What Is Cryptocurrency? A Guide For Beginners

What Is Cryptocurrency? A Guide For Beginners

Part #1 of our look at Bitcoin and cryptocurrency from a legal perspective

As lawyers, we at Anglo Dutch Legal Translations like to keep abreast of developments that affect all of us, both Globally however also locally, this is mainly from a legal perspective, There are many articles and assumptions surrounding cryptocurrencies, however we would like to look at this from a legal perspective, The benefits however, also what to look for in terms and conditions when making decisions around your involvement or lack of involvement in this exciting new World.

We intend to address the various elements of cryptocurrency, what it actually is, what the initial idea for its conception were, what you can do with it, how you can benefit from it and how to navigate safely around the World of Crypto.

In this initial article is an introduction that goes through and explains the most important aspects of cryptocurrency. After reading it, you will understand more about this phenomenon than most others.

The following topics are discussed in this guideline:

The beginning: The-history of cryptocurrency
The parts: What does cryptocurrency consist of?
The design: How does cryptocurrency actually work?
Industry: How is cryptocurrency created?
Applications: What can you use cryptocurrency for?.
Criticism: The cryptocurrency’s-problems.
The future: Where is cryptocurrency going?

Cryptocurrencies have become a phenomenon. They began as a vaguely worded idea, largely limited to the cypherpunk and cryptography cultures of the 1990s. Today, cryptocurrency is a market giant that operates globally and is worth hundreds of billions of dollars.

Among those who have access to the internet, few have not heard of cryptocurrency. Bitcoin, Ethereum, ICOs, blockchain and a number of other concepts are mentioned daily in the media across the globe. And yet there are apparently a very limited number of people who have a thorough understanding of this revolution in decentralised economics.

In this guide, we try to give you an overview of what cryptocurrency is, from the beginning until today. We look at the technology behind decentralised money, so you can gain an understanding of why cryptocurrency has spread around the world like wildfire. You get an overview of how digital currency operates today. To conclude, we come up with our own thoughts on where this technology is headed.


Bitonic-buy-trade-bitcoinWe recommend Bitonic as a reliable and safe company with good terms and conditions for you to buy, sell and even trade bitcoin.

Click on the logo or go here ⇒ to explore what Bitonic can offer you in their safe and secure environment..

Is this the first time you are buying Bitcoin? Bitonic have all the information you need for both buying, storing and trading Bitcoin if you choose to do so.



The beginning: The history of cryptocurrency

Cryptography is defined as the science of principles and techniques for concealing information. This science is there for about secure communication between two parties keeping third parties from accessing that communication, peer to peer communication as its called. A third party could be the general public, or a more specific entity such as a bank, government, or other person. These are referred to as opponents, and with good cryptography you should be able to conceal relevant information from them. Electronic currency can be said to be the digital version of paper money. These should ideally have the same functionality as paper money, but in addition ensure that users remain anonymous and that the money can not be traced. These are two of the foundations of cryptocurrency, which we immediately conclude.In digital payments and electronic currency, cryptography is used to secure transactions. This is mainly done by means of signature generation for each individual user, based on cryptographic principles. The cryptography is written into an algorithm, which is then executed and ensures that the transaction information remains anonymous and secure, both for sender and receiver, Thus a peer to peer transaction with no third party involvement needed to facilitate that transaction, i.e. a bank charging fees.



When the definition of cryptography is about concealing information, it should also come as no surprise that the creators of the first cryptocurrency were supporters of anonymity.
The very first attempt at a digital payment system based on cryptography and anonymity was David Chaum’s DigiCash. Chaum wrote about what he called Blind Signature Technology as early as 1982, which was based on signature generation and total anonymity for users of online transactions.
The technology was implemented in DigiCash in 1990, but did not survive. David Chaum himself has said that his company was probably out too early – some years before digital commerce and the internet became a matter of course in society. Nevertheless, DigiCash became an important attempt for the early history of cryptocurrency.

In 2002, the now world-famous cryptographer Nick Szabo published his article Shelling Out: The Origins of Money . Here he discusses the origins of money, and how direct trade in limited, or scarce, resources, such as chains made of seashells, is the root of man’s ability to cooperate. That Szabo was particularly interested in shell chains is extra interesting.

