1. What is Cryptocurrency?
1.1 Definition of Cryptocurrency
Cryptocurrency is a digital currency based on blockchain technology (a decentralized distributed ledger technology). Unlike traditional currencies (like RMB or USD), cryptocurrency is not issued by central banks or governments but is generated by computer programs and secured by complex mathematical algorithms.
You can think of cryptocurrency as 'digital gold'—it cannot be arbitrarily issued by any institution and can also be used for transactions like cash. The first cryptocurrency was Bitcoin, proposed in 2009 by an anonymous person (or group) known as Satoshi Nakamoto.
Characteristics of Cryptocurrency:
Decentralization: Not controlled by banks or governments; transactions are maintained by a global network of computers.
Anonymity: Transaction records are publicly transparent, but the identity of traders is usually not directly exposed.
Immutability: Once a transaction is recorded, it cannot be changed or revoked.
Global circulation (Borderless): Can transfer freely around the world without being restricted by national borders.
For example:
Imagine you are traveling overseas and need to send money to your family. If you transfer through a bank, it may take several days and incur high fees. However, if you use cryptocurrency like bitcoin, you can directly send it through your phone, and it will arrive within minutes with very low fees.
1.2 Traditional Currency vs Cryptocurrency
To better understand cryptocurrency, we can compare it with traditional currency:
Traditional currency is like a shopping card issued by banks or governments. When you use it, the issuing institution knows your spending history and can restrict or invalidate your card.
Cryptocurrency is like a shopping card that no one can control; anyone around the world can trade freely without going through a bank.
1.3 The Origin of Cryptocurrency: The Birth of Bitcoin
The concept of cryptocurrency was first initiated by Bitcoin.
In 2008, against the backdrop of the global financial crisis, a person (or group) using the pseudonym 'Satoshi Nakamoto' published a paper: (Bitcoin: A Peer-to-Peer Electronic Cash System).
This paper proposed a brand-new electronic payment method that does not rely on banks but ensures transaction security through blockchain technology.
The key innovation of Bitcoin:
Blockchain: A decentralized database that records all bitcoin transactions, accessible to anyone.
Mining: Obtaining bitcoins by solving mathematical problems with computers while maintaining network security.
Fixed total supply: The total amount of bitcoin is set at 21 million coins to prevent inflation.
Real Case: The First Transaction of Bitcoin
In May 2010, programmer Laszlo Hanyecz used 10,000 bitcoins to buy two pizzas. This was the first recorded case of bitcoin being used for a real transaction. If he had kept those 10,000 bitcoins until now, their value would be close to $1 billion.
This case illustrates bitcoin's initial low value and the subsequent astonishing price increase. It has gradually evolved from an experimental digital currency to 'digital gold', accepted by global investors, businesses, and even some countries.
2. Blockchain: The Core Technology of Cryptocurrency
2.1 Basic Principles of Blockchain
Blockchain is a decentralized distributed ledger used to securely and transparently record transactions. You can think of it as a public digital ledger where all transaction information is recorded in blocks and linked in chronological order to form a chain.
How blockchain works:
After a transaction occurs, transaction information is packaged into a block.
This block must be verified by miners (individuals or organizations using computers to perform mathematical calculations).
Verified blocks are added to the existing blockchain, forming new transaction records.
This process is irreversible; once data is recorded, it cannot be modified or deleted.
2.2 The Decentralized Characteristics of Blockchain
Transactions in traditional banking systems require verification through banks, while blockchain adopts a decentralized mechanism.
Centralized systems: All transactions are controlled by a single center (such as a bank).
Decentralized systems: Transactions are maintained by multiple global computer nodes, without a single controller.
For example:
In the banking system, your deposit information is stored in the bank's database, and the bank can modify or even freeze your account.
On the blockchain, all transaction information is stored on millions of computers worldwide; even if one node fails, the system can still operate normally.
2.3 Differences between Public Chains, Private Chains, and Consortium Chains
Based on usage scenarios, blockchains can be divided into three main types:
Public Blockchain: Anyone can participate, such as Bitcoin and Ethereum.
Private Blockchain: Restricted to specific organizations or individuals, such as a bank's internal blockchain system.
Consortium Blockchain: Maintained by multiple organizations, such as interbank settlement systems.
Each blockchain has different application scenarios. For example, Bitcoin belongs to a public chain, completely open, while interbank transactions may use consortium chains to ensure data privacy and efficiency.
