Cryptocurrency operates through a decentralized network of computers that uses blockchain technology to record transactions securely and transparently. Transactions are grouped into blocks, which are verified by the network using consensus mechanisms such as proof-of-work or proof-of-stake. Once a block is verified, it is added to the blockchain, creating a permanent and unchangeable record of ownership and transfers. To navigate the cryptocurrency space safely and effectively, new users must grasp these fundamental ideas.
Wallets
A cryptocurrency wallet is a tool that allows a new crypto user to access, store, and manage digital assets. Wallets do not hold actual cryptocurrencies, instead, they store cryptographic keys that interact with the blockchain to view balances and authorize transactions. Wallets come in several types:
- Hot wallets are connected to the internet, such as mobile apps or browser extensions like MetaMask. They are convenient for frequent transactions but are more susceptible to hacks.
- Cold wallets are offline devices, such as Ledger or Trezor hardware wallets. They offer enhanced security, making them ideal for long-term storage.
- Custodial wallets are managed by third parties, often exchanges, which hold your private keys on your behalf.
- Non-custodial wallets give users full control of their keys, reinforcing the principle of personal responsibility in crypto management.
To use a wallet, a user generates an address (a string of characters) for receiving funds. Backing up seed phrases (12–24 words) is essential, as they restore access if the wallet is lost. A new crypto user should always ensure these backups are secure and private.
Private and Public Keys
Public and private keys are the core of cryptocurrency security, enabling secure ownership and transactions through asymmetric cryptography.
- Public keys act as addresses for receiving funds and verifying transactions. They are derived from private keys and can be shared openly, often hashed into wallet addresses (e.g., Bitcoin addresses starting with ‘1’ or ‘bc1’).
- Private keys are large, randomly generated numbers (typically 256 bits) that must remain secret. They are used to sign transactions and authorize spending. If compromised, all associated funds can be stolen.
For example, elliptic curve cryptography, used in Bitcoin and Ethereum, generates public keys from private keys through one-way mathematical functions, making it computationally infeasible to reverse-engineer the private key. Wallets manage keys automatically, but a new crypto user must understand their importance, adhering to the principle of “not your keys, not your crypto.”
Exchanges: Buying, Selling, and Trading
Cryptocurrency exchanges facilitate the buying, selling, and trading of digital assets. There are two main types:
- Centralized exchanges (CEXs), such as Binance and Coinbase, act as intermediaries. They hold user funds in custodial wallets, provide fiat on-ramps (e.g., USD to BTC), and offer tools like order books for spot and derivative trading. CEXs require KYC (Know Your Customer) verification and charge fees based on maker/taker models. While convenient, they are vulnerable to hacks, such as the 2014 Mt. Gox incident.
- Decentralized exchanges (DEXs), like Uniswap, operate without intermediaries using smart contracts for peer-to-peer trading via automated market makers (AMMs). Users retain control of their keys but face higher slippage risks and more complex transactions.
A new crypto user should always verify exchange security, enable two-factor authentication, and consider moving funds to a personal wallet after trading.
Coins vs. Tokens
Coins are native to their blockchains and function as the primary unit for transactions and network security. For example:
- Bitcoin (BTC) is the native coin of the Bitcoin blockchain, used for peer-to-peer payments.
- Ether (ETH) powers the Ethereum blockchain, paying for gas fees and smart contract execution.
Tokens, on the other hand, are built on existing blockchains and represent assets, utilities, or governance rights. Examples include:
- USDT (Tether), a stablecoin token pegged to the US dollar.
- UNI (Uniswap), a governance token that allows holders to vote on protocol changes.
Coins are created via mining or staking, while tokens are minted using smart contracts. The distinction affects interoperability, as coins are blockchain-specific, whereas tokens can move across blockchains via bridges.
Transaction Fees
Transaction fees, also known as gas fees, compensate validators or miners for processing and including transactions in blocks. These fees prevent spam and incentivize network maintenance. Fee amounts depend on network congestion, transaction complexity, and priority.
- On Bitcoin, fees are measured in satoshis per byte, based on transaction size.
- On Ethereum, gas fees include a base fee (burned) plus a tip (paid to validators). Fees are paid in the native coin (e.g., ETH for Ethereum).
High demand periods can spike fees, for instance, Ethereum fees exceeded $50 during the 2021 bull run. Layer-2 solutions like Polygon offer cheaper alternatives. A new crypto user should monitor current fees via blockchain explorers like Etherscan to avoid overpaying.
Jefferson Wachira is a writer at Africa Digest News, specializing in banking and finance trends, and their impact on African economies.