A cryptocurrency is a form of virtual currency that uses encryption techniques as means of securing the verification of transactions.
It can be centralized or decentralized, depending on the method of issuance of that particular digital currency.
The cryptography is used to secure and also verify transactions, as well as to control the creation of new units of new cryptocurrencies.
How does cryptocurrency work?
Cryptocurrency does not need bank, third-party or any other financial institution to be transacted.
User can simply transfer or trade cryptocurrencies between each online freely, and even without trusting each other with their financial information.
Cryptocurrencies do this by recording every transaction (like the one above between Peter and Paul) on a shared database called a blockchain.
How to use cryptocurrency
Cryptocurrency adoption levels are increasing across the world at a remarkable rate. Today, more companies accept crypto than ever.
It means you can use cryptocurrency to pay for products and services in physical stores and online – something that was unheard of just a few years ago.
Before you can use Bitcoin or any other token, you’ll need to buy some crypto. It’s easy to do; several services exist that make the process painless.
Once you’re up and running, you’ll be able to use crypto credit cards and even send crypto to your friends and family via SMS.
It costs a fraction of the cost of sending money via a bank, especially if you’re making an international transfer.
Do you know crypto has even seeped into the entertainment world?
There are crypto board and blockchain-based mobile games that you can play.
There are many kinds of cryptocurrency, but all of them has these things in common. Every cryptocurrency must be aimed at these things below:
Cryptocurrencies are digital money (or digital currencies), which means that, it only exists in computers. Cryptocurrencies don’t have physical coins or paper notes just like the popular fiat money.
A cryptocurrency can only be passed from person to person digitally. You don’t need to pass it through any financial institution to get it through to the person you are transferring it to.
A cryptocurrency is the same in every country, and this is to say that, they can be used freely between countries and across borders.
This is where we get the crypto part of the cryptocurrency definition. Crypto is Latin for hidden. So, cryptocurrency translates as hidden money.
In cryptocurrency world, everyone is in charge of their own money, it isn’t kept in a bank. A bank is a centre, where lots of people keep money.
Cryptocurrencies are not managed by a central server, that’s why we say they are decentralized.
The way cryptocurrencies are built means that you don’t have to trust anyone in the system in order for it to work.
Status of “money” and virtual currencies
The nature of “money” of decentralized cryptocurrency is to be questioned.
Money is traditionally identified with three functions:
- Money as a means of exchange;
- Money as a unit of account;
- Money as a store of value.
Fiat money vs digital currencies
Fiat money is a currency that a government has declared to be legal tender, but not backed by a physical commodity.
The value of fiat money is derived from the relationship between supply and demand, rather than from the value of the material that the money is made of.
Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on the faith and credit of the economy.
Fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. If people lose faith in a nation’s paper currency, like the U.S. dollar bill, the money will no longer hold any value.
In the process of trying to define “virtual currencies,” we run into several problems. The problem becomes all the more evident when considering that a “currency” essentially requires a statutory definition.
Virtual currencies however, lack a normative definition. From the “synthesis” of this syllogism, we can deduce that virtual currencies are not actually “currencies” because of the legal vacuum surrounding them.
This makes them both extremely attractive and dangerous as they’re still in the ‘legal grey zone’.
This absence of clear regulation, however, does not mean that they are not being closely monitored by regulatory agencies around the world.
Virtual currencies have traditionally been classified according to their relationship with “real money” and the “real economy”, taking into account how the money flows between virtual currencies and real currencies works.
According to these characteristics, the existing virtual currency schemes have been divided into…
- Closed virtual currency schemes (that have scarce, if any, interaction with the real economy; e.g. currencies used for online games);
- Virtual currency schemes with unidirectional flow (that implies an irreversible conversion at a specific exchange rate from the “real currency” to the “virtual currency” that can then be used both to buy virtual and real goods and services; e.g. “credits”, “vouchers”, “points” or other “bonus” systems);
- Virtual currency schemes with a bidirectional flow (virtual currencies can be bought and sold according to exchange rates with real currencies and can also be used to purchase both virtual and real goods and services; e.g. Bitcoins).
However, virtual currencies that are most interesting to the watchful eye of the regulators are Bitcoin, Ethereum, Litecoin, Dogecoin and other top-ranking crypto-coins in the market.
Cryptocurrency vs penny stocks
In the previous years, investors have been asking one central question;
Which would be more profitable when I invest in cryptocurrency vs stock?
While this debate among some investors still appears to be going on, many experts agree that cryptocurrencies offer the volatility that leads to consistently unrivalled returns with very few downsides.
There are external tools that analyse markets and trends to give investment advice that better secures successful crypto investments.
