Disclaimer: I’m an engineer, not a financial advisor or a trading expert, nor am I holding myself out to be. Thank you.
I am going to be bluntly honest here and say that this was not an easy topic to research and study. Maybe because it has been a while since I did some comprehensive reading on a topic I’m not familiar with (given this is my first article this year), or perhaps because it is indeed a bit of a complex topic.
Either way, I hope that in this article I would have managed to make it simpler and easier to understand for those who have absolutely no idea what a cryptocurrency is and how it works.
I am discussing the basics of digital currency and cryptocurrency and a detailed explanation of what Bitcoin and Pi Network are and how they work, plus some tips to help you decide whether or not this would be a good investment for you.
So, take a deep breath and let’s dive in!
The Simplest Guide To Cryptocurrency For Beginners (Plus All You Need To Know About Pi Network)
- What is digital currency?
- What is a blockchain?
- What is mining?
- What is Bitcoin?
- What is Pi Network?
What is digital currency?
Digital currency is defined as a balance that is stored in a distributed database on the internet. A distributed database means that it is stored across different physical locations.
So a digital currency is any currency that exits in an electronic form.
There are a few types of digital currency, those are some examples:
- CBDC (Central Bank Digital Currency)
- Virtual currency
This is fiat currency but in digital form, like the money in your credit card. This type of digital currency is regulated and centralized.
Meaning, it has a central authority, such as central banks and governments, that controls and issues it.
This currency is regulated and can be manipulated, which means that, for example, the central authority controlling this currency can decide to print more of it, when needed, and cause inflation of currency.
This causes a drop in the purchasing value of this currency, and also causes what seems to be a rise in prices.
Fun fact: 92% of all fiat currency is in digital form. The amount of physical money in the world doesn’t exceed 8% of the total global currency.
This is a type of digital currency that is created and controlled by a person or a private entity.
It can be in the form of tokens accepted among members of a certain virtual community, like in games, or in the form of unregulated coins such as cryptocurrencies.
A cryptocurrency is a type of virtual currency with a higher level of security. It is created using cryptographic algorithms.
A cryptographic algorithm is a set of complex mathematical instructions used to encrypt or decrypt data.
The encryption and decryption processes depend on a cryptographic key selected by the entities participating in the encryption and decryption process.
A cryptographic key is a string of characters used within a cryptographic algorithm for altering data so that it appears random.
This ensures that no unauthorized entity can read the transaction information of this currency and its traders/users.
This type of currency is unregulated, meaning that the value of a cryptocurrency stems mainly from its users.
The more the currency is traded/used by people, the higher its value becomes, and vice versa. Therefore, it can experience volatile price/value changes.
Some of the well-known cryptocurrencies are:
- Bitcoin (BTC)
- Ethereum (ETH)
- Litecoin (LTC)
- Ripple (XRP)
- Zcash (ZEC)
You can read a little bit about each individual currency in this article. (Continue reading for more on Bitcoin.)
Cryptocurrency transactions are processed through something called a blockchain technology; this is what ensures these transactions’ security and inability to be manipulated by any person or entity.
What is a blockchain?
The blockchain does the job of securing the transaction, which is the same role as your credit card issuer or the central bank in the case of digital fiat currency transactions.
Blockchain is defined as a type of distributed ledger technology (DLT) that is public and decentralized.
Let’s think of it this way, a blockchain is a chain of blocks.
The Blocks = digital information. The chain = database.
So a blockchain is digital information stored in a database.
This database is public, this means every user in the network has access to view it.
It is decentralized, means that no one person or entity has access to change or manipulate this information in any way.
These blocks of information are distributed among several computers; it is sent to every node in the network. Every user’s computer in the network is called a node.
So, every computer has a copy of all the blocks in the chain. This makes the blockchain hard to manipulate and the information hard to hack; because in order to hack it or manipulate it in any way, you would need to hack every single computer that has a copy of it; that can be hundreds of thousands, or even millions, of computers.
