Browsing: Cryptocurrency

What Is Cryptocurrency?

A cryptocurrency is a digital or virtual currency that is secured by cryptography. Widespread opinion claims that cryptocurrency is nearly impossible to counterfeit or double-spend.

Many cryptocurrencies are decentralized networks based on blockchain technology – a distributed ledger enforced by a disparate network of computers.

The most important feature of cryptocurrencies is that they are generally not issued by any central authority. That’s why cryptocurrency is theoretically immune to government interference or manipulation.

Key Takeaways

• A cryptocurrency is a form of digital asset based on a decentralized network that is distributed across a large number of computers. No governments and central authorities can control these networks.
• Experts believe that blockchain and related technology will disrupt many industries, including finance and law.
• Decentralized systems do not collapse at a single point of failure, which makes cryptocurrencies stable.
• The disadvantages of cryptocurrencies include their price volatility, high energy consumption for mining, and use in criminal activities.

Understanding Cryptocurrencies

Cryptocurrencies are digital or virtual currencies that use cryptographic systems and decentralized blockchain networks.

Cryptocurrencies enable secure online payments without third-party intermediaries.

The word “crypto” is used to describe various encryption algorithms and cryptographic techniques that safeguard the transactions and any other operations with cryptocurrencies.

These techniques include elliptical curve encryption, public-private key pairs, and hashing functions.

There are two ways to acquire cryptocurrencies. They can either be mined or purchased from cryptocurrency exchanges.

Cryptocurrencies, even popular ones like Bitcoin, are still hardly used for retail transactions. However, the skyrocketing value of cryptocurrencies has made them popular as trading instruments.

Blockchain

Blockchain technology is essential to cryptocurrencies.

This technology is based on creating chains of interconnected blocks of information.

Each block contains a set of transactions that have been independently verified by each member of the network. Every new block generated must be verified by each node before being confirmed, making it almost impossible to forge transaction histories.

It’s also possible that blockchain technology can process transactions much faster than the existing payment processing systems.

Most popular Cryptocurrencies

Beyond any doubt, the most popular cryptocurrency now is Bitcoin (BTC). It is the first cryptocurrency and it still dominates the market.

Every crypto that is not Bitcoin is nowadays referred to as altcoin. The most popular and influential altcoin is Ether (ETH).

But it is now closely followed by Solana, Binance Coin, Tether, Avalanche, Cardano, XRP etc.

New cryptocurrencies continue to appear almost everyday.

Bitcoin is the most popular and valuable cryptocurrency. An anonymous person called Satoshi Nakamoto invented it and introduced it to the world via a white paper in 2008. There are thousands of cryptocurrencies present in the market today.

Each cryptocurrency claims to have a different function and specification. For example, Ethereum’s ether markets itself as gas for the underlying smart contract platform. Ripple’s XRP is used by banks to facilitate transfers between different geographies.

By November 2021, the aggregate value of all the cryptocurrencies in existence had reached over $2.1 trillion—Bitcoin represented approximately 41% of that total value.

Bitcoin

The first cryptocurrency is still the most popular. It is still being mined and is considered to be the most secure thanks to it Proof-of-Work model.

Bitcoin, which was made available to the public in 2009, remains the most widely traded and covered cryptocurrency. As of November 2021, there were over 18.8 million bitcoins in circulation with a total market cap of around $1.2 trillion. Only 21 million bitcoins will ever exist.

Though very volatile, Bitcoin is still a very popular tool for crypto investors. And the price of BTC to USD is the main indicator of the crypto market.

Ether

ETH is based on the Ethereum blockchain which is different from Bitcoin blockchain. Until recently ETH was mostly mined, but the upcoming switch to Proof-of-Stake model.

Are Cryptocurrencies Legal?

Unlike fiat currencies that are backed by governments, cryptocurrencies are not backed by any public or private entities.

Therefore, it has been difficult to make a case for their legal status in different financial jurisdictions throughout the world.

Cryptocurrencies have largely functioned outside most existing financial infrastructure. The legal status of cryptocurrencies has implications for their use in daily transactions and trading. In June 2019, the Financial Action Task Force (FATF) recommended that wire transfers of cryptocurrencies should be subject to the requirements of its Travel Rule, which requires AML compliance.
In December 2021 El Salvador became the first country in the world to allow Bitcoin as legal tender for monetary transactions. In March 2022 Ukraine became the second country with this kind of legalization, although unlike El Salvador BTC is not named as equal currency to Ukrainian hrynvya. In the rest of the world, cryptocurrency regulation varies by jurisdiction.

In most Western countries cryptocurrency exchanges operating in the country are subject to collect information about the customer and details relating to the wire transfer.

In summer 2021 China banned cryptocurrency exchanges and mining within its borders. India is also discussing a mining ban. Russian authorities were to ban mining and crypto activities in January, but have radically changed course after invasion to Ukraine.

Cryptocurrencies are legal in the European Union. Derivatives and other products that use cryptocurrencies will need to qualify as “financial instruments.”
In June 2021, the European Commission released the Markets in Crypto-Assets (MiCA) regulation that sets safeguards for regulation and establishes rules for companies or vendors providing financial services using cryptocurrencies.8 Within the United States, the biggest and most sophisticated financial market in the world, crypto derivatives such as Bitcoin futures are available on the Chicago Mercantile Exchange. The Securities and Exchange Commission (SEC) has said that Bitcoin and Ethereum are not securities.

