Cryptocurrency: meaning and definition
Cryptocurrency, sometimes referred to as cryptocurrency or cryptocurrency, is a form of money that exists in digital or virtual form and uses cryptography to secure transactions. Cryptocurrencies do not have a central issuing authority or regulator, but they use a decentralized system to record transactions and issue new units.
What is a cryptocurrency?
A cryptocurrency is a digital payment system that does not rely on banks to verify transactions. It is a P2P (peer-to-peer) sharing system allowing anyone to send and receive payments anywhere. It is not physical money transported or exchanged in the real world: cryptocurrency payments are purely virtual entries made in an online database and corresponding to certain specific transactions. When you transfer funds in cryptocurrency, the transactions are recorded in a public ledger. Cryptocurrencies are stored in digital wallets.
These cryptocurrencies were named so because they use encryption to verify transactions. In other words, they incorporate complex coding to store and transfer cryptocurrency data from wallets to public ledgers. Encryption is intended to provide security.
The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today. Much of the interest in cryptocurrencies lies in the pursuit of profit, with speculators sometimes driving prices sky-high.
How do cryptocurrencies work?
Cryptocurrencies operate on a distributed public ledger called blockchain, an up-to-date record of all transactions held by holders of a currency.
Cryptocurrency units are created through a process called “mining,” which involves using the power of computers to solve complicated mathematical problems that generate coins. Users can also buy the coins from brokers and then store and spend them using crypto wallets.
If you own cryptocurrency, you don’t own anything tangible. What you have is a key that allows you to move a record or a unit of measurement from one person to another without going through a trusted third party.
Although Bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still booming financially, and new uses are expected in the future. Transactions including bonds, stocks and other financial assets could eventually be exchanged using this technology.
Examples of cryptocurrencies
There are thousands of cryptocurrencies. Examples of known cryptocurrencies:
Founded in 2009, Bitcoin was the first cryptocurrency and remains the most traded. The currency was developed by Satoshi Nakamoto, believed to be the pseudonym of a person or group of people whose precise identity remains unknown.
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.
This currency most closely resembles Bitcoin, but has evolved faster to develop innovations including faster payments as well as processes for more transactions.
Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track different types of transactions, not just cryptocurrencies. The company behind it has worked with various banks and financial institutions.
Cryptocurrencies other than Bitcoin are commonly referred to as “altcoins” to distinguish them from the original currency.
How to buy cryptocurrencies?
You may be wondering how to buy cryptocurrencies safely. The procedure usually takes place in three stages. Here they are :
Step 1: Choosing a platform
The first step is to decide which platform to use. In general, you have the choice between a traditional broker and a specialized cryptocurrency exchange platform:
- Traditional brokers. These are online brokers that offer ways to buy and sell cryptocurrencies, as well as other financial assets such as stocks, bonds, and ETFs. These platforms tend to offer lower trading costs, but fewer cryptocurrency-related features.
- Cryptocurrency exchange platforms. There are many cryptocurrency exchanges to choose from, each offering different cryptocurrencies, different wallet storages, different interest-earning account options, and more. Many exchanges apply asset-based fees.
When comparing the different platforms, consider the cryptocurrencies offered, the fees they charge, their security features, storage and withdrawal options, and educational resources.
Step 2: Funding your account
Once you have chosen your platform, the next step is to fund your account so that you can start trading currencies. Most cryptocurrency exchanges allow users to purchase cryptocurrencies using fiat (i.e. government-issued) currencies, such as US dollars, British pounds or Euros using their debit or credit cards (although this varies by platform).
Credit card cryptocurrency purchases are considered risky, and some exchanges do not support them. Some credit card companies also do not allow cryptocurrency transactions. Indeed, cryptocurrencies are very volatile and it is not advisable to risk going into debt (or potentially paying high credit card transaction fees) for certain assets.
Some platforms also accept ACH transfers as well as bank transfers. Accepted payment methods and deposit or withdrawal times differ between platforms. Similarly, the time it takes to validate deposits varies by payment method.
Fees are an important factor to consider. These include any deposit and withdrawal transaction fees as well as transaction fees. The fees vary depending on the payment method and the platform, which should be checked upfront.
Step 3: Placing an order
You can place an order through the web or mobile platform of your broker or exchange. If you are considering buying cryptocurrency, you can do so by selecting “buy”, choosing the type of order, entering the amount of cryptocurrency you wish to buy and confirming the order. The same process applies to “sell” orders.
There are also other ways to invest in cryptocurrencies. These include payment services, such as PayPal, Cash App, and Venmo, which allow users to buy, sell, or hold cryptocurrencies. The following investment instruments are also available:
- Bitcoin funds: You can buy shares of bitcoin trusts with a regular brokerage account. These instruments allow retail investors to gain exposure to cryptocurrencies 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 invest in cryptocurrency indirectly through blockchain companies that specialize in the technology that underpins cryptocurrency and cryptocurrency transactions. You can also buy stocks or ETFs from companies that use blockchain technology.
The best option for you will depend on your investment goals and risk appetite.
How to store cryptocurrencies?
Once you have purchased cryptocurrencies, you need to store them securely to protect them from hacks or theft. Usually, cryptocurrencies are stored in cryptocurrency wallets, which are physical devices or online software used to securely store the private keys of your cryptocurrencies. Some exchanges provide wallet services, which makes it easier for you to make purchases directly on the platform. However, not all exchanges or brokers automatically provide wallet services.
