What is Cryptocurrency and How does it work?
Cryptocurrency is on the rise and quickly becoming one of the finest ways to gain money for all investors. You may have heard of Bitcoin or Ethereum, but cryptocurrencies are still unfamiliar territory for you. Even buying and keeping cryptocurrencies might be confusing at first, so let’s look at the definitions, operations, and how to use crypto to its best potential.
- What is cryptocurrency?
Cryptocurrency, also known as crypto, is the form of currency that exists digitally and utilizes cryptography for secured transactions. Based on blockchain technology, cryptocurrencies use decentralized networks to record transactions and verify new units without any central authority such as banks, government agencies.
Using a P2P (peer-to-peer) system enables recorded cryptocurrency transactions in a public and distributed online ledger anytime and anywhere, which means that you do not have to carry physical money around and exchange it in the real world. The encrypto is involved in transferring and storing crypto data safely between digital wallets and to public databases.
2. How does cryptocurrency work?
Cryptocurrencies represent the type of digital asset running on blockchain, which is distributed across a numerous number of computers and held by currency holders publicly to record all transactions updated.
To generate units of cryptocurrency, users need to solve complex mathematical issues through a process named mining. Digital coins are also traded from brokers, then stored and spent by using cryptographic wallets.
The applications of blockchain technology on cryptocurrencies are still rising in financial terms, and more uses are expected in the near future. Transactions including bonds, stocks, and other financial assets could definitely be traded via this blockchain technology.
3. Some popular cryptocurrencies in the market
Until now, there are thousands of cryptocurrencies created in the digital market. Some of the best known are listed below:
- Price: $44,011
- Market cap: $808 billion
The very first cryptocurrency founded was Bitcoin, which is still the best known traded today. This cryptocurrency was developed by an anonymous person or group under the name of Satoshi Nakamoto and introduced to the world via a white paper in 2008.
- Price: $3,112
- Market cap: $360 billion
Developed in 2015, Ethereum is a platform powered by blockchain technology with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.
- Price: $1.00
- Market cap: $81 billion
Tether is the world’s third-biggest digital cryptocurrency by market value. It is known as a stable coin and is tied to real-world assets — the U.S. dollar, for example — to maintain a stable value, unlike most cryptocurrencies which are known to be volatile.
Binance Coin (BNB)
- Price: $405.66
- Market cap: $67 billion
Binance Coin is the cryptocurrency issued by Binance, among the largest crypto exchanges in the world. While originally created as a token to pay for discounted trades, Binance Coin can now be used for payments as well as purchasing various goods and services.
USD Coin (USDC)
- Price: $1.00
- Market cap: $53 billion
Like Tether, USD Coin is a stable coin pegged to the dollar, meaning that its value should not fluctuate. The currency’s founders say that it’s backed by fully reserved assets or those with “equivalent fair value” and those assets are held in accounts with regulated U.S. institutions.
For more information, non-Bitcoin cryptocurrencies are collectively known as “alt coins” to distinguish them from the original one.
4. How to buy cryptocurrency?
There are typically three steps to follow for safe transactions.
Step 1: Choosing a platform
Generally, you can choose between a traditional broker or dedicated cryptocurrency exchange:
- Brokers: Online brokers offer methods to trade cryptocurrency, as well as other financial assets like stocks, bonds, and ETFs. These platforms have the intention to offer lower trading costs but fewer crypto features.
- Cryptocurrency exchanges: There are many cryptocurrency exchanges to choose from, each offering different cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge fees based on the value of the assets.
When comparing different platforms, cryptocurrencies offer, charge, security features, storage and withdrawal options, and any educational resources involved should be considered.
Step 2: Funding your account
You need to sign up to open an account and verify your identity to avoid fraud and meet regulatory requirements. Then, the next step is to fund your account, so you can begin buying and selling crypto.
Most crypto exchanges allow users to purchase crypto using fiat currencies such as the US Dollar, the British Pound, or the Euro via their debit or credit cards — although this varies by platform. While, some credit card companies do not allow crypto transactions due to the high volatility of cryptocurrencies and the emerging credit card transaction fees for certain assets. However, some platforms accept ACH transfers and wire transfers.
Another important factor to consider is fees since they include potential deposit and withdrawal transaction fees plus trading fees. Fees will vary by payment method and platform, which is something to research at the outset.
Step 3: Placing your cryptocurrency order
You are ready to place an order via your traditional broker’s or exchange’s platform once your account is funded. You can select “buy”, choose the order type of cryptocurrencies you want to buy, enter the amount of units, and then confirm the order. The same process applies to the “sell” process.
There are also other ways to invest in crypto. Users can use payment services like PayPal, Cash App, and Venmo, which allow them to trade or hold cryptocurrencies. The alternatives are following the ETFs to buy exposure to hundreds of individual investments in one fell swoop in a less risky way and investing in companies which own cryptocurrencies or blockchain technology.
5. How to store cryptocurrency?
Storing these digital assets safely helps protect them from hacks or thefts after the transactions. Cryptocurrency is stored in crypto wallets with the form of physical devices or online software to hold the private keys to your cryptocurrencies securely.
There are “hot wallet” and “cold wallet” to choose from:
- Hot wallet storage: These crypto wallets refer to online storage and run on software and internet-connected devices to protect the private keys to the assets. Despite its convenience, hot wallets are costly and quite risky as they are connected to the internet.
- Cold wallet storage: Unlike hot wallets, cold wallets (also known as hardware wallets) do not have the connection to the internet and rely on offline electronic devices like a USB or a hard drive to secure the private keys.
6. Helpful tips to invest in cryptocurrencies safely
If you are planning to invest in cryptocurrencies, these tips can help you make educated choices as all the investments carry risk.
There are approximately 500 exchanges to choose from. Therefore, do your research, read reviews, and talk with experienced investors before you invest in any cryptocurrency exchange.
Know how to store your digital currency:
As with exchanges, you should investigate your storage choices before investing. You can keep it on an exchange or in a digital wallet based on benefits, technical requirements and security.
Diversify your investments:
Diversification is key to any good investment strategy for crypto trading. Do not put all your eggs in one basket, for example, you only buy Bitcoin because that is the name you know. There are thousands of options, and it is better to break down your investment across several types of currencies.
Be in it for the long term:
Prices change day to day and cryptocurrencies are not going to go away. Leaving your money in the crypto market for months or years at a time could offer you the best rewards in the future.
Prepare for volatility:
The cryptocurrency market is highly volatile, so be prepared for all the ups and downs. Dramatic swings in prices are always there. If your investment portfolio or mental wellbeing can’t handle that, cryptocurrency might not be a wise choice for you. If you plan to participate, do your research, and invest conservatively to start.