3 years later, in 2005, came the publication Bit Gold , which basically outlined the basis for cryptocurrency as we know it today:

«Precious metals and collectibles have a scarcity that can not be counterfeited, simply because it is expensive to produce them. This once ensured that the value of money was largely independent of trust in a third party. (…)

(But because you can not pay with metal online) it would have been preferable that there was a protocol where expensive pieces (whose value could not be forged) could be created digitally, with minimal dependence on third parties, and then stored securely, transferred and quality assured with a similar minimal need for trust. Bit gold. »
Szabo further described that he envisioned a chain of such bits (read: blockchains today), which could be confirmed by ‘challenge bits’, or what we today know as the Proof-of-Work function. Four years later, Szabo’s vision was brought to life by none other than Satoshi Nakamoto.


That Bitcoin is so similar to the Szabo sketch from 2005 is part of the reason why many people wonder if it is Nick Szabo who is indeed Satoshi Nakamoto himself. The former, however, has denied this several times, and the godfather of cryptocurrency remains anonymous to this day. Launched in 2009, Bitcoin was the world’s first successful attempt at a decentralised cryptocurrency.Just as the seashell chains Szabo had written about in 2002 as the origin of money, Bitcoin was designed as a chain of blocks. Each block consisted of information about the relevant money transfer – ie the transaction. And each block could only be verified and added to the chain using the decentralised network.
New blocks were extracted using the Proof-of-Work algorithm – solving cryptographic problems, which ensured that the value of each new device could not be falsified. Satoshi Nakamoto succeeded in creating a truly decentralised currency, which is still the largest on the market today.


The components: What does cryptocurrency consist of?
But what does cryptocurrency really consist of? How are these digital money systems structured? Let’s take a look at the four most important components of cryptocurrency and how they work.


Without the blockchain, we would not have had cryptocurrency. It’s that simple. It is this digital chain of blocks – think of them as building blocks with content – that makes it possible to create, extract and use decentralised money in practice. And a blockchain is exactly what it sounds like: a long line of electronic pieces of information stuck together.
A block consists of many different things. And it can also consist of a lot of weird stuff. There does not necessarily have to be transaction information inside a block. But the common denominator for all cryptocurrency blocks is that they contain information that says something about who sent, who received, and how much was sent.
In addition to the actual transaction information, however, there are two other things in the block; the two things that make cryptocurrency based on blockchain so revolutionary. The block contains two keys, or two hashes , which act as signatures. One hash belongs to the previous block; the other belongs to the new block. And the only way to add the block to the chain is if it is confirmed by the nodes on the network.


A blockchain depends on a network to function. The network ensures security and stability – and is decentralised, which is one of the basic ideas of cryptocurrency.  A node is a user on the blockchain network. This is a person, behind a computer, who helps to confirm new blocks into the block chain.

The more nodes that are active on a cryptocurrency network, the more decentralised the blockchain will be. Therefore, it can also be said that with more nodes, a safer and stronger network is ensured; then there are several computers that need to be cracked in order to successfully attack the chain.
The nodes are responsible for adding new blocks to the chain. The active users compete to win, or win, a new block – that is, a new unit on the chain – in order to confirm the transactions it contains. The information is then distributed to all other nodes in the network, which then update their documentation about the blockchain.
For this to work, the nodes are dependent on confirming the transactions in new blocks based on a common reference. They do this using the transaction ledger of the relevant cryptocurrency.


What makes cryptocurrencies so special is that their transaction ledgers are public and distributed. In a traditional payment system, there is a centralised third party who sits on the transaction information; your bank, PayPal, government agencies and so on. One of the weaknesses of centralised transaction ledgers is that they are easily hacked – and tampered with.
Cryptocurrencies, on the other hand, have public transaction ledgers, which means that all nodes on the network have access to the information in them. This also makes it easy for the nodes to confirm or reject new transactions. By having a distributed ledger, a consensus among the nodes is achieved relatively quickly.
Here we return to the signatures, or hashes , of the individual blocks. Remember that all nodes that are to confirm the transactions have access to all previous transactions and blocks. And all new blocks contain a fingerprint, a signature, from the block that came before them.
If someone then tries to falsify a transaction, it will be easy to filter it out with the help of the public transaction ledger. In this way, cryptocurrency provides decentralised security in a very efficient way.


