Cryptocurrency refers to virtual or digital currency secured by cryptography, making it hard to double-spend or counterfeit. Many cryptocurrencies are decentralized and based on blockchain technology, a distributed ledger enforced through a network of computers. The defining feature of cryptocurrencies is that they’re not issued by any central authority, making them arguably immune to government manipulation or interference.
You can use cryptocurrencies to transact securely. Cryptocurrencies are systems that offer secure payments represented by virtual “tokens”, which are recorded in ledgers. “Crypto”, in this case, means the encryption algorithms and techniques that secure these ledger entries.
Types of Cryptocurrency
Bitcoin was the first cryptocurrency. It remains the most valuable and most popular. Today, there are thousands of cryptocurrencies which serve different functions and offer unique specifications. Most of them are Bitcoin clones, while others are built from scratch.
In 2009, an individual by the pseudonym Satoshi Nakamoto launched Bitcoin. There have been attempts to identify the inventor of Bitcoin with no conclusive proof. As of 2020, there were more than 18 million bitcoins. The competing cryptocurrencies borrowed from Bitcoin are referred to as “altcoins” and include currencies such as Ethereum, Litecoin, Namecoin, EOS, and Cardano.
How Cryptocurrencies Work
Cryptocurrencies rely on a decentralized system to allow users to make secure payments or store money without requiring their names or going through a bank. They use a public ledger known as a blockchain, which includes records of all transactions held by currency holders.
How is a Cryptocurrency Created?
Units are created through mining, which involves leveraging computer power to solve math problems that generate coins. You can also buy coins from brokers and store them or spend using your wallet.
Are Cryptocurrencies Legal?
In the United States, cryptocurrencies are legal. However, in places like China, the government has banned the use of cryptocurrencies, so whether they’re legal depends on where you’re located. While transacting cryptocurrencies, be sure to protect yourself as there are fraudsters who view digital currencies as the perfect opportunity to defraud users.
Who Should Use Cryptocurrency?
Due to their reputation as a secure medium of exchange and the excellent level of anonymity, cryptocurrencies are preferred for online payments. You cannot fake or reverse transactions, and you’re charged very low fees, which makes it a reliable option compared to conventional currencies. The decentralized nature of the currencies means anyone can use them.
However, due to the high level of anonymity, many people associate cryptocurrencies with illegal activity, especially those on the dark web. As a user, you must exercise due diligence and be careful when transacting as the currency is not centralized. You cannot complain to any authority if things don’t go as agreed.
But with more and more businesses embracing cryptocurrencies, there’s hope this will become a mainstream payment solution in the near future. You can also use cryptocurrencies to trade like you would any other currency, but be sure to know the risk as the currencies are volatile.
In cryptocurrency, trading refers to speculating on price movements or buying and selling coins via an exchange. When you invest in cryptocurrencies via an exchange, you buy individual coins. For this, you need to register an exchange account, put the asset’s value to initiate a position, and then store the tokens until you’re ready to sell.
One benefit of exchanges is that they simplify the steep learning curve as you must understand how to interpret the data. Cryptocurrency markets are moved by demand and supply, but they mostly remain free from political and economic concerns because they’re decentralized. Key events such as security breaches, regulatory updates, and economic setbacks could affect prices.
Are Cryptocurrencies Good Investments?
Cryptocurrencies are volatile and can go up in value because of different reasons. Many investors consider them speculations. Like real currencies, they don’t generate cash flow, so to profit from a cryptocurrency, you have to sell it more than you bought. In contrast to a business that will provide consistent value over time, you count on the price of a cryptocurrency rising to make a profit. Consult an expert in market research to know how to plan your investment to minimize losses.
Tips to Invest in Cryptocurrency
If you’re considering venturing into cryptocurrency, you might want to first read about the different pitfalls to avoid. Here are tips before you get started investing in cryptocurrency.
- Research Exchanges
Before you put down even a single dollar, learn how exchanges work. Exchanges facilitate the buying and selling of cryptocurrencies, but you have more than 500 platforms to choose from. Do research, talk with an experienced investor, and read reviews before moving forward. As you might know, due to the anonymous nature of cryptos, they appear attractive to fraudsters, so only choose platforms that are established and rated well.
- Understand How to Store Your Cryptocurrencies
After you buy a cryptocurrency, you have to store it. You could use an exchange to store your digital assets or pick a wallet. There are different types of wallets, each with its benefits, security, and technical requirements. Investigate your storage options to know what works best for your case.
- Diversify Your Portfolio
Diversification is an essential component of your strategy when dealing with cryptocurrency. Never put all your money into one currency. You have thousands of options and it’s advisable to spread your investment over several currencies.
- Prepare for Volatility
Volatility is a defining element of the cryptocurrency market, so when you invest in these digital assets, be prepared to deal with ups and downs. You should expect dramatic swings in prices. If your mental well-being or portfolio cannot handle abrupt price changes, then it would be best if you avoided cryptocurrency.
Cryptocurrency is still in its infancy, so you must prepare to deal with the challenges that come with investing in something new. If you want to participate in crypto trading, be sure to conduct your research and start conservatively. You could also benefit from consulting experts in the industry who will guide you on market research and data analysis.