What Is Cryptocurrency? Here’s Everything You Should Know

A cryptocurrency is a digital payment system used to buy goods and services virtually. It does not rely on banks to verify transactions but instead uses an online ledger with solid cryptography to secure them. The digital currency uses a decentralised system to record transactions and offer new units because it does not have a regulatory body or a central issuing. 

Cryptocurrency is used interchangeably with “crypto” and crypto-currency. The principal interest in this digital currency is to trade for profits, with speculators at times taking the prices upward.

The most famous crypto, Bitcoin, had volatile price tendencies hitting about $65,000 in April and crashing nearly half of its value in May. By September, the price had swiftly boomed again, reaching its all-time highs above $66,000 before dropping again. This writing discusses what cryptocurrencies are, how to purchase them and secure yourself. Read on to discover the seven things to know and consider in crypto-currency. 

1. What is cryptocurrency?

Cryptocurrency is a digital peer-to-peer system that enables individuals to make and receive payments from whichever location. Crypto payments exist entirely as digital entries to an online database with particular transactions rather than substantial money used in the real world.

Cryptocurrency derived its name from encryption, which is used to verify transactions. The objective of encryption is to offer security and safety. Additionally, the currency is stored in digital wallets; thus, advanced coding is needed to store and transmit cryptocurrency data between the wallets and the blockchain.

Companies issued their currencies called tokens, traded mainly for their services or goods and almost similar to casino chips or arcade tokens. Therefore, you will oblige to exchange the real money for a digital currency for you to access the services and goods.

Crypto-currency works using blockchain technology, decentralised expertise spread across many computers that record and manage transactions. Security is the most exciting feature of this technology.

Read more: What Is Blockchain? The Technology Behind Cryptocurrency

How does cryptocurrency work?

Cryptocurrency is a digital payment method maintained by a system of computers that uses cryptography to verify transactions. Digital currencies can also be explained as decentralised networks built on blockchain technology, a distributed ledger where a record of all transactions are updated and held by currency holders. The most profound feature of crypto is that no government or central authority controls it.

Crypto users acquire cryptocurrency units through a process called mining that uses computer power to solve complicated algorithms to generate coins. Also, the digital currency is purchased from crypto-currency exchanges or brokers, and it is then stored in digital wallets. Cryptocurrency is not a tangible asset; however, it is a key that allows you to move records or units of measure from one individual to another without involving a third intermediary. The most famous cryptocurrency, Bitcoin, was created in 2009. Despite Bitcoins presence in the market, crypto and applications of blockchain technology are still emerging in financial terms. More uses are being invented and expected to increase in the future. There is the possibility that stocks, bonds and other financial assets transactions could be made using the technology in due course.

2. How many cryptocurrencies are there? How much are they worth?

According to coinmarketcap.com, more than 15,000 digital currencies are traded publicly, and they continue to multiply. As of Dec 10, 2021, the total value of all cryptocurrencies was nearly $2.3 trillion, having dropped off an all-time high of over $2.9 trillion weeks earlier. The total value of the most famous digital currency, Bitcoin, was estimated at nearly $932.4billion.

Cryptocurrency examples

There are multiple digital currencies. The most popular are:

Bitcoin

It was the first cryptocurrency developed in 2009 by pseudonymous Satoshi Nakamoto. Even to date, Bitcoin is the most commonly traded crypto.

Ethereum

Ethereum is a blockchain platform with its crypto called Ether (ETH) or Ethereum. It is the most well-known currency after Bitcoin. It was created in 2015.

Litecoin

This currency is quite similar to Bitcoin, although it has quickly developed innovations that ensure faster processes and payments to allow several transactions.

Ripple

Apart from cryptocurrency, Ripple is used to tracking various kinds of transactions. It is also described as a distributed ledger system developed in 2012. The company that built Ripple has been used in financial institutions and with different banks.

Non-Bitcoin cryptocurrencies are collectively called “Altcoins” to differentiate them from the original; they are alternative digital currencies to Bitcoin.

Best top 10 cryptocurrencies by market cap

This information is per Dec 10, 2021.

3. Why are cryptocurrencies so popular?

Digital currencies attract supporters for various reasons that differ from one individual to another. The most known factors are:

Some users like the crypto technology, blockchain, a decentralised recording and processing system that is more secure than traditional payments systems.

Banks tend to decrease the value of money through inflation over time; thus, some supporters like the fact that the digital currency gets rid of central banks from controlling the money supply. 

Some speculators like cryptocurrency because it is growing up in value and have no appeal in its long-term acceptance as a means to move funds.

