Cryptocurrency-The Basics about Cryptocurrency
What is Cryptocurrency and how does it work?
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| Crypto Coins |
What is cryptocurrency?
Cryptocurrency is a digital payment system that doesn't rely on banks to verify transactions. It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.
Cryptocurrency received its name because it uses encryption to verify transactions. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers. The aim of encryption is to provide security and safety.
The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today. Much of the interest in cryptocurrencies is to trade for profit, with speculators at times driving prices skyward.
Cryptocurrency – meaning and definition
Cryptocurrency, sometimes called crypto-currency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies don't have a central issuing or regulating authority, instead using a decentralized system to record transactions and issue new units.
The Basics about Cryptocurrency
Cryptocurrency comes under many names. You have probably read about some of the most popular types of cryptocurrencies such as Bitcoin, Litecoin, and Ethereum. Cryptocurrencies are increasingly popular alternatives for online payments. Before converting real dollars, euros, pounds, or other traditional currencies into ₿ (the symbol for Bitcoin, the most popular cryptocurrency), you should understand what cryptocurrencies are, what the risks are in using cryptocurrencies, and how to protect your investment.
What is cryptocurrency? A cryptocurrency is a digital currency, which is an alternative form of payment created using encryption algorithms. The use of encryption technologies means that cryptocurrencies function both as a currency and as a virtual accounting system. To use cryptocurrencies, you need a cryptocurrency wallet. These wallets can be software that is a cloud-based service or is stored on your computer or on your mobile device. The wallets are the tool through which you store your encryption keys that confirm your identity and link to your cryptocurrency.
What are the risks to using cryptocurrency? Cryptocurrencies are still relatively new, and the market for these digital currencies is very volatile. Since cryptocurrencies don't need banks or any other third party to regulate them; they tend to be uninsured and are hard to convert into a form of tangible currency (such as US dollars or euros.) In addition, since cryptocurrencies are technology-based intangible assets, they can be hacked like any other intangible technology asset. Finally, since you store your cryptocurrencies in a digital wallet, if you lose your wallet (or access to it or to wallet backups), you have lost your entire cryptocurrency investment.
Follow these tips to protect your cryptocurrencies:
- Look before you leap! Before investing in a cryptocurrency, be sure you understand how it works, where it can be used, and how to exchange it. Read the webpages for the currency itself (such as Ethereum, Bitcoin or Litecoin) so that you fully understand how it works, and read independent articles on the cryptocurrencies you are considering as well.
- Use a trustworthy wallet. It is going to take some research on your part to choose the right wallet for your needs. If you choose to manage your cryptocurrency wallet with a local application on your computer or mobile device, then you will need to protect this wallet at a level consistent with your investment. Just like you wouldn't carry a million dollars around in a paper bag, don't choose an unknown or lesser-known wallet to protect your cryptocurrency. You want to make sure that you use a trustworthy wallet.
- Have a backup strategy. Think about what happens if your computer or mobile device (or wherever you store your wallet) is lost or stolen or if you don't otherwise have access to it. Without a backup strategy, you will have no way of getting your cryptocurrency back, and you could lose your investment.
Understanding Cryptocurrency
Cryptocurrencies are digital or virtual currencies underpinned by cryptographic systems. They enable secure online payments without the use of third-party intermediaries. "Crypto" refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.
Central to the appeal and functionality of Bitcoin and other cryptocurrencies is blockchain technology. As its name indicates, a blockchain is essentially a set of connected blocks of information on an online ledger. Each block contains a set of transactions that have been independently verified by each validator on a network.
Every new block generated must be verified before being confirmed, making it almost impossible to forge transaction histories. The contents of the online ledger must be agreed upon by a network of individual nodes, or computers that maintain the ledger.
Experts say that blockchain technology can serve multiple industries, supply chains, and processes such as online voting and crowdfunding. Financial institutions such as JPMorgan Chase & Co. (JPM) are using blockchain technology to lower transaction costs by streamlining payment processing.
