Cryptocurrency – meaning and definition
Cryptocurrency, sometimes referred to as cryptocurrency or cryptocurrency, is any form of money that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies do not have a central issuing or regulatory authority, but instead use a decentralized system to record transactions and issue new units.
What is cryptocurrency?
Cryptocurrency is a digital payment system that does not depend on banks to verify transactions. It is a peer-to-peer system that allows anyone, anywhere to send and receive payments. Rather than being physical money transported and exchanged in the real world, cryptocurrency payments simply exist as digital entries in 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 gets its name from the fact that it uses encryption to verify transactions. This means that advanced coding is required when storing and transferring cryptocurrency data between wallets and public ledgers. The purpose of encryption is to provide security and protection.
The first cryptocurrency was Bitcoin, which was created in 2009 and is the best known to this day. Much of the point of cryptocurrencies is to trade for profit, with speculators sometimes driving prices up.
What Is BlockChain
How does cryptocurrency work?
Cryptocurrencies operate on a distributed public ledger called blockchain, a record of all transactions updated and maintained by currency holders.
Cryptocurrency units are created through a process called mining, which uses computer power to solve complex mathematical problems that generate coins. Users can also buy the currencies from brokers and then store and spend them using crypto wallets.
When you own a cryptocurrency, you don’t own anything tangible. What you have is a key that allows you to pass a record or a unit of measurement 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 on the rise in financial terms, and more applications are expected in the future. Transactions such as bonds, stocks and other financial assets could potentially be traded using 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.
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:
Moreover, Ripple is a distributed ledger system that was founded in 2012. However, 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.
How to buy cryptocurrency
You may be wondering how to buy cryptocurrency safely. There are typically three steps involved. These are:
Step 1: Choosing a platform
The first step is deciding which platform to use. Generally, you can choose between a traditional broker or dedicated cryptocurrency exchange:
- Traditional brokers. These are online brokers who offer ways to buy and sell cryptocurrency, as well as other financial assets like stocks, bonds, and ETFs. These platforms tend 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 asset-based fees.
When comparing different platforms, consider which cryptocurrencies are on offer, what fees they charge, their security features, storage and withdrawal options, and any educational resources.
Step 2: Funding your account
After choosing your platform, the next step is to fund your account so you can start trading. Most crypto exchanges allow users to purchase crypto with fiat (i.e. government-issued) currencies such as US Dollars, British Pounds, or Euros using their debit cards. debit or credit – although this varies by platform.
Purchasing crypto with credit cards is considered risky and not supported by some exchanges. Some credit card companies also do not allow crypto transactions. Indeed, cryptocurrencies are very volatile and it is not advisable to take the risk of going into debt for certain assets – or possibly paying high transaction fees by credit card.
Some platforms also accept ACH transfers and bank transfers. Accepted payment methods and the time it takes to deposit or withdraw differ by platform. Similarly, the time it takes for deposits to clear varies depending on the payment method.
An important factor is the fees. This includes potential transaction fees for deposits and withdrawals, as well as trading fees. Fees vary by payment method and platform, which is something to look out for upfront.
Step 3: Placing an order
You can place an order via your broker’s or exchange’s web or mobile platform. If you are planning to buy cryptocurrencies, you can do so by selecting “buy,” choosing the order type, entering the amount of cryptocurrencies you want to purchase, and confirming the order. The same process applies to “sell” orders.
There are also other ways to invest in crypto. These include payment services like PayPal, Cash App, and Venmo, which allow users to buy, sell, or hold cryptocurrencies. In addition, there are the following investment vehicles:
- Bitcoin trusts: You can buy shares of Bitcoin trusts with a regular brokerage account. These vehicles give retail investors exposure to crypto through the stock market.
- Bitcoin mutual funds: There are Bitcoin ETFs and Bitcoin mutual funds to choose from.
- Blockchain stocks or ETFs: You can also indirectly invest in crypto through blockchain companies that specialize in the technology behind crypto and crypto transactions. Alternatively, you can buy stocks or ETFs of companies that use blockchain technology.
The best option for you will depend on your investment goals and risk appetite.
How to store cryptocurrency
Once you have purchased cryptocurrency, you must keep it in a safe place to protect it from hacking or theft. Typically, cryptocurrency is stored in crypto wallets, which are physical devices or online software used to securely store the private keys to your cryptocurrencies. Some exchanges offer wallet services that make it easier for you to save directly through the platform. However, not all exchanges or brokers automatically offer you wallet services.