There are 3 types of digital information stored in a block:
Every transaction made on the network is recorded in a block. The information recorded include the time and amount of transaction and the ID/digital address of the person or entity to which this transaction is being sent.
Transaction initiator information
The block also contains information of the person who initiated this transaction. However, this information is encrypted, as mentioned earlier. Your information is added in the form of a digital signature, not your name or address or any other info that can personally identify you.
So, even though these blocks of information are public to all users, no one can actually identify you, the person who made the transaction, or the one who received the transaction.
Block identification code (Hash)
After every transaction’s information is stored in a block, the block is given a hash. The hash is a code that identifies this block and distinguishes it from other blocks in the chain.
After the block is created and the transaction is approved and completed, the new block is then added at the bottom of the chain.
Here’s an example of what a transaction record looks like to the users in the network:
Now we understand that the blocks added to the blockchain can only be viewed and cannot be edited or changed.
However, how are these blocks added?
If there is no entity or one person responsible or in control of this blockchain, how are these transactions validated and approved to create a new block in the chain?
Only someone with a cryptographic key can validate transactions and add a new block to the chain. And this process is called mining.
What is mining?
Mining or crypto-mining is the process of validating the transactions in the network and adding a new block to the blockchain.
Because the process of transferring cryptocurrency relies on users in the network to validate the transaction and confirm that it is not a fraudulent activity, for example, this requires users to dedicate their computers to do this.
In exchange for mining and validating these transactions, the user receives a reward that is a certain amount of coins.
However, the mining process is not a simple one. This process consist of solving heavy mathematical equations; it is more like a puzzle.
What the computer needs to do is to figure out the right cryptographic code that will create the right hash for the new block. Once it does, the transaction is validated and the new block is added to the chain.
Now that we have a general understanding of digital currency and cryptocurrency and the basics of how it all works, let’s get a little into Bitcoin and Bitcoin mining, since it is the most popular cryptocurrency, and also the most valuable, as of the writing of this article.
What is Bitcoin?
Bitcoin is a cryptocurrency that isn’t managed by any authority, and in which transactions are recorded in a blockchain that is public and contains records of every transaction that takes place.
It was created in January 2009 by an anonymous person/group under the pseudonym Satoshi Nakamoto, and it is considered to be the first alternative to fiat currency.
Bitcoin is also the first cryptocurrency that managed to use peer-to-peer transaction and eliminated the middleman, like the credit card company or the bank, where an authorization for the transaction needs to take place first.
Here is an example of how different an online transaction is like when made using digital fiat currency vs bitcoin (with blockchain technology):
Let’s say that X wants to send 100 pounds to Y (two different banks).
- X will request the transaction from their bank.
- The bank will send the request to a Central Bank.
- The Central Bank will authorize the transaction and send the money to Y’s bank.
Now let’s say X wants to send 100 Bitcoins to Y.
- X will access their account and directly send 100 Bitcoins to Y.
This transaction will be recorded in a public ledger (the blockchain) where all nodes in the network receive an encrypted copy of it, to ensure the security of the transaction instead of a central authority.
What does it mean to own Bitcoin?
Bitcoin is a completely digital currency, so there are no actual physical coins. Owning Bitcoin means that you own the right to access the ledger using a specific Bitcoin address and perform transactions from your address to other addresses in the network. Or use it to pay for services and products that accept Bitcoin payments.
The first Bitcoin transaction took place on 12 January 2009. However, at the time, Bitcoin had almost no value. The first real price for Bitcoin was in July 2010 when its value went from $0.0008 to $0.08 for a single coin.
Volatile price change
In January 2017, the price of one Bitcoin was $800. In December of the same year, Bitcoin reached its highest value to-date of $19,783 for a single coin.
Of course, those who bought Bitcoin in the previous years, or even at the beginning of that year, where its worth was 2-,3-digit figures for a coin, have made hundreds of thousands, if not millions, of dollars in profit.
