcoins.

Registration, anonymity

Some exchanges employ stricter rules when registering new members. These are primarily ones where you can use traditional money to deposit, since there are different rules and regulations for such enterprises that serve to hinder money laundering and they also have check their clients' identity.

This process usually involves you having to upload a scanned image of one of your picture IDs. In most places the process is automated and gets approved almost immediately, but there are exchanges where you need to wait multiple days, too.

Headquarters of the exchange

If you are registering from certain countries, your registration attempts may not be approved due to rules and regulations specific to that country.

Commissions

Almost all exchanges will charge you commission for their services. These commissions can range from depositing and withdrawing from the exchange to trading itself. You can get more information about these commissions on their websites.

Choice

Most CryptocurrenCies are available on most of the exchanges; however, if you wish to widen your portfolio, you'll need to register to multiple exchanges.

Liquidity

Larger volumes mean better prices and faster transactions, with more active community support as well.

Many trader spend their time looking for good moment to open a position or a find a sign that tell "buy" or "sell." And while the search can be fascinating, the result is always the same. Traders must learn a variety of indicators that can help to determine the best time to buy or sell an asset.

What indicators are visible on our charts and how to use them?

Exponentialy Weighted Moving Average - EMA

This is a trend following indicator what makes possible to recognize the direction of the major trend easily and attempt to profit by trading in the trend's direction. Many people try to use them as separate trading system, but the real purpose of the EMA is to suggest whether you should be looking to enter a long position or a short position. So let's consider one of the simplest trend-following methods – the moving average crossover.

Relative Strenght Index - RSI

After opting to follow the direction of the major trend, a trader must decide whether he or she is more comfortable jumping in as soon as a clear trend is established or after a pullback occurs. In other words, if the trend is determined to be bullish, the choice becomes whether to buy into strength or buy into weakness. For this, a trader will rely on an overbought/oversold indicator. There are many indicators that can do this job, however, one that is useful from a trading standpoint is the 14 day relative strength index. For example, well-known market technician Constance Brown, has promoted the idea that an oversold reading on the RSI in an bullish trend is likely much higher than 30%, and an overbought reading on the RSI during a bearish trend is much lower than the 70% level.

Moving Average Convergence Divergence - MACD

MACD is one of the most popular trend confirmation tool. This indicator first measures the difference between two exponentially smoothed moving averages. In essence, when the trend-following moving average combination is bearish and the MACD histogram is negative, then we have a confirmed bearish trend. When both are positive, then we have a confirmed bullish trend.Moving Average Convergence Divergence - MACD