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| Bitcoins on a Laptop Computer |
Types of Cryptocurrency
Many cryptocurrencies were created to facilitate work done on the blockchain they are built on. For example, Ethereum's ether was designed to be used as payment for validating transactions and opening blocks. When the blockchain transitioned to proof-of-stake in September 2022, ether (ETH) inherited an additional duty as the blockchain's staking mechanism. The XRP Ledger Foundation's XRP is designed for financial institutions to facilitate transfers between different geographies.
Because there are so many cryptocurrencies on the market, it's important to understand the types. Knowing whether the coin you're looking at has a purpose can help you decide whether it is worth investing in—a cryptocurrency with a purpose is likely to be less risky than one that doesn't have a use.
Most of the time, when you hear about cryptocurrency types, you hear the coin's name. However, coin names differ from coin types. Here are some of the types you'll find with some of the names of tokens in that category:
- Utility: XRP and ETH are two examples of utility tokens. They serve specific functions on their respective blockchains.
- Transactional: Tokens designed to be used as a payment method. Bitcoin is the most well-known of these.
- Governance: These tokens represent voting or other rights on a blockchain, such as Uniswap.
- Platform: These tokens support applications built to use a blockchain, such as Solana.
- Security tokens: Tokens representing ownership of an asset, such as a stock that has been tokenized (value transferred to the blockchain). MS Token is an example of a securitized token. If you can find one of these for sale, you can gain partial ownership of the Millennium Sapphire.
If you find a cryptocurrency that doesn't fall into one of these categories, you've found a new category or something that needs to be investigated to be sure it's legitimate.
Is cryptocurrency safe?
Cryptocurrencies are usually built using blockchain technology. Blockchain describes the way transactions are recorded into "blocks" and time stamped. It's a fairly complex, technical process, but the result is a digital ledger of cryptocurrency transactions that's hard for hackers to tamper with.
In addition, transactions require a two-factor authentication process. For instance, you might be asked to enter a username and password to start a transaction. Then, you might have to enter an authentication code sent via text to your personal cell phone.
While securities are in place, that does not mean cryptocurrencies are un-hackable. Several high-dollar hacks have cost cryptocurrency start-ups heavily. Hackers hit Coincheck to the tune of $534 million and BitGrail for $195 million, making them two of the biggest cryptocurrency hacks of 2018.
Unlike government-backed money, the value of virtual currencies is driven entirely by supply and demand. This can create wild swings that produce significant gains for investors or big losses. And cryptocurrency investments are subject to far less regulatory protection than traditional financial products like stocks, bonds, and mutual funds.
How to Buy Cryptocurrency
If you want to use cryptocurrency to buy products and services, you will need to visit a cryptocurrency exchange. These are businesses that allow you to buy or sell cryptocurrencies from other users at the current market price, similar to a stock. After buying the coins, you will need to transfer them to a digital wallet or use a third-party service like Coinbase to store your coins.
If you only want to buy cryptocurrency as an investment, you may be able to do so through your brokerage. For example, Robinhood allows users to invest in bitcoin and other cryptocurrencies, although you cannot withdraw them from the platform for purchases. In addition, there are several crypto ETFs that provide exposure to the crypto asset class without requiring the investors to maintain their own wallets. For instance, as of May 2024, investors may choose to hold Bitcoin futures ETF shares. The SEC has also approved the listing and trading of Ether spot shares.
Four tips to invest in cryptocurrency safely
According to Consumer Reports, all investments carry risk, but some experts consider cryptocurrency to be one of the riskier investment choices out there. If you are planning to invest in cryptocurrencies, these tips can help you make educated choices.
Research exchanges:
Before you invest, learn about cryptocurrency exchanges. It’s estimated that there are over 500 exchanges to choose from. Do your research, read reviews, and talk with more experienced investors before moving forward.
Know how to store your digital currency:
If you buy cryptocurrency, you have to store it. You can keep it on an exchange or in a digital wallet. While there are different kinds of wallets, each has its benefits, technical requirements, and security. As with exchanges, you should investigate your storage choices before investing.
Diversify your investments:
Diversification is key to any good investment strategy, and this holds true when you are investing in cryptocurrency. Don't put all your money in Bitcoin, for example, just because that's the name you know. There are thousands of options, and it's better to spread your investment across several currencies.