The last component of a cryptocurrency is probably the currency itself, or the entities that the protocol consists of. Part of the background to Bitcoin and the origins of cryptocurrencies is the financial crisis in 2008. Things such as inflation, excessive risk-taking among financial institutions and unsustainable handling of national economies were motivating factors for a decentralised economy.
Therefore, cryptocurrency is programmed in such a way that it can not be ‘printed’ more than a predetermined number of currency units. For Bitcoin, the number is 21 million; for Litecoin it is 84 million. Although some cryptocurrencies do not have such a specific number, they still have functionality that ensures that the recovery of the currency takes time and corresponds to the value that is extracted.
The currency units of cryptocurrencies have different rules for their protocols, depending on the blockchain project behind them. There will be restrictions on how small decimals they can be broken down into, as well as how they are extracted. The unit value is governed by the market and demand.

Design: How does cryptocurrency actually work?

Now that you have familiarised yourself a little more with what components cryptocurrency consists of, you are probably wondering how these interact. Then we come to the design of the cryptocurrency, or the daily operation of decentralised currency.

Het blockchain-netwerk


As we have seen, absolutely everything that has to do with cryptocurrency takes place at the top of the blockchain network. It is basically this technology that makes it possible to run decentralised payment solutions. The network is constantly running because it is decentralised, which means that cryptocurrency has a round-the-clock operation.
When it comes to cryptocurrency, we can say that the transactions consist of information about the recipient, sender and the amount to be transferred. The transaction information is distributed to the node network, which together confirms the transaction using the public ledger. If everything is in order, the money will be transferred.
In addition to confirming transactions, the nodes help secure the network, by keeping up-to-date versions of the transaction ledger. They are also responsible for adding new blocks to the chain, and this process depends on each cryptocurrency’s algorithm.


If cryptocurrency is the decor and the blockchain is the building structure, the algorithm is the foundation of the house. This is the programming – the data code – that determines how a cryptocurrency should work on a daily basis. The algorithm is especially important with regard to how new blocks are extracted and added to the block chain.
To extract a new block of transactions, one of the nodes on the network must solve a cryptographic task; a mathematical problem. But which node can solve this problem? This is where the Proof-of-Work and Proof-of-Stake algorithms come into play.
The former is Bitcoin’s algorithm, and can easily be explained by the fact that the one with the most computing power (CPU) is the one who will have the greatest chance of ‘winning’ a new block. Think of it as a lottery; the more tickets you buy, the better chance you have of winning.
Proof-of-Stake is used by Ethereum, among others. Here, however, it is not computer power that determines your lottery chances, but how many currency units you have in your wallet. In other words: How much money are you willing to invest to help secure the network and approve transactions?
There are certain other algorithms, which are attempts to improve PoW and PoS, but these two are still the big ones in the cryptocurrency market.


If we now move back to the cryptocurrency, and how the transactions are actually carried out in practice, there is one last thing that is critical for the daily operation of the cryptocurrency. These are the public and private keys to the wallets that hold currency units.
Say you want to get a wallet for cryptocurrency. This is of course a digital wallet, which is linked to your user. Still, the contents of your wallet will be public, according to the distributed transaction ledger. However, to access the wallet, and send money back and forth in it, you need a private key. This is the only one you sit with.
It should also be said that the wallets of cryptocurrencies are anonymised: the public key is a combination of numbers and letters. You can think of this as an address on the internet, without any direct connection to you as a person. The only thing that appears in the transaction ledger is thus how much currency is on the associated public key.

Openbare en privésleutels

Industry: How is cryptocurrency created?

Now we have gone through how cryptocurrency operates in the form of transactions and algorithms on the blockchain network on a daily basis. However to understand more about the basis of the cryptocurrency market, it is appropriate to familiarise oneself with the underlying industry, namely the extraction of blocks and cryptocurrencies.


