Cryptocurrency Study Guide

📖 Core Concepts Cryptocurrency – digital money that runs on a decentralized network; no central bank or government controls it. Blockchain – a tamper‑resistant ledger made of sequential blocks (hash of previous block + timestamp + transactions). Consensus mechanisms – rules that let a distributed network agree on the next block: Proof‑of‑Work (PoW) – miners solve a hard hashing puzzle (e.g., SHA‑256). Proof‑of‑Stake (PoS) – validators lock up (stake) a quantity of the native token to propose/attest blocks. Stablecoin – a crypto designed to keep its purchasing power roughly constant (usually pegged to a fiat or basket). Wallet – stores a public key (address) and a private key/seed (the secret that lets you write to the ledger). Regulatory landscape – global (FATF Travel Rule), regional (EU MiCA), and national (U.S. FIN‑TECH Act, El Salvador’s legal‑tender law). --- 📌 Must Remember Market cap: \(\displaystyle \text{Market Cap}= \text{Price} \times \text{Circulating Supply}\). Bitcoin halving cuts the block reward by 50 % roughly every 4 years → short‑term price spikes, long‑term supply shock. Tax treatment (U.S.) – Bitcoin is property; every transfer is a taxable capital‑gain event. FATF Travel Rule – VASPs must collect & transmit originator + beneficiary info for each transfer. Energy use: PoW (e.g., Bitcoin) ≈ 150 TWh/yr (≈ medium‑sized country); PoS ≈ 0.001 % of Bitcoin’s electricity. Stablecoin risk – peg can break (e.g., Terra UST fell from $1 → $0.26). Block reward = newly minted coins + transaction fees; miners stay profitable only if reward >  electricity + hardware cost. --- 🔄 Key Processes Transaction creation – user signs a transfer with their private key → produces a signed message. Broadcast – signed transaction is sent to peers (nodes) via encrypted P2P network. Validation (PoW) – miners collect pending txs, build a candidate block, compute hash < target; first to find a valid nonce wins. Validation (PoS) – validator stakes tokens, is randomly selected, proposes block, other validators attest; finality reached after enough attestations. Block finality – once a block is added, subsequent blocks must be re‑mined/re‑validated to alter it → infeasible without >50 % of network power/stake. Stablecoin peg maintenance – algorithmic (adjust supply) or collateral‑backed (reserve assets); monitor market price and trigger mint/burn or collateral liquidation. --- 🔍 Key Comparisons PoW vs. PoS – Security: PoW → computational difficulty; PoS → economic stake. Energy: PoW = high; PoS = low. Hardware: PoW needs ASIC/FPGAs; PoS needs only a node with sufficient stake. Bitcoin vs. Altcoins – Block time: Bitcoin 10 min; many altcoins < 2 min. Function: Bitcoin = store of value; Ethereum = smart contracts + NFTs. Stablecoins vs. Regular Crypto – Price goal: stable (≈ $1) vs. market‑driven volatility. Risk: peg‑break risk vs. inherent market risk. Public key vs. Private key – Public: shareable address; receives funds. Private: secret seed; authorizes spending. --- ⚠️ Common Misunderstandings “Cryptocurrencies are untraceable.” – Blockchains are public; only the identity behind an address may be unknown. All stablecoins are fully collateralized. – Some (e.g., Terra UST) were algorithmic and lost their peg. Mining is always profitable. – Profitability depends on coin price, electricity cost, and hardware efficiency. Every token is a security. – Only tokens meeting the Howey test (investment of money in a common enterprise with expectation of profit) are treated as securities. NFTs only exist on Ethereum. – NFTs can be minted on many blockchains (Polkadot, Solana, Flow, etc.). --- 🧠 Mental Models / Intuition Blockchain as a linked chain of safes – each block is a safe that holds the previous safe’s key (hash). Changing one safe forces you to re‑lock all later safes – practically impossible. Consensus = voting with money or work – PoW = “who can solve the puzzle fastest”; PoS = “who has the most skin in the game”. Private key = password; public key = username – you give out the username (address) freely; keep the password secret. Market cap = crypto market’s “GDP” – price × supply gives a quick size snapshot, just like a company’s market value. --- 🚩 Exceptions & Edge Cases Hybrid consensus – some chains (e.g., Decred) combine PoW for block creation and PoS for governance. Zero‑fee cryptocurrencies – Nano uses “client‑side PoW” only to prevent spam, no network fee. Legal classification variance – a token may be a commodity in the U.S., a security in the EU, and a currency in another jurisdiction. Stablecoin peg mechanisms – algorithmic vs. collateral‑backed vs. fiat‑backed; each has different failure modes. --- 📍 When to Use Which Choosing a consensus for a new project – use PoS if energy efficiency & fast finality matter; use PoW if you need maximal resistance to stake‑centralization. Wallet type – custodial wallets for convenience (exchange); hardware wallets for high‑value, long‑term storage; paper wallets for offline cold‑storage. Stablecoin vs. volatile crypto – use stablecoins for payments, remittances, or as a hedge during market turbulence; use volatile assets for speculative gains. Regulatory compliance path – follow FATF Travel Rule for cross‑border VASP operations; adopt MiCA licensing if operating in the EU; consider FIN‑TECH Act definitions for U.S. activities. --- 👀 Patterns to Recognize Pre‑halving price rally – Bitcoin price often climbs 10‑30 % in the months before a halving. Regulatory news spikes – announcements (e.g., MiCA rollout, U.S. SEC actions) trigger sharp short‑term moves across most tokens. Concentration of holdings – a few wallets hold > 10 % of Bitcoin supply → watch for potential market manipulation. Wash‑trade signatures – identical buy‑sell timestamps, same counter‑party address, unusually high volume on a single exchange. --- 🗂️ Exam Traps Confusing “proof‑of‑work” algorithm with “consensus”. The algorithm (e.g., SHA‑256) is a puzzle; the consensus rule is how the network chooses the winner. Assuming all transaction fees are fixed. Bitcoin fees depend on transaction size (bytes) and mempool congestion; Ethereum fees depend on gas price × gas used (computational work). Believing every token is a security. Only tokens that satisfy the Howey test are securities; many utility tokens are not. Mixing up public vs. private keys – public key can be shared; private key must never be disclosed. Thinking “stablecoin = safe investment”. Peg failures (e.g., UST) show they can lose value dramatically. ---