3. Acquisition and Configuration Strategies for Cryptocurrency
3.1 Acquiring Cryptocurrency
(Centralized Exchanges vs Decentralized Exchanges)
The simplest way to acquire cryptocurrency is to buy it through an exchange.
Centralized Exchange (CEX)
Centralized exchanges are platforms operated by companies, similar to traditional stock markets. For example:
Binance
Coinbase
OKX
These exchanges are like 'banks of cryptocurrency'; you need to register an account, perform identity verification (KYC, Know Your Customer), and then you can purchase cryptocurrencies with fiat money (like USD or RMB).
Advantages:
User-friendly trading experience, suitable for beginners
Provide more trading tools, such as contract trading and leveraged trading.
Funds stored in exchanges for easy management
Disadvantages:
Needs to rely on exchanges, with risks of being hacked.
Decentralized Exchange (DEX)
Decentralized exchanges do not require centralized institutions for management but instead automatically match trades based on blockchain smart contracts. For example:
Uniswap (based on Ethereum)
PancakeSwap (based on Binance Smart Chain)
Advantages:
No identity verification required; anyone can trade.
Funds always remain in your wallet, making it safer.
No exchange restrictions, complete freedom.
Disadvantages:
Transactions require payment of blockchain fees (Gas Fee).
Transaction prices may be subject to slippage, with rapid price changes.
3.2 Cryptocurrency Configuration Strategies (representing personal views, not investment advice)
Here are three different cryptocurrency allocation strategies, combining risk preferences, return targets, and capital scales to develop specific allocation plans with detailed analysis:
High-risk aggressive strategy.
Core Thought: Pursue excess returns at the expense of security for high-volatility assets.
Specific Ratios:
Bitcoin (BTC) + Ethereum (ETH): 10%
Mainstream coins (uni, link, bnb, sol, xrp): 10%
Altcoins (such as ondo, gala, ygg, pendle, arb, ssv, fet, render, ar, ray, jto, tia, inj, ordi, ach, cfx, op, velodrome, aave, 1inch, snx, stx, auction, lpt, bigtime, ape, ens, sui, etc.): 50%
MEME coins (such as doge, shib, pepe, floki, etc.): 25%
Stablecoins (USDT/USDC): 5% (emergency replenishment)
Strategic Logic:
Focus on altcoins and MEME coins, leveraging their high volatility for potential short-term doubling returns.
Hold 20% of mainstream coins to hedge against extreme market risks.
5% stablecoins for bottom-fishing or responding to sudden crashes.
Pros and Cons:
High potential returns; selecting explosive projects may yield 5-10 times returns.
Altcoins/MEME coins have zero-risk potential.
Suitable Audience: Young investors, high-risk tolerators, trading players familiar with market hotspots.
Notes: Avoid putting all funds into a single cryptocurrency, prioritize selecting altcoins within the top 150 by market capitalization, and stay away from illiquid tokens.
Moderate to high-risk balanced strategy.
Core Thought: Balance returns and risks, considering the stability of mainstream coins and the growth potential of altcoins.
Specific Ratios:
Bitcoin (BTC) + Ethereum (ETH): 20%
Mainstream coins (uni, link, bnb, sol, xrp): 20%
Altcoins (Layer 1 public chains + AI track): 40%
MEME coins: 15%
Stablecoins: 5%
Strategic Logic:
40% allocation to altcoins with fundamental support (such as public chains, AI, leading projects in the Depin track)
Increase the proportion of mainstream coins to 40% to ensure basic returns.
Pros and Cons:
Balanced offense and defense; mainstream coins provide downside protection while altcoins capture industry rotation opportunities.
Altcoins and MEME coins may still experience significant drawdowns.
Suitable Audience: Investors with some experience who can tolerate moderate volatility.
Moderate to low-risk conservative strategy.
Core Thought: Using mainstream coins as ballast, selecting undervalued altcoins to avoid high-volatility assets.
Specific Ratios:
Bitcoin (BTC) + Ethereum (ETH): 40%
Mainstream coins (uni, link, bnb, sol, xrp): 30%
Altcoins (mature projects in the top 50 by market capitalization): 25%
Stablecoins: 5%
Pros and Cons:
Drawdowns are controllable, suitable for large capital inflows and outflows.
Ceiling on returns lowered, long-term holding required for compound interest.
Universal Supplementary Principles
Position management: Regardless of capital scale, the initial position should not exceed 50%, and remaining funds should be bought in batches at lower prices.