There are various wallet providers you can choose from. The terms “hot wallet” and “cold wallet” are used:
- Hot Wallet: “Hot wallets” refer to cryptocurrency storage that uses online software to protect the private keys to your assets.
- Cold wallet: Unlike hot wallets, cold wallets (also known as hardware wallets) rely on offline electronic devices to securely store your private keys.
In general, cold wallets tend to charge fees, while hot wallets do not.
What can you buy with cryptocurrency?
When it was first launched, Bitcoin was meant to be an everyday transaction medium, enabling the purchase of everything from a cup of coffee to a computer, even high-value assets like real estate. This has yet to materialize, and while the number of institutions accepting cryptocurrencies is increasing, large transactions involving them are rare. Despite this, it is possible to buy a wide variety of products on e-commerce websites using cryptocurrencies. Here are some examples :
Technology and e-commerce sites:
Several companies that sell technology products accept cryptocurrencies on their websites, such as newegg.com, AT&T, and Microsoft. Overstock, an online trading platform, was among the first sites to accept Bitcoin. Shopify, Rakuten, and Home Depot also accept it.
Luxury products :
Some luxury brands accept cryptocurrency as a method of payment. For example, online luxury retailer Bitdials allows Bitcoin to be used to buy Rolex, Patek Philippe and other high-end timepieces.
Some car dealerships – ranging from high-end consumer brands to high-end luxury dealerships – already accept cryptocurrency as a method of payment.
In April 2021, Swiss insurer AXA announced that it had started accepting Bitcoin as a form 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 United States, also accepts Bitcoin for premium payment.
If you want to spend cryptocurrency at a retailer that doesn’t accept it directly, you can use a cryptocurrency debit card, like BitPay in the US.
Cryptocurrency frauds and scams
Unfortunately, cryptocurrency crime is on the rise. Cryptocurrency scams include the following:
Fake Websites: Fake sites that feature fake testimonials and crypto lingo promising massive, guaranteed returns, provided you keep investing.
Virtual Ponzi pyramid schemes: Cryptocurrency criminals promote non-existent opportunities to invest in digital currencies and create the illusion of huge returns by paying off old investors with money from new ones. A scam operation, BitClub Network, raised more than $700 million before its perpetrators were indicted in December 2019.
“Celebrity” endorsement: Scammers pretend to be billionaires or well-known personalities online who promise to multiply your investment in a virtual currency, but actually steal what you send them. They may also use messaging apps or chat rooms to start rumors that a famous businessman is supporting a particular cryptocurrency. Once they encourage investors to buy and drive up the price, the scammers sell their shares and the currency loses its value.
Romance scams: The FBI warns of a trend of online dating scams, where fraudsters persuade people they meet on dating apps or social media to invest or trade virtual currencies. The FBI’s Internet Crime Complaint Center received more than 1,800 reports of cryptocurrency-related romance scams in the first seven months of 2021, with losses reaching $133 million.
Cybercriminals can also pose as legitimate virtual currency traders or set up fake exchanges to trick people into giving them money. Another cryptocurrency scam involves fraudulent sales pitches for individual cryptocurrency retirement accounts. Then there is outright cryptocurrency hacking, where criminals break into digital wallets where users store their virtual currency in order to steal it.
Are cryptocurrencies safe?
Cryptocurrencies are generally based on blockchain technology. Blockchain describes how transactions are recorded in “blocks” and timestamped. This is quite a complex technical process, but ultimately results in a digital record of cryptocurrency transactions that hackers have a hard time tampering with.
Additionally, transactions require a two-factor authentication process. For example, you may be asked to enter a username and password to start a transaction. Next, an authentication code sent by SMS to your mobile phone may need to be entered.
Although security measures are in place, cryptocurrencies are not immune to hacking. Several large-scale hacks have cost young cryptocurrency companies dearly. Hackers attacked Coincheck for $534 million and BitGrail for $195 million, making them two of the biggest cryptocurrency hacks of 2018.
Unlike government-backed currency, the value of virtual currencies is entirely determined by supply and demand. This can create wild swings that produce big gains for investors or big losses. Additionally, cryptocurrency investments are subject to far less regulatory protection than traditional financial products, such as stocks, bonds, and mutual funds.
Four ways to invest in cryptocurrency safely
According to consumer reports, all investments involve risk, but some experts consider cryptocurrencies to be one of the riskiest investment choices. If you’re considering investing in cryptocurrencies, these tips can help you make informed choices.
Learn about exchange platforms:
Before investing, find out about cryptocurrency exchange platforms. It is estimated that there are over 500 exchanges to choose from. Do some research, read reviews, and chat with more experienced investors before jumping in.
Find out how to store your digital currencies:
If you buy cryptocurrency, you must store it. You can keep it on an exchange or in a digital wallet. Although there are many kinds of wallets, each has its advantages, technical requirements and security. As with exchanges, you should think about your storage choices before investing.
Diversify your investments:
Diversification is essential in any good investment strategy, and this is especially true when investing in cryptocurrencies. Don’t invest all your money in Bitcoin, for example, just because it’s the name you know. There are thousands of possibilities, and it’s best to spread your investment across multiple currencies.
Prepare for currency volatility:
The cryptocurrency market is very volatile, so be prepared for fluctuations. You will observe dramatic price variations. If your investment portfolio is not able to handle them or if your temperament does not adapt well to these upheavals, cryptocurrencies may not be a wise choice for you.
Cryptocurrencies are all the rage right now, but remember that they are still in their infancy and are considered highly speculative. Investing in something new is not easy, so prepare yourself properly. If you’re considering getting started, do your research and invest wisely to get started.
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