The Crypto community sees cryptocurrencies such as Bitcoin as the future currency; hence they are racing to buy it before it shoots in value.

Read more: How to Buy Ethereum

What can you buy with cryptocurrency?

When Bitcoin was launched in 2009, its primary purpose was to act as a medium of daily transactions, making it possible to buy a cup of tea or a laptop or even make more significant purchases such as real estate investments. However, the first primary purpose has not materialised since the number of institutions accepting digital currencies continues to grow. Nevertheless, it is possible to purchase various products and services from e-commerce websites using crypto. 

Here are some examples:

Cars – Many car dealers, from mass-market brands to high-end luxury dealers, already accept digital currency as a form of payment.

Luxury goods – Some luxury retailers allow cryptocurrency as a payment method for their products and services. For instance, online luxury retailer Bitdials offers Rolex and other luxurious watches in exchange for Bitcoin.

Insurance – some insurers accept Bitcoin as the mode of payment; for example, in April 2021, Swiss insurer AXA announced that it would be using Bitcoin to pay all its insurance lines except life insurance due to regulatory issues. Also, Premier Shield Insurance accepts Bitcoin for premium payments. The company is based in the United States, and it sells home and auto insurance policies.

Technology and e-commerce sites – several companies that trade tech products accept digital currencies as a payment method on their websites, such as Microsoft, Shopify and Home Depot. However, an e-commerce platform called Overstock was among the first to accept Bitcoin as a payment method.

You can use a crypto debit card such as BitPay to spend your digital currency at a retailer that does not accept it directly in the United States.

4. Is cryptocurrency a good investment?

It is possible to get filthy rich by trading cryptocurrencies in 2021, but you could also lose all of your money in a matter of seconds. Both are possible since investing in digital currency is risky, and however, it can be potentially highly profitable in the same measure.

Cryptocurrencies do not generate cash flow, unlike real money, and despite their value growth, most investors do not see it as a real investment but mere speculation. For an individual to profit in crypto, another person has to pay more for the token than you did. Cryptocurrencies contrast the well-managed businesses, which inflate in value over time by increasing the profitability and cash flow of the venture; thus, likening it to the “greater fool” theory of investment.

Notable individuals in the investor community have advised the wannabe investors to steer off the cryptocurrency business. For instance, a legendary investor Warren Buffet compared Bitcoin to paper checks and questioned the coin’s value. A currency needs stability and consistency for the traders and consumers to determine a fair cost for the services and goods.

Cryptocurrency has recorded a lot of volatility throughout much of its history. Taking an example of Bitcoin, it traded at nearly $20,000 by fall of 2017; a year later, its price crashed to as low as $3200 and in December 2020, it was trading at its highs again.

If cryptocurrencies were worth more in future, the community would be reluctant to spend and circulate them today; thus, they would be less practical as a currency. The price volatility creates a dilemma since it would be unthoughtful to sell a Bitcoin at a lower price, knowing it will be three times worth more in value in the following year.

Read more: Is Bitcoin Safe? Investing in Bitcoin

Tips for investing in cryptocurrency safely

All investments are prone to risks but investing in cryptocurrency is riskier; therefore, do not invest more than you are willing to lose. Below are tips that can help you to make an informed decision:

Diversify your investments – spread your investment across various currencies. Please do not put all your assets in Bitcoin because it is the most popular and traded currency. Diversification is the core of any sound investment plan, which holds true when investing in digital currencies.

Research exchanges – do adequate research before selecting your exchange, read reviews and ask investors who have used the exchange in the past.

Prepare for volatility – cryptocurrency market is very volatile. The prices can be at their most high today, and tomorrow they plunge to their most lows. Therefore, have the mental capacity to handle the dramatic price swings.

Know how to store your digital currency – if you trade crypto, you have to store it; thus, you can keep it in an exchange or a digital wallet. However, there are various wallets, and each has its security features, technical capabilities and benefits. You should first research and investigate your storage choices for exchanges before investing.

When you adhere to the above tips, you can be assured of being safe from all kinds of crypto scams, frauds and uncertainty. However, considering the volatility of digital currencies, it is advised to diversify your investment across several cryptocurrencies. Also, do not invest more in online currencies than you are willing to lose.

5. How do I buy cryptocurrency?

The first step of buying cryptocurrencies is deciding which platform to use. You can choose between a traditional broker and a crypto-currency exchange. When comparing different mediums, consider; which crypto’s on offer, storage and withdrawal options, available education resources, charge fee and security features.

Fund your account after choosing a platform to begin trading. While some cryptocurrencies are available for purchase using US dollars, others need you to pay using Bitcoin or any other currency. You should consider fees since it differs from the payment method to the platform.