Prepare for volatility:
The cryptocurrency market is highly volatile, so be prepared for ups and downs. You will see dramatic swings in prices. If your investment portfolio or mental wellbeing can't handle that, cryptocurrency might not be a wise choice for you.
Cryptocurrency is all the rage right now, but remember, it is still in its relative infancy and is considered highly speculative. Investing in something new comes with challenges, so be prepared. If you plan to participate, do your research, and invest conservatively to start.
One of the best ways you can stay safe online is by using a comprehensive antivirus. Kaspersky Internet Security defends you from malware infections, spyware, data theft and protects your online payments using bank-grade encryption.
Why is cryptocurrency the future of finance?
Cryptocurrencies are the first alternative to the traditional banking system, and have powerful advantages over previous payment methods and traditional classes of assets. Think of them as Money 2.0. -- a new kind of cash that is native to the internet, which gives it the potential to be the fastest, easiest, cheapest, safest, and most universal way to exchange value that the world has ever seen.
- Cryptocurrencies can be used to buy goods or services or held as part of an investment strategy, but they can’t be manipulated by any central authority, simply because there isn’t one. No matter what happens to a government, your cryptocurrency will remain secure.
- Digital currencies provide equality of opportunity, regardless of where you were born or where you live. As long as you have a smartphone or another internet-connected device, you have the same crypto access as everyone else.
- Cryptocurrencies create unique opportunities for expanding people’s economic freedom around the world. Digital currencies’ essential border lessness facilitates free trade, even in countries with tight government controls over citizens’ finances. In places where inflation is a key problem, cryptocurrencies can provide an alternative to dysfunctional fiat currencies for savings and payments.
- As part of a broader investment strategy, crypto can be approached in a wide variety of ways. One approach is to buy and hold something like bitcoin, which has gone from virtually worthless in 2008 to thousands of dollars a coin today. Another would be a more active strategy, buying and selling cryptocurrencies that experience volatility.
- One option for crypto-curious investors looking to minimize risk is USD Coin, which is pegged 1:1 to the value of the U.S. dollar. It offers the benefits of crypto, including the ability to transfer money internationally quickly and cheaply, with the stability of a traditional currency. Coinbase customers that hold USDC earn rewards, making it an appealing alternative to a traditional savings account.
Why invest in cryptocurrency?
Online exchanges like Coinbase have made buying and selling cryptocurrencies easy, secure, and rewarding.
- It only takes a few minutes to create a secure account, and you can buy cryptocurrency using your debit card or bank account.
- You can buy as little (or as much) crypto as you want, since you can buy fractional coins. For example, you can buy $25.00 worth of bitcoin.
- Many digital currencies, including USD Coin and Tezos, offer holders rewards just for having them.
- On Coinbase, you can earn 1% APY on— that’s much higher than most traditional savings accounts.
- You can also earn up to 5% APY when you stake Tezos on Coinbase. Learn more about Tezos staking rewards.
- Unlike stocks or bonds, you can easily transfer your cryptocurrency to anyone else or use it to pay for goods and services.
- Millions of people hold bitcoin and other digital currencies as part of their investment portfolios.
What is a stablecoin?
USD Coin is an example of a cryptocurrency called stablecoins. You can think of these as crypto dollars—they’re designed to minimize volatility and maximize utility. Stablecoins offer some of the best attributes of cryptocurrency (seamless global transactions, security, and privacy) with the valuation stability of fiat currencies.
- Stablecoins do this by pegging their value to an external factor, typically a fiat currency like the U.S. dollar or a commodity like gold.
- As a result, their valuations are less likely to shift dramatically from day to day. That stability can increase their utility for everyday use as money, because both buyers and merchants can be confident that the value of their transaction will remain relatively consistent over a longer timeframe.
- They can also work as a safe and stable way to save money, like a traditional savings account.
What is cryptocurrency mining?
Most cryptocurrencies are ‘mined’ via a decentralized (also known as peer-to-peer) network of computers. But mining doesn’t just generate more bitcoin or Ethereum - it’s also the mechanism that updates and secures the network by constantly verifying the public blockchain ledger and adding new transactions.