Let’s go back to Nick Szabo and his fascination with seashell jewelry. Szabo argued that the reason this type of currency is more favorable than today’s paper money is the effort required to produce it. It takes more time to extract shells from the sea and grind them than it takes to print a few thousand pieces of paper.
In Szabo’s proposed bit gold system, it was therefore important that the recovery of the value units should be difficult enough for the value to be maintained. On the blockchain, this is done by solving mathematical, or cryptographic, problems to extract a new block. It will therefore be challenging to gain access to more blocks, and more cryptocurrency.
Thus, no new block will be released until the mathematical problem is solved. The degree of difficulty increases in line with emissions, which counteracts inflation and ensures that it is not possible to ‘drain’ the pre-programmed fixed unit quantity too quickly.


As we just mentioned earlier, there are many nodes competing to solve the mathematical problems, and thus win each new block. Depending on the algorithm system used, it will be either data power or wallet size that determines the chance of accessing a new block.
In a Proof-of-Work system, it is the computing power that gives you the greatest chances of winning. This has led to the creation of so-called mining teams, where several nodes work together to extract new blocks. When Bitcoin was launched, a normal computer could dig for blocks; now there is talk of relatively large investments in computer equipment to have something to contend with increasingly difficult mathematical equations needed to be solved to mine coins..
Therefore, the nodes work together, and today there are huge mining teams with a correspondingly large computing power and capacity to extract blocks. This has received some criticism with regard to the decentralised network. When a mining team becomes large enough, it has a great influence over the blockchain, and access to a lot of cryptocurrency.
You get similar problems in a Proof-of-Stake system. There are no mining teams here, but it is still the largest wallet that has the greatest chance of winning. Recent blockchain projects, with their associated cryptocurrencies, seek to address both PoW and PoS issues.


Although blocks in the blockchain and cryptocurrency are closely linked, they are not one and the same thing. Cryptocurrency is the associated value unit of a blockchain. Ethereum, for example, is much more than just Ether. So what do the nodes have to gain from extracting new blocks?
Each blockchain has its own system for how the nodes, which secure the network, are to be rewarded. For some cryptocurrencies, it is in the form of transaction costs for all transactions in a new block. For others, there is a fixed amount of cryptocurrency per block.
Just as a shareholder receives a return on their investment, the nodes of a blockchain network will be rewarded according to the work they contribute. Look at the cryptocurrency as a form of pay for ’employees’ in the blockchain network.
How lucrative it is to extract cryptocurrency depends on several things. The competition is of course important; the greater the competition, the harder it will be to win a new block and the associated reward. But the design of the cryptocurrency is also important, and this depends on the creators of the blockchain project.

Applications: What can you use cryptocurrency for?
Now you should have a relatively good overview of how cryptocurrency, and the underlying blockchain technology, works. Cryptocurrency is today an industry worth hundreds of billions of dollars. So what is this digital money used for?


Bitcoin, the very first cryptocurrency, was solely a decentralised payment system. And when it comes to cryptocurrency, ie not blockchain technology, the main purpose is precisely anonymised and secure transactions. There are several advantages of cryptocurrencies that make them particularly favorable compared to traditional banking transactions.
They are irreversible
Because the blockchain is based on sequencing – that each new block is added to the existing chain – it is impossible to change a transaction once it has been completed. This means that cryptocurrency transactions cannot be tampered with. Once registered, the information is in a public transaction ledger to which the entire network has access.
They are fast and global
Have you ever transferred money internationally? The amount of intermediaries the funds have to go through before they reach the recipient leads to an extreme transaction inertia. Cryptocurrency transactions are run on the global, decentralised network, and are transmitted directly from sender to receiver. Where in the world these two people are is unimportant.
They are safe
Keep in mind that the transaction ledger is available for all nodes on a blockchain network that is the basis of a cryptocurrency. If someone tries to crack this network, a distributed ledger means that the attacker must crack every active node. This is in principle an impossibility, and no one has succeeded so far.