The general consensus among some inexperienced investors on reddit, is that volatility is the same as unpredictability, making some investors shy away from cryptocurrency.
This, however, is not the case.
Using external tools that can analyse and predict future price actions greatly improves one’s odds of capitalizing on the benefits of a volatile market, while keeping the potential downsides in check.
How to invest in cryptocurrency
If you are interested in making money from different blockchain projects, you should read my comprehensive guide on how to start crypto investment.
Note: It’s not always easy to pick the right cryptocurrency exchange for your investment needs.
For instance, the best exchanges for Americans may not be the same for users in other regions, due to difference in governmental regulations.
It has both a US and worldwide version, but be aware that you will need to go through a KYC (Know Your Customer) and ID verification process.
Before you start, make sure to know what you’re doing. Failure to prepare well is a sure-fire way to lose money, and you should know that, there are crypto investment risks involve.
Luckily, there are dozens of greats books about crypto business, as well as plenty of cryptocurrency investment YouTube channels that you can explore.
Now that you have a better understanding of what cryptocurrency is all about, you may want to know about the top cryptocurrencies, and maybe, get started by investing in some of them.
Bitcoin (BTC) is the original cryptocurrency, it is the market leader due to its established reputation worldwide, its security and the huge community base powering it.
It holds significant value and has received media attention around the world.
Retailers such as Overstock.com accept payments and Bitcoin, and Amazon allows consumers to purchase gift cards with BTC crypto-coins.
Brief history of Bitcoin
Satoshi Nakamoto is fictional name provided as the inventor of the first ever cryptocurrency, Bitcoin. Some believe that Satoshi is, in fact, a pseudonym for a group of people.
The community believes that Nakamoto started working on the project in 2007.
In 2008 the Bitcoin domain was registered on a site that allows the anonymous registration of domain names. Bitcoin.org was up and running a year after Satoshi started working on the concept.
Nakamoto then quickly moved to publish a piece that explained in full what Bitcoin was, how it worked and how double spending would be prevented.
The first mining took place in January 2009 after the project was registered on SourceForge.net – a website focused on open source software.
Bitcoin was actually intended to be a peer-to-peer electronic cash system and not a currency. Many had tried and ultimately failed in their attempts to design digital money previously.
Bitcoin founder Satoshi Nakamoto made the first cryptocurrency transaction, sending Hal Finney 100 bitcoins on January 12th, 2009.
Currently, Bitcoin is the most valuable cryptocurrency, and is valued at $96 billion, which is about 57% of the entire crypto-market.
Bitcoin was designed as a digital currency cash system, while Ethereum (ETH) was designed to help companies deploy applications on the distributed blockchain.
The underlying currency, called Ether, acts as the fuel that powers these applications. Currently, Etherum is valued at $28 billion.
Ethereum is often referred to as a ‘Swiss Army knife’ and supports numerous use cases which can range from ticket sales, escrow agents, online gaming betting, and more.
Ripple (XRP) is a digital asset targeted to allow financial institutions to make global payments more easily and more cheaply. Ripple is currently valued at $7.8 billion
To meet the demand of these institutions, their technology also focuses on transaction throughput and already can handle about 200 times more transactions per second than Bitcoin can.
They already boast a strong list of customers which includes RBC, UBS, Santander, CIBC, and more than a dozen other banks, crypto exchanges, and payment providers.
Litecoin (LTC) was released in 2012 as a ‘lite’ version of Bitcoin, built using much of the original Bitcoin code base. It is currently worth $2.9 billion
Its primary advantages are that it supports much faster payments and far more transaction throughput than Bitcoin, capable of handling global payments in less than one second.
Litecoin is sometimes referred to as the ‘test bed’ for Bitcoin because it is known to adopt and implement technological advancements much quicker and more smoothly than Bitcoin.
With no central authority, it’s difficult to hack, censor, or otherwise stop cryptocurrency – and this is why it’s so brilliant.
The technology behind crypto – the immutable blockchain – is also incredibly secure. It’s almost impossible for accounts and balances to be falsified, and crypto transactions are near-bulletproof.
But crypto does have some security issues that are unique to the sector.
For example, there are thousands of crypto scams that you need to watch out for. They can take the form of ICOs, fundraisers, or too-good-to-be-true trading ideas.
You also need to be wary of exchange hacks. Some of the worst hacks in crypto history have seen billions of dollars stolen, much of which was never returned.
If you’re worried about your privacy, make sure you use an anonymous crypto wallet. You could also try a non-custodial wallet like Unstoppable.
To keep your investment safe, make sure you never leave funds in an exchange wallet unnecessarily. You can purchase one of the most trusted hardware wallets instead.