- Technically, anyone with a computer and an internet connection can become a miner. But before you get excited, it’s worth noting that mining is not always profitable. Depending on which cryptocurrency you’re mining, how fast your computer is, and the cost of electricity in your area, you may end up spending more on mining than you earn back in cryptocurrency.
- As a result, most crypto mining these days is done by companies that specialize in it, or by large groups of individuals who all contribute their computing power.
- How does the network encourage miners to participate in maintaining the blockchain? Again, taking Bitcoin as an example, the network holds a lottery in which all the mining rigs around the world race to become the first to solve a math problem, which also verifies and updates the blockchain with new transactions. Each winner is awarded new bitcoin, which can then make its way into the broader marketplace.
Is Cryptocurrency Legal?
Fiat currencies derive their authority from the government or monetary authorities. For example, the U.S. dollar is recognized and issued by the government as the official currency of the United States and is "legal tender."
But cryptocurrencies are not issued by any public or private entities. Therefore, it has been difficult to make a case for their legal status in different financial jurisdictions throughout the world. It doesn't help matters that cryptocurrencies have primarily functioned outside most existing financial infrastructure.
Advantages and Disadvantages of Cryptocurrency
Cryptocurrencies were introduced with the intent to revolutionize financial infrastructure. As with every revolution, however, there are tradeoffs involved. At the current stage of development for cryptocurrencies, there are many differences between the theoretical ideal of a decentralized system with cryptocurrencies and its practical implementation.
Advantages Disadvantages
Removes single points of failure Transactions are pseudonymous
Easier to transfer funds between parties Pseudonymity allows for criminal uses
Removes third parties Have become highly centralized
Can be used to generate returns Expensive to participate in a network and earn
Remittances are streamlined Off-chain security issues
Prices are very volatile
Is Crypto Actually a Good Investment?
Crypto can be a good investment for someone who enjoys speculating and can financially tolerate losing everything invested. However, it is not a wise investment for someone seeking to grow their retirement portfolio or for placing savings into it for growth.
Is Crypto Real Money?
One definition of money is something that is generally accepted as a medium of exchange, a measure or store of value, and a unit of account. By this definition, cryptocurrency is real money.
How Does Crypto Make You Money?
There are several ways cryptocurrency can make money for you. Decentralized finance applications let you loan your crypto with interest; you can stake a compatible one on a blockchain or at certain exchanges for rewards, or you can hold on to it and hope its market value increases. None of these methods are guaranteed to make money, but many people have benefitted from them.
How does cryptocurrency work?
Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders.
Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.
If you own cryptocurrency, you don’t own anything tangible. What you own is a key that allows you to move a record or a unit of measure from one person to another without a trusted third party.
Although Bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging in financial terms, and more uses are expected in the future. Transactions including bonds, stocks, and other financial assets could eventually be traded using the technology.
Cryptocurrency examples
There are thousands of cryptocurrencies. Some of the best known include:
Bitcoin:
Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded. The currency was developed by Satoshi Nakamoto – widely believed to be a pseudonym for an individual or group of people whose precise identity remains unknown.
Ethereum:
Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.
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Litecoin:
This currency is most similar to bitcoin but has moved more quickly to develop new innovations, including faster payments and processes to allow more transactions.
Ripple:
Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track different kinds of transactions, not just cryptocurrency. The company behind it has worked with various banks and financial institutions.
Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them from the original.
Cryptocurrency Related FAQs:
What is cryptojacking and how does it work?
Cryptojacking is the unauthorized use of someone’s computer to mine cryptocurrency. It works by secretly installing malware or scripts that use system resources to generate digital coins.
What is Bitcoin?
Bitcoin is a digital currency created in 2009. It allows peer-to-peer transactions without a central authority, using blockchain technology for security and transparency.
Four common cryptocurrency scams
Common crypto scams include phishing, fake giveaways, Ponzi schemes, and rug pulls. Scammers trick users into giving up info or money, promising big returns but stealing funds instead.
Scam websites and how to avoid them
Scam websites mimic real ones to steal data or money. Avoid them by checking URLs, using secure sites (HTTPS), avoiding unknown links, and researching before entering personal info.
How safe are money e-transfers?
Money e-transfers are generally safe with encryption and authentication. But risks exist—use trusted apps, enable security features, and verify recipient details to stay protected.
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