Gedecentraliseerde transacties


One of the other unique features of cryptocurrency transactions is that they are executed without any intermediaries. The way we run banking services today, we are dependent on a third party; a bank, a payment system or the like that we put our trust in with our money. When it comes to cryptocurrencies, you only need to rely on the network.
In the business world, therefore, cryptocurrency opens an ocean of opportunities. Imagine that a company in The Netherlands wants to do business with a company in Brazil. Today, all money transfers have to go through at least two banks – and probably take many days. With cryptocurrency, the transactions are almost immediate, and go directly from the Chinese company to the Brazilian one.
Furthermore, they have minimal transaction costs, which also makes them attractive to the business world. With an increasingly global world market, there is a great demand for simple and fast payment solutions, which can be used across continents. Cryptocurrency offers such a solution.


The dedicated cryptocurrency enthusiasts are confident that with cryptocurrency we have found the basis for the world economy of the future. That cryptocurrency is the natural next step for gold, paper money, and electronic money. The potential is definitely there.
With a decentralised and worldwide network, there are really no restrictions on cryptocurrency. As long as the blockchain is designed in such a way that it can be scaled according to increased demand, it can grow enormously.
Nor should we forget that billions of people today do not have access to ordinary banking services. However, there are very many fewer who do not have access to a mobile phone and internet – which are the only two things you need to use cryptocurrency.
As computer crime is becoming an increasing problem, it is also not difficult to envisage a world economy based on a decentralised and secure network. However, there are several major challenges with cryptocurrency with regard to both the international and national economy as they stand today.

Criticism: The problems with cryptocurrency


Our banking systems are in many ways based on regulation and organisation. When everything is centralised, it is also a lot easier for governments to retain order within monetary systems. Then all of the transactions go through a bank or similar institution that is obliged to report on a number of different things.
How does cryptocurrency fit into this structure? When funds can be moved around the world in minutes, directly from sender to receiver, national economies will quickly have a problem providing an overview of cash flow. Then things like taxation and income reporting become a huge challenge.
The beginning of this conflict has already been seen. Some countries have virtually banned cryptocurrency, others have imposed severe sanctions on trade, while others still struggle to keep up with the times. If cryptocurrency is to really become the basis for the economy of the future, these two systems must be consolidated in one way or another.


The main challenge in this regard is the basic principles on which cryptocurrency is built. For banks and other traditional financial institutions to function, they depend on transparency and transparency in the transactions they process.
It is not enough to just know that x amount of money was transferred from Person A to Person B. The bank must know who the persons are. They need to know where the money came from and where it went from there. Preferably, they should also know what the money was used for, so that they can report any breaches of financial legislation.
Cryptocurrency transactions are based on anonymity for users. It goes without saying that the two components of this paradox do not work together. There are very many aspects of the traditional financial system worldwide that stand in stark contrast to the basic ideas of cryptocurrency. Similarly, there are several things about cryptocurrency that simply do not work in today’s banking services.
That is why we are facing a major challenge. As more and more people start using cryptocurrencies, banks are rushing for solutions for reporting and systematisation. And somehow these two structures must find a way to coexist.


Silk Road was an illegal online marketplace that traded in drugs, weapons and child pornography to name a few of the illegal types of transactions. The payment method on this site was Bitcoin. Users remained anonymous and could buy whatever they wanted without the transaction being traced back to them.
While one can of course argue for the right to individual privacy, this is something quite different from an economy worth billions of dollars that is 100% based on anonymity. When transactions are allowed to be anonymous, illegal activity abounds. There were many who had not heard of Bitcoin before Silk Road came into the spotlight, and it took the cryptocurrency a long time to repair its reputation.
Anonymous transactions are one of the biggest challenges in the consolidation process between existing and new, decentralised financial systems. There must be some connection between the transactions and the people who deal with them. At the same time, the transaction ledger for cryptocurrency is public, which also creates problems with regard to data protection.