4. Cryptocurrency Wallets and Security
4.1 What is a Cryptocurrency Wallet? (Hot Wallet vs Cold Wallet)
A cryptocurrency wallet is a tool for storing, receiving, and sending cryptocurrencies. Simply put, it is like your 'digital wallet', but unlike a cash wallet, it actually stores your private keys rather than the cryptocurrency itself.
Cryptocurrency wallets are mainly divided into two categories:
Hot Wallet: A wallet connected to the Internet, convenient but relatively low in security.
Cold Wallet: An offline storage wallet, more secure but inconvenient to use.
Advantages and Disadvantages of Hot Wallets
Advantages:
Easy to use, suitable for daily transactions.
Accessible anytime, anywhere.
Disadvantages:
Connected to the Internet, susceptible to hacker attacks.
Advantages and Disadvantages of Cold Wallets
Advantages:
Due to offline storage, it is not easily attacked by hackers.
Suitable for long-term secure storage.
Disadvantages:
Requires additional equipment, such as a hardware wallet.
Withdrawals and transactions are not as convenient as hot wallets
Can be likened to:
Hot wallets = electronic payment accounts (like Alipay, WeChat Pay), readily available but easily stolen.
Cold wallets = safes for storing valuable assets, not easily stolen but inconvenient to access.
4.2 Common Types of Wallets (MetaMask, Ledger, Trust Wallet, etc.)
There are many types of cryptocurrency wallets; here are some common types:
Software Wallet (Hot Wallet)
MetaMask:
Applicable to Ethereum and other EVM-compatible blockchains.
Browser plugin + mobile application
Trust Wallet:
Supports multiple blockchains.
Suitable for novice users.
Hardware Wallet (Cold Wallet)
Ledger:
Physical device, needs to be connected to a computer or phone.
High security, suitable for long-term storage.
Trezor:
Another well-known hardware wallet
Supports multiple cryptocurrencies
4.3 How to Safely Store Cryptocurrency?
To ensure the security of your cryptocurrency, the following measures should be taken:
Use cold wallets to store long-term assets:
For example, store most assets in hardware wallets like Ledger.
Properly store private keys and mnemonic phrases:
Mnemonic phrase (Seed Phrase): A set of 12-24 words generated when creating a wallet, used to recover the wallet.
Never store mnemonic phrases online; write them down and keep them in a secure place.
Avoid phishing websites and scams:
Any website claiming 'free cryptocurrency giveaways' is usually a scam.
Do not click on unknown links in emails or social media.
Use two-factor authentication (2FA):
Bind to Google Authenticator to enhance security.
Regularly update wallet software:
To prevent the latest security vulnerabilities.
5. Investment and Risks of Cryptocurrency
5.1 Spot Trading vs Contract Trading
Investment methods in the cryptocurrency market are mainly divided into spot trading and contract trading.
Spot trading: Refers to directly purchasing cryptocurrency and holding it in a wallet or exchange account. For example, if you buy one bitcoin (BTC) for $10,000, you are the actual holder of that bitcoin and can sell or transfer it at any time.
Contract trading: A type of derivative trading (referring to trading contracts based on the price of an asset rather than directly purchasing the asset). Contract trading allows investors to use leverage to amplify profits or losses. For example, if you open a BTC long position (bullish) with 10x leverage using $1,000, it's equivalent to investing $10,000, but if the price drops by 10%, your funds might be liquidated (i.e., a total loss).
5.2 Price Volatility and Market Risks
The cryptocurrency market is extremely volatile (referring to sharp price fluctuations within a short time), which means investors may face enormous profits or losses.
Reasons for volatility: market news, policy changes, large holder sell-offs (whales crashing the market), changes in market sentiment, etc.
Classic case: In May 2021, Tesla CEO Elon Musk announced that Tesla would no longer accept BTC as a payment method, causing the price of bitcoin to drop more than 30% within a few days.
How to deal with volatility?
Reasonable allocation of funds.
Avoid high leverage operations to reduce the risk of liquidation.
Investing in cryptocurrency is like riding a roller coaster, with prices fluctuating wildly. Beginners who are not prepared may be thrown off.
5.3 Scams and Schemes: Common Tactics and Preventive Measures
The cryptocurrency industry is rife with scams and schemes, and beginners need to be particularly vigilant.
Common scams:
Ponzi Scheme: Uses money from new investors to pay old investors, attracting more people to invest, ultimately collapsing. For example, the PlusToken scam in 2019 defrauded over $3 billion.