There are different wallet providers to choose from. The terms “hot wallet” and “cold wallet” are used:
- Hot wallet storage: “hot wallets” refer to crypto storage that uses online software to protect the private keys to your assets.
- Cold wallet storage: Unlike hot wallets, cold wallets (also known as hardware wallets) rely on offline electronic devices to securely store your private keys.
Typically, cold wallets tend to charge fees, while hot wallets don’t.
What can you buy with cryptocurrency?
When it was launched, Bitcoin was intended to be a medium for everyday transactions, enabling the purchase of anything from a cup of coffee to a computer or even large items like real estate. That hasn’t quite happened yet, and while the number of institutions accepting cryptocurrencies is growing, large cryptocurrency transactions are rare. Despite this, it is possible to buy a variety of products on e-commerce sites using crypto. Here are some examples:
Technology and e-commerce sites:
Several companies that sell tech products accept crypto on their websites, such as newegg.com, AT&T, and Microsoft. Overstock, an e-commerce platform, was among the first sites to accept Bitcoin. Shopify, Rakuten, and Home Depot also accept it.
Luxury goods:
Some luxury retailers accept crypto as a form of payment. For example, online luxury retailer Bitdials offers Rolex, Patek Philippe, and other high-end watches in return for Bitcoin.
Cars:
Some car dealers – from mass-market brands to high-end luxury dealers – already accept cryptocurrency as payment.
Insurance:
In April 2021, Swiss insurer AXA announced that it had begun accepting Bitcoin as a mode of payment for all its lines of insurance except life insurance (due to regulatory issues). Premier Shield Insurance, which sells home and auto insurance policies in the US, also accepts Bitcoin for premium payments.
If you want to spend cryptocurrency at a retailer that doesn’t accept it directly, you can use a cryptocurrency debit card, such as BitPay in the US.
Cryptocurrency fraud and cryptocurrency scams
Unfortunately, cryptocurrency crime is on the rise. Cryptocurrency scams include:
Fake Websites: Fake websites with fake testimonials and crypto lingo promising massive and guaranteed returns provided you keep investing.
Virtual Ponzi schemes: Cryptocurrency criminals promote non-existent opportunities to invest in digital currencies and create the illusion of huge returns by paying old investors with new investors’ money. A scam operation, BitClub Network, raised more than $700 million before its perpetrators were indicted in December 2019.
“Celebrity” endorsements: Scammers pose as billionaires or online big names who promise to multiply your virtual currency investment, but instead steal what you send. You can also use messaging apps or chat rooms to spread rumors that a famous businessman is endorsing a certain cryptocurrency. Once they trick investors into buying and inflating the price, the scammers sell their share and the currency depreciates.
Romance Scams: The FBI warns of a trend of online dating scams where scammers convince people they meet on dating apps or social media to invest or trade virtual currencies. The FBI’s Internet Crime Complaint Center has filed over 1,800 reports of crypto-focused romance scams with losses of up to $133 million in the first seven months of 2021.
Otherwise, scammers could pose as legitimate virtual currency traders or set up fake exchanges to trick people into giving them money. Another crypto scam involves fraudulent sales pitches for individual cryptocurrency retirement accounts. Then there is simple cryptocurrency hacking, where criminals break into the digital wallets people use to store their virtual currency in order to steal it.
Is cryptocurrency safe?
Cryptocurrencies are usually created using blockchain technology. Blockchain describes how transactions are recorded in “blocks” and timestamped. It’s a fairly complex technical process, but the result is a digital record of cryptocurrency transactions that is difficult for hackers to falsify.
Additionally, transactions require a two-factor authentication process. For example, you may be prompted for a username and password to start a transaction. Next, you may need to enter a passcode which will be texted to your personal cell phone.
Although safeguards are in place, this does not mean that cryptocurrencies are not hackable. Several expensive hacks have cost cryptocurrency startups dearly. Hackers hit Coincheck with $534 million and BitGrail with $195 million, making them two of the biggest cryptocurrency hacks of 2018.
Unlike government-backed money, the value of virtual currencies is entirely determined by supply and demand. This can lead to wild swings that net investors big profits or big losses. And cryptocurrency investments are subject to far less regulatory protection than traditional financial products such as stocks, bonds, and mutual funds.
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 prepare yourself 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.
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