Place an order via your brokers or exchanges mobile application or website. If you plan to buy crypto, you can do so by selecting “buy”, choosing the order type, entering the number of currencies you want to purchase, and confirming the order.

Cryptocurrency is stored in crypto wallets. Some exchanges offer wallets, making it easier since you will keep tokens directly on the platform. However, not all platforms provide wallet services, and thus you can consider other providers such as hot wallet storage and cold wallet storage.

Coinbase is one of the most admired cryptocurrencies trading exchanges where you can build both a wallet and trade Bitcoin and other currencies. Robinhood offers free cryptocurrencies trading. Also, a rising number of online brokers offer currencies such as eToro, Sofi Active Investing and Tradestation.

How to store cryptocurrency

Typically, digital currency is stored in wallets, either physical devices or online software used to keep your private keys to your cryptocurrencies securely. However, not all brokers or exchanges provide you with wallet services. After purchasing cryptocurrencies from the broker or exchange platform, it is in your best interest to store your currency safely away from any possible scamming or theft.

There are various types of wallet providers to select from:

Hot wallet storage – hot wallet refers to the digital currency wallet that uses online software to secure private keys to your assets.

Cold wallet storage – cold wallets are also known as hardware wallets. Unlike Hot wallets, cold wallets rely on offline electronic devices to safely store your private keys.

Usually, cold wallets charge a fee, while hot wallets do not.

6. Are cryptocurrencies legal?

Digital currencies are legal in the United States, though; China has banned the use of digital currencies. Therefore, the legality of cryptocurrencies depends on each country. Also, be sure to find out how to protect yourself from fraudsters who see virtual currencies as an opportunity to steal from investors.

Read more: What Are Altcoins?

Cryptocurrency frauds and scams

It is miserable that crypto crime is prevalent. These online currency scams include:

Celebrity endorsements – scammers pose online as wealthy and use famous names that promise to multiply your investment in digital currency, then ask you for funds. They use messaging applications and social media platforms to spread gossips that a famous person is endorsing a particular cryptocurrency. They persuade investors to buy and raise the cost of the crypto just for them to sell their stake, and the currency reduces in value. Afterwards, steal what you send and ghost you.

Virtual ponzi schemes – digital currency thieves endorse imaginary opportunities to invest in cryptocurrency and create an illusion of huge returns by paying off old investors with newcomers’ money.

Romance scams – the scammers persuade people they meet in dating applications or social media platforms to invest in crypto. The fraudsters can fake identities as legitimate cryptocurrency traders to trick unsuspecting people into giving them money. Also, another scam involves fraudulent sales pitches for people retirement accounts in crypto. Then, there is the typical hacking where criminals hack into digital wallets where individuals keep their currency and steal it.

Fake websites – the fraudsters feature fake testimonials that guarantee massive returns if you keep investing.

7. How do I protect myself?

If you want to purchase digital currency in an Initial Coin Offering (ICO), read the fine print in the company’s leaflet for the following information:

The availability of other investors in the company- is a good sign since it means other famous investors want a piece of the token.

Know whether you will own a stake in the company or just tokens or currency. Owning a stake means you will participate in its earnings, while buying tokens means you are entitled to use them, like chips in a casino.

The company owner, an identifiable and well-known owner, is an appositive sign.

The further the development of the currency, the less risky it is. Therefore, It is crucial to know whether the coin is already developed or searching for funds to build it.

If the prospectus is detailed, there is a better chance that the currency is legitimate. However, the legitimacy of the coin does not mean it will succeed. Having cryptocurrencies exposes you to the risk of theft as hackers try to break into digital wallets where people store their virtual currency to steal it. Therefore, it is vital to use two-factor authentication processes when transacting.

Cryptocurrency is any currency that exists virtually or digitally and uses cryptography to protect buying and selling payments. It is a decentralised system that enables transactions from anywhere globally. Cryptocurrencies work by running on a Blockchain where all transactions are recorded, updated, and held by currency holders. Buying digital currency involves choosing a platform, creating an account and eventually placing an order. The coins are stored in a wallet. Also, the legality of virtual currency depends on the country; for example, cryptocurrencies are banned in China but legalised in the United States. Crypto crimes are on the rise, and it is essential to be aware and consider ways to protect yourself. Despite cryptocurrency being risky, it is a good investment if you want to increase direct exposure to the demand for digital currency.

Related articles:

• Is Bitcoin safe?
• How to buy Bitcoin?
• What are altcoins and how do they work?
• Safety measures when trading crypto