Phishing website: A fake wallet or exchange that tricks users into entering their private keys or mnemonic phrases (the 12-24 words used to recover the wallet), thereby stealing funds.
Fake Airdrop: Requires users to deposit a certain amount of coins, promising larger returns in the future, but ultimately disappears.
Preventive Measures:
Do not trust high-return promises.
Carefully verify the URLs of exchanges or wallets to avoid accessing phishing sites.
Never disclose your private keys or mnemonic phrases.
5.4 The Impact of Regulatory Policies on Cryptocurrency
Different countries have different regulatory policies on cryptocurrencies (laws and regulations set by the government), which directly affect market development.
Countries with open policies (like the U.S., Canada, and some European countries): Allow exchanges to operate legally but must comply with anti-money laundering (AML) and user identity verification (KYC) regulations.
Strictly regulated countries (like China): Prohibit cryptocurrency exchange operations, but individuals can still hold cryptocurrencies.
Impact of policy changes:
In September 2021, China announced a complete ban on cryptocurrency trading, leading to a sharp drop in BTC that day.
In 2023, the U.S. Securities and Exchange Commission (SEC) filed lawsuits against several exchanges, causing market panic.
6. Future Development Trends of Cryptocurrency
6.1 Layer 2 Solutions: How to Reduce Transaction Costs
Transactions of cryptocurrencies on the blockchain usually involve higher gas fees (transaction fees), especially on the Ethereum network, where transaction fees can reach several dozen dollars during busy times. To address this issue, Layer 2 solutions have emerged.
What is Layer 2?
Layer 2 is an extension technology built on top of the main blockchain, primarily aimed at increasing transaction speed and reducing costs.
Common Layer 2 Solutions:
Rollups: A technique that bundles multiple transactions into a batch for recording on the main chain, reducing on-chain data volume. For example, Optimistic Rollups and ZK-Rollups.
State Channels: Like 'group purchases' in Alipay, users can trade offline and only record it on the blockchain at the end.
Sidechains: Independent blockchains that connect to the main chain for transaction processing, such as Polygon (MATIC).
Layer 2 is like a 'fast lane' beside the highway, reducing congestion and making transactions faster and cheaper.
6.2 Competition between Central Bank Digital Currency (CBDC) and Cryptocurrency
CBDC (Central Bank Digital Currency) is the digital currency developed by various governments, which differs from cryptocurrencies in that it is government-controlled and not decentralized.
Impact of CBDC
May make it easier for governments to regulate the digital economy, but may also sacrifice user privacy.
May reduce the intermediary role of traditional banks and accelerate cross-border payments.
CBDC is like the 'official Alipay' launched by the government, while bitcoin is like 'decentralized gold', each with its pros and cons.
6.3 The Decentralization Revolution of the Web3.0 Era
Web3.0 is the concept of the future Internet, emphasizing decentralization and user data autonomy.
Web1.0 (Static Web Era): The Internet of the 1990s, where people could only browse information like 'electronic bulletin boards'.
Web2.0 (Social Media Era): Users can interact and share content, but data is controlled by tech giants like Facebook and Google.
Web3.0 (Decentralized Era): User data is controlled by individuals, and decentralized applications (DApps) based on blockchain become mainstream.
Core technologies of Web3.0
Blockchain: Ensures data security and transparency.
NFT (Non-Fungible Token): Users can truly own digital assets, such as gaming skins, artworks, etc.
DAO (Decentralized Autonomous Organization): A community-driven governance model, such as decisions made by voting among token holders in some decentralized exchanges (DEX).
Web1.0 is like a 'library', where you can only read.
Web2.0 is like a 'social platform'; you can share but do not own the data.
Web3.0 is like a 'community-governed city-state', where users own their own data and assets.
6.4 Future Challenges in the Development of Cryptocurrency
While cryptocurrency is full of potential, it also faces many challenges.
Regulatory risks: Governments may introduce strict policies that affect the cryptocurrency market. For example, the U.S. Securities and Exchange Commission (SEC) has repeatedly sued cryptocurrency companies, causing market panic.
Technical challenges: The scalability issue of blockchain has not yet been fully resolved, and high transaction fees limit user growth.
Security issues: Hacker attacks and smart contract vulnerabilities remain significant risks facing the industry.
Market Volatility: Prices of cryptocurrencies like Bitcoin are highly volatile, making them unsuitable as stable payment tools.