Few things have received as much focus and publicity as the value turbulence on the cryptocurrency exchange. Cryptocurrency is, as we have seen in this guide, a completely unregulated form of value unit. There is thus no central bank that ensures that the value remains stable. Here, it is the market forces that prevail, and they can sometimes be very aggressive.
This is also one of the reasons why cryptocurrency has received a lot of criticism. How can one trust a system that is not stabilised in any way? Where, in principle, one can lose all their money overnight, without financial security?
The value turbulence of cryptocurrency is another major challenge for the new digital money. If people are to digitise and decentralise their income, there must be some form of security; a stability you can trust. As the cryptocurrency market looks today, this security is non-existent.

The future: Where is cryptocurrency heading?
Whether you are an optimist or a pessimist, there is no doubt that cryptocurrency is here to stay. However, it is a challenge to state anything concrete about how far this market will move, and where it is headed.

THE NEED FOR GLOBAL PAYMENT SOLUTIONS. Wereldwijde betalingsoplossingen

One can still say with certainty that the need for global payment solutions is only growing bigger and bigger. As all the continents of the world will need to carry out financial transactions with each other, there will be no waiting time of several weeks and trust in several banking institutions.
PayPal and Western Union are among the fastest payment solutions available on the market today. And yet there is no doubt that both systems are a thing of the past. Transaction costs are significant, and you are still dependent on trusting a third party to complete your transactions.
We mentioned earlier the many people in the world who do not have access to a bank account. With the speed of digital development and innovation, traditional and existing economic systems are unable to keep up. Sooner or later, these people will need payment solutions that do not require a fixed income or bank account.
New cryptocurrencies are also constantly emerging, often trying to solve the problems of existing cryptocurrencies. But which currency and algorithm ends up at the top – which will be the preferred cryptocurrency or the preferred cryptocurrencies on the world market – only time will tell.


When it comes to value speculation for cryptocurrency, one can clearly distinguish between the optimists and the pessimists. The former are convinced that cryptocurrency, and the underlying blockchain technology, is the future. These people believe that we have only seen a fraction of the potential of cryptocurrency for the world economy.
Pessimists often compare cryptocurrencies to different bubbles from history; the 17th-century tulip mania, the dot-com bubble of the 90s, the housing bubble of the United States in 2006. These people are convinced that it is only a matter of time before the whole industry, and its underlying technology, completely collapses however do not take into consideration how un sustainable the current economic model is based on never ending growth in a resource finite World.
When it comes to cryptocurrency, it is important to find out what you believe in yourself. There is no doubt that a good number of people have made a fortune on price developments. At the same time, there are people whose personal finances are ruined by cryptocurrency investments. As a rule of thumb, you should definitely be prepared to lose all your investment when buying cryptocurrency.
It is also a good idea to always familiarise yourself with the underlying blockchain project that you in practice invest in when you buy cryptocurrency. Because it is by no means the case that money transactions are the only potential use for the blockchain.Waar-is-cryptocurrency-naartoe


Basically, the blockchain is about decentralisation. Initially, the technology has been used to decentralise currency. Still, there is nothing to prevent you from decentralising other things as well – everything that has a value can technically be digitised and secured on a blockchain.
Therefore, the possibilities of the blockchain, if one has faith in the technology behind it, are endless. Imagine political choices on the blockchain. Real estate on the blockchain. Legal services, Health documents and digital services on the blockchain. If something has a value, and this value can get a digital certificate that is valid worldwide, it can be decentralised.
Then the value is secured, all transactions associated with the value are public in the transaction ledger, and no one can tamper with it. Cryptocurrency was the beginning of the age of decentralisation, but all trends suggest that we still have a long way to go to the digital economy of the future.

How to Make A Mint: The Cryptography of Anonymous Electronic Cash, NSA. http://groups.csail.mit.edu/mac/classes/6.805/articles/money/nsamint/nsamint.htm#1
b-money, Wei Dai.
Shelling Out: The Origins of Money, Nick Szabo.
Bit Gold, Nick Szabo.
How Does the Blockchain Work? Michele D’Aliessi
What is Blockchain Technology? Blockgeeks
Blockchain: Massively Simplified, Richie Etwaru
Blockchain – Technical Details, Imperial College of London

Dutch Version here →

Pin It on Pinterest