But here is the thing though, this price of $19,783 only lasted 24 hours, the price then went down to $13,800, and then in about 16 days it went to be $6,200.
As of the writing of this article, a single Bitcoin’s price is $9,745.
The graph below shows how Bitcoin’s price has changed over the past 10 years, from July 2010 when 1 Bitcoin was worth $0.05, until June 2020 where 1 Bitcoin is worth $9.74K.
You can also see the dramatic change in price in some of the years, like the huge spike at the end of 2017 and then the huge drop in 2019.
So, while the profits of owning and trading cryptocurrencies, like Bitcoin, can be huge, there is no denying that there is also a considerable amount of risk one would be making when investing money into it.
It requires you to be attentive to market changes, so you can make a good judgment call. Much like investing in stocks, you also need to have some type of background and understand when to sell in order to make profit and avoid huge losses.
What is Bitcoin mining?
We already have an idea now of what it means to mine for currency, but let’s get into more detail with Bitcoin mining to understand this process better.
Mining Bitcoin means that you try to guess the right hash for a new transaction block in order to add it to the blockchain.
In the case of Bitcoin, there is one right code out of 13 trillion possibilities. And if you think this is difficult, here is more..
Not only do you need to guess the right code/hash, you need to be the first miner to do it in order to get the reward. So you are also competing with hundreds of thousands of miners around the world.
This requires a very high performing computer in order to be able to figure out the right code as fast as possible. (This process usually takes 10 minutes.)
Also, putting in mind that the more people join the network, the harder the codes get, requiring even more power and more device capacity and higher performance.
As Bitcoin kept evolving and more people were trading it, users started finding ways to be able to mine for longer and mine more to earn more. First they started using more than one computer to be able to earn more in less time.
But as more people joined, the mining difficulty increased and cracking the code became harder, and a normal computer’s CPU was no longer efficient enough, ASIC miners were created.
An ASIC miner is a device with a high processor power and capacity that is created only for mining Bitcoin. And there are new types that keep coming out every couple of years, with higher efficiencies and capacity to adapt to the increase in mining difficulty.
The current cost of an ASIC miner can range between $20 and $5000. The higher the price, the higher the capacity and, therefore, chances for this miner to guess the right code first to get the reward.
The mining process, especially for Bitcoin, takes up a huge amount of power. In 2019, it was reported that the the amount of electricity consumed by Bitcoin miners over the course of one year is more than that of the entire country of Switzerland.
The amount of electricity needed to mine one bitcoin is around 657.39 kWh, which is the equivalent of 59 days of electricity for an average British household. (I don’t even want to imagine what that electricity bill looks like..)
If you are interested in mining Bitcoin in 2020 though, you can opt for a little cheaper method which is participating in a mining pool.
There is also another option to obtain Bitcoin, of course, which is through direct purchase of the currency. Much like you would do with trading stocks, buy low and sell high. Or buy and hold (HODL).
Downsides to Bitcoin
Earning Bitcoin has become more complex and mining has become almost impossible for the general public, people with no special mining equipment and enough money to afford the huge consumption of electricity that the mining process consumes have no chance.
There are around four million computer rigs worldwide that are constantly mining for Bitcoin, yet 98% of them will never get the code first, and so will never verify the transactions, despite the huge electricity expense.
And even when they do manage to get it, the rewards are often incredibly low compared to cost. A recent case study showed that the mining setup and electricity costs mean that mining one Bitcoin at home in 2020 will also cost about one Bitcoin at current prices.
Another downside is that, while Bitcoin started out as a new means for a currency that is decentralized, accessible to all, and is controlled by all its users, as the network grew, this has somewhat changed.
Bitcoin has in a way become centralized, in that the majority of the currency is withheld by only a small number of people and so, in a way, they have an upper power of the currency. It is reported that 87% of all Bitcoins are owned by less than 1% of the network.
