Cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of currency units and verify the transfer of funds, operating independently of a central bank. Cryptocurrencies are a subset of alternative currencies, specifically digital currencies.
There are hundreds of different types of cryptocurrency available, but Bitcoin is the most popular by far. This article will provide an in-depth beginner’s guide to cryptocurrency to better understand what it means to invest in them.
What is Cryptocurrency?
Cryptocurrencies are digital money. That’s the simplest way to define what they are. Cryptocurrencies use decentralized technology to let users make secure payments and store money without the need to use their name or go through a bank.
The cryptography (the art of writing or solving codes) behind cryptocurrencies means that transactions made in them are incredibly secure, which creates a trust in them that traditional currencies can’t offer. Cryptocurrencies like Bitcoin can also offer much lower fees than traditional online payment mechanisms, and, as they become more mainstream, these digital currencies could lead the way for online transactions.
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However, all this security comes at a price. Since financial authorities don’t regulate cryptocurrencies like banks, they’re also favored by criminals looking to make transactions anonymously. Unfortunately, this means that there have been many instances of cryptocurrency being used for illicit purposes over the past few years.
Cryptocurrencies use blockchains, a form of distributed ledger – a list of records that everyone on the network can see. For example, every time someone makes a transaction with Bitcoin, that transaction is recorded in a public list called the blockchain. Each time someone wants to send or receive Bitcoin, the transaction has to be approved by the network, which uses complex algorithms to evaluate and verify each transaction.
The Most Popular Cryptocurrencies
Bitcoin, Ethereum, and Litecoin are the three most popular cryptocurrencies. But, first, let’s start with Bitcoin, which is the most widely used form of cryptocurrency. Bitcoin was first introduced by someone named Satoshi Nakamoto in 2009.
There were two primary reasons it was created: to function as a medium of exchange outside of central authority control and to be a digital currency where no double-spend would occur.
The first cryptocurrency was Bitcoin, created in 2009 and is still the best known. There are hundreds of cryptocurrencies in active use today, with hundreds more under development. We’ll go into the details below, but here’s the summary:
As mentioned above, Bitcoin is the first, most popular, and best-known cryptocurrency. It’s also known as BTC and XBT.
Ethereum is another well-known cryptocurrency that offers smart contracts — a feature that allows users to make agreements on the Ethereum network without any third parties involved in each transaction.
Litecoin was created in 2011 by Charlie Lee – an MIT graduate and former Google engineer. It’s often referred to as “the silver to Bitcoin’s gold.”
So what does that mean for you? Instead of using traditional fiat currencies (like U.S. dollars), you can spend your Bitcoins or other cryptocurrencies at certain businesses instead—both online and brick-and-mortar stores accept them.
What is a Cryptocurrency Exchange?
Coinbase, Kraken, and most of the exchanges you’ve probably heard of are examples of centralized exchanges. They have many users, and they hold the private keys to each user’s funds (the unique key that allows someone to move their cryptocurrency).
The problem with centralized exchanges is that they are a honeypot for hackers. Users on these exchanges trust them with their private keys, so if the exchange gets hacked, the hacker has access to everyone’s funds. This means extreme caution needs to be taken when choosing an exchange.
Decentralized exchanges (DEX) don’t hold your private keys. Instead, you connect your wallet directly to the exchange using a “wallet connector.” You can either download it or use it directly in your browser. The DEX controls all trades through smart contracts on blockchains like Ethereum, but all trades happen peer-to-peer.
Decentralized exchanges have risen in popularity since the 2017 bull market and Initial Coin Offering (ICO) boom. People have become more aware of how little privacy they actually have on centralized platforms like Coinbase or Kraken.
What is Cryptocurrency Mining?
In the context of cryptocurrency, mining refers to the process of verifying digital transactions and generating new currency. In the real world, a miner is someone who excavates precious metals such as gold or silver.
A crypto miner digs up virtual coins through a process of solving complex mathematical formulas to validate transactions on a blockchain. Miners are rewarded for their work with new cryptocurrency tokens and transaction fees paid by other users.
The most effective way to mine crypto is with specialized hardware known as an application-specific integrated circuit (ASIC). Many people mine using their computer’s graphics processing unit (GPU) or central processing unit (CPU). This requires an internet connection and software to connect you to a mining pool that offers rewards. Mining can be costly in terms of electricity use.
What is a Cryptocurrency Wallet?
A cryptocurrency wallet is a software that allows you to store, send and receive digital currencies. You can buy and sell via online exchanges like Coinbase. However, you don’t have control of your private keys, and if that exchange shuts down, your funds could be lost.
You might also hear the term “hot wallet” (or “hot storage”) thrown around. The main difference between hot wallets and cold wallets is that hot wallets allow you to access your money more efficiently. In contrast, cold storage keeps it offline, protecting it from hackers and thieves (at the cost of making transactions more difficult). Some examples of each include:
How Risky is Cryptocurrency?
A cryptocurrency is a form of digital currency that exists within a digital network. It’s not controlled by any central authority such as governments or banks, and encryption techniques are used to regulate the generation of new currency units and verify the transfer of funds. While there has been much hype over its potential benefits, cryptocurrency also comes with serious risks.
First and foremost, you need to understand how cryptocurrencies work to navigate them with any success. They’re created through encryption algorithms that use decentralized peer-to-peer networks to verify transactions. Of course, this doesn’t mean they’re totally secure—for one thing, you must make sure your password is secure for your private key (the means of securing your wallet) to work properly—but it does mean that hackers can’t steal coins from your computer or other users’ computers because they don’t have access to the user’s private keys. For another thing, you can lose everything if you forget your password!
The second most important thing to know about cryptocurrencies is their volatility. Investing in cryptocurrency carries very high risks: If the price falls drastically in a short period—especially if there’s no news about what happened—you could lose all the money you invested. This makes the safety of funds significant; try not to buy cryptocurrencies when they are cheap and sell them when prices rise sharply in a short period.
Thirdly, keep an eye out for possible scams. There have been several cases where scammers tried to trick people into buying fake cryptocurrencies with stolen personal info (like an email address or phone number), using money from an old purse via credit card fraud, etc., so make sure you conduct thorough internet searches before buying any cryptocurrency at all!
Fourthly, keep an eye out for hacks. Finally, to be on the safe side, avoid storing large amounts of money on exchanges like Coinbase or Binance; these exchanges are pretty well protected against hacking but even, so it’s best not to hold too much cash there.
Where Can I Spend Cryptocurrency?
Other than mining, another fundamental way to obtain cryptocurrency is to buy it. In theory, you can purchase any amount of cryptocurrency from anywhere in the world and have a transaction completed within minutes. Most exchanges that allow the purchase of Bitcoin also sell several other cryptocurrencies for users who wish to diversify their portfolios.
Once you own some cryptocurrency, what are the best ways to use it? The first obvious answer is as an investment. Many investors choose not to “cash out” as they believe that holding onto cryptocurrency will yield more profits in the future. Others, who may be less bullish on Bitcoin’s price performance or want to minimize risk, cash out regularly to avoid losing money in case of a market crash.
The second option is spending it at various merchants that accept cryptocurrency online and increasingly offline. Cryptocurrency has even become accepted at major retailers such as Microsoft and Overstock.
Cryptocurrency is a wild ride, and it’s not for the faint of heart. It’s an emerging market with many opportunities, but it’s also highly volatile, so you need to understand the risks involved before you invest.
Cryptocurrency can be confusing and often overwhelming at first, but as long as you do your research and keep an open mind, you’ll be able to grasp the basics quickly and easily.