What is Pi Network?
Pi is a new cryptocurrency that was created by 3 Stanford PhDs and was launched on March 4th, 2019 (also known as Pi Day, as 3/14 is the first three digits of ?).
It is considered the first digital currency that can be used by everyday people. Meaning you don’t need special devices or extensive technical background to be able to mine and earn Pi coins, unlike Bitcoin for example.
It is also the first cryptocurrency that enables mining through your phone (both Android and iOS), without draining your battery or using up too much power.
Pi Network mainly relies on its contributors to strengthen its security circle right now. From March 2019 to March 2020 they managed to have 3.5 million miners in their network.
I was introduced to Pi Network by an ex-coworker and I was intrigued by the idea that it’s still in its beginning phases, and the fact I can mine with the click of a button on my phone, so I decided to learn and read more into it.
I have seen many people being skeptical about it, thinking that they’re making it “too easy” and it’s “too good to be true.”
Or that this is going to just crash and burn, like many other types of cryptocurrency that tried to be “the new Bitcoin” and failed.
However, I don’t see the harm in going for it still, since we’re not really risking anything by doing so. They’re not asking you to pay to earn those coins.
All they ask of their miners is that they use the app once every day, by just clicking an icon, and then the app will continue earning Pi for them for another 24 hours.
They also encourage miners to contribute to strengthening the network by adding 3-5 people to their security circle. And when they open the app everyday, they start earning by confirming that those 3-5 people are trustworthy people.
While cryptocurrencies like Bitcoin secure their ledgers by forcing miners to burn energy (proof of work), Pi secures its ledger when its members vouch for each other as trustworthy.
Pi’s Contributors vouch for each other by building security circles comprised of 3-5 members they deem as trustworthy.
Security circles should be comprised of people you trust not to execute fraudulent transactions. The network’s security circles form a global trust graph that determines who can be trusted to execute transactions on Pi’s ledger.Pi Core Team
Apart from your security circle that is consisted of 5 people, you can add more to the network to be a part of your “earning team.”
When you add more people to your earning team, your Pi earning rate per hour increases, and you also help grow the Pi network.
Is it worth it to join Pi Network?
Well, I remember, as some of you might too, when Bitcoin first came out in 2009/2010, how everyone was skeptical, most people thought it was a scam.
Only few people believed that it could actually amount to something and decided to take the leap and go for it.
Let’s say, someone in 2010 took a chance on Bitcoin and decided to buy it when a single coin was for around $0.06.
If this person bought 100 Bitcoins for only $6 thinking, “it’s just $6, no big deal.”
Fast-forward to 2018, a single Bitcoin reached $19,783.
This person who decided to buy 10 Bitcoins for $6 in 2010, in 2018 had 10 Bitcoins for $197,830.
See where I’m going with this?
Though there is absolutely no guarantee that Pi will go as high as Bitcoin, or even go anywhere at all, since this is all still a beta version of the real thing. However, there is also a great chance that it might go somewhere.
If you look at how quickly their platform is growing, how in only 12 months from launch date they managed to gain over 3.5 million users in 180 countries and are still growing every day, this is a really good indicator that it might get somewhere.
Also, the fact they are filling a hole in this industry, providing a simple way for the everyday person to acquire cryptocurrency; adding to that the fact it is an eco-friendly system that still isn’t compromising security; these are some promising factors as well.
How can you start earning Pi coins?
You can’t just download the app and join the Pi Network on your own; in order to join the network, you need to have an invitation code from someone in the network.
So, if you feel like you want to give this a try, you can click here and when asked for a code, you can use my invitation code RanaRay.
When you join, you will create your own code that you can then share to invite others to join too, if you wish to increase your hourly earning rates.
At the moment, the earning rate for a new user is 0.25 pi/hour. This rate used to be much higher when the network had fewer users.
The more people join the network, the lower the rates become. The base rate of mining halves every time the number of active users increases by a factor of 10
So it went from 1 pi/hour at 1000 users to 0.50 at 10,000, and to 0.25 at 1,000,000. The next milestone, at 10,000,000 users, the rates will either be halved again or fall to zero.
When the rate eventually falls to zero, the users will then be rewarded through transaction fees not minting new currency.
So, the sooner you join the network, the better!
If you want to learn more or have any questions about how Pi Network works, feel free to send them my way.
When will Pi coins be worth money?
On their website, Pi Network team has explained what their plan is and the steps and phases they are going to take until this currency takes off and can be traded for money.
There are 3 different phases for the launch of the currency. I’m not going to get too technical, you can read everything in detail here.
However, to put it simply, they are done with Phase 1 and Phase 2 started in March 2020, which consists of testing the process on a testnet mimicking the real system before going live.
In Phase 2, users are encouraged to set up their computers to act as Nodes in the network and to participate in the current testing process. This is not a requirement though, and there are no announced benefits to the users doing it so far. For now, it is just a way for contributors to help the Pi network grow.
When these tests are finished, they will move to Phase 3 where the official launch of the currency will take place, and that’s when Pi will be listed in currency exchange lists and have a price, and that’s when your coins can be traded for other currencies.
During Phase 3, all users with verified accounts on the current beta version will be migrated to the live, official version with the balance of Pi coins they have earned during this period.
(You are asked to verify your identity by verifying your phone number, so don’t forget to do that when you join.)
There is no official date set for the start of Phase 3 yet; however, it is speculated that it would be sometime late 2020 or early 2021.
Pros of Pi Network
- Simple. You can easily mine and earn coins with the click of a button. No need for technical background.
- Fair. Coin distribution doesn’t depend on the capacity or the performance of your device. Rates for all users start the same, and only increases as each individual contributes to the network.
- Affordable. You don’t need to buy special mining devices or pay too much on electricity. And it doesn’t drain your phone battery.
- Eco-friendly. Mining for Pi doesn’t consume too much power, unlike mining for other cryptocurrencies.
- A digital currency is any currency that exits in an electronic form.
- Virtual currency is an unregulated type of digital currency.
- A cryptocurrency is a sub-type of digital, virtual currency.
- All cryptocurrency is digital, but not all digital currency is crypto.
- Cryptocurrency uses blockchain technology which ensures the user’s and transaction’s information security.
- A blockchain is blocks of digital information stored in a distributed, public database.
- 1 Bitcoin is worth 9,745 USD as of the writing of this article.
- Pi is a new digital currency created in 2019 and the creators are offering FREE coins (no payments required) until they reach Phase 3 of their launch.
- The price/value of 1 Pi is not yet identified, and will not be until they reach Phase 3.
- You can only join the Pi Network through a referrer. So if you are interested in joining and earning those free coins, you can click here to join, then use RanaRay as your invitation code.
A comparison between fiat digital currency and cryptocurrency:
|Digital fiat currency||Cryptocurrency|
|Centralized (has central authority)||Decentralized|
|Regulated (can be manipulated)||Unregulated|
|Transactions require middleman|
|Transactions are peer-to-peer|
|Ledger/records are classified||Ledger is public (transparent)|
|Bank has control over your funds||Only you control your funds|
|Change in value is usually gradual||Change in value is volatile & unpredicted|
A comparison between Bitcoin and Pi Network mining and technology:
|Requires high technical skills||No technical skills needed|
|Requires a high performing computer and special mining equipment||No special equipment needed and you can mine on your phone|
|Takes a huge amount of electricity||Doesn’t use up electricity|
|Coin distribution/rewards vary based on the device capacity used for mining||Coin distribution is equal for all users|
Do you own any cryptocurrency or have you ever tried cryptocurrency trading? Do you have tips to share with those who never have before? Let me know in the comments below!
Till next time, happy days!
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