Advantages and Disadvantages of Cryptocurrency

Advantages

Cryptocurrencies represent a new, decentralized paradigm for money.
Intermediaries, such as banks, are not needed to enforce trust and police transactions between two parties. A system with cryptocurrencies eliminates the possibility of a single point of failure, such as a large bank, setting off a cascade of crises around the world.

Cryptocurrencies promise to make it easier to transfer funds directly between two people or organizations.

Decentralized transfers are secured by the use of public keys and private keys. Also no third-party intermediaries mean that cryptocurrency transfers between two transacting parties are faster than standard money transfers.

Cryptocurrency investments generate profits as crypto markets have skyrocketed in value over the past decade. In February 2022 the crypto capitalization reached almost $2 trillion with Bitcoin valued at more than $862 billion in crypto markets.

Cryptocurrency can easily cross any borders. Sometimes it is difficult to transfer fiat money from one country to another. But it can be done easily with cryptocurrencies such as Bitcoin that serve as intermediate resources. For instance, a fiat currency is converted to Bitcoin (or another cryptocurrency), transferred across borders and, subsequently, converted to the destination fiat currency.

Disadvantages

The crypto prices are highly volatile, and governments do not secure such investments.

The aforementioned ability to transfer funds across the border might also be considered as a help to all kinds of illegal activities. For example, Russians are already actively using this kind of transfers to withdraw money avoiding sanctions.
Though they claim to be an anonymous form of transaction, cryptocurrencies are actually pseudonymous. They leave a digital trail that agencies such as the Federal Bureau of Investigation (FBI) can decipher. This opens up possibilities of governments or federal authorities tracking the financial transactions of ordinary citizens.

Cryptocurrencies have become a popular tool with criminals for nefarious activities such as money laundering and illicit purchases. The case of Dread Pirate Roberts, who ran a marketplace to sell drugs on the dark web, is already well known. Cryptocurrencies have also become a favorite of hackers who use them for ransomware activities.

In theory, cryptocurrencies are meant to be decentralized, their wealth distributed between many parties on a blockchain. In reality, ownership is highly concentrated. For example, an MIT study found that just 11,000 investors held roughly 45% of Bitcoin’s surging value.

One of the conceits of cryptocurrencies is that anyone can mine them using a computer with an Internet connection. However, mining popular cryptocurrencies requires considerable energy, sometimes as much energy as entire countries consume.

There are some questions concerning security. While cryptocurrency blockchains are highly secure, other crypto repositories, such as exchanges and wallets, can be hacked. Many cryptocurrency exchanges and wallets have been hacked over the years, sometimes resulting in stealing coins worth millions of dollars.

High volatility is another problem. Bitcoin has experienced rapid surges and crashes in its value, climbing to as high as $69,000 in November 2021 before dropping to $32,000 in the following months.

How to buy cryptocurrency

You can buy cryptocurrency in a few simple steps.

Choose a Broker or Crypto Exchange

To buy cryptocurrency, first you need to pick a broker or a crypto exchange. While either lets you buy crypto, there are a few key differences between them to keep in mind.

What Is a Cryptocurrency Exchange?

A cryptocurrency exchange is a platform where buyers and sellers meet to trade cryptocurrencies. Exchanges often have relatively low fees, but they tend to have more complex interfaces with multiple trade types and advanced performance charts, all of which can make them intimidating for new crypto investors.

Some of the most well-known cryptocurrency exchanges are Coinbase and Binance. While these companies’ standard trading interfaces may overwhelm beginners, particularly those without a background trading stocks, they also offer user-friendly easy purchase options.

What Is a Cryptocurrency Broker?

Cryptocurrency brokers take the complexity out of purchasing crypto, offering easy-to-use interfaces that interact with exchanges for you. Some charge higher fees than exchanges. Others claim to be “free” while making money by selling information about what you and other traders are buying and selling to large brokerages or funds or not executing your trade at the best possible market price.

While they’re undeniably convenient, you have to be careful with brokers because you may face restrictions on moving your cryptocurrency holdings off the platform.

Create and Verify Your Account

Once you decide on a cryptocurrency broker or exchange, you can sign up to open an account. Depending on the platform and the amount you plan to buy, you may have to verify your identity. This is an essential step to prevent fraud and meet federal regulatory requirements.

You may not be able to buy or sell cryptocurrency until you complete the verification process. The platform may ask you to submit a copy of your driver’s license or passport, and you may even be asked to upload a selfie to prove your appearance matches the documents you submit.

To buy crypto, you’ll need to make sure you have funds in your account. You might deposit money into your crypto account by linking your bank account, authorizing a wire transfer or even making a payment with a debit or credit card. Depending on the exchange or broker and your funding method, you may have to wait a few days before you can use the money you deposit to buy cryptocurrency.

Here’s one big buyer beware: While some exchanges or brokers allow you to deposit money from a credit card, doing so is extremely risky—and expensive. Credit card companies process cryptocurrency purchases with credit cards as cash advances.

This means they’re subject to higher interest rates than regular purchases, and you’ll also have to pay additional cash advance fees. For example, you may have to pay 5% of the transaction amount when you make a cash advance. This is on top of any fees that your crypto exchange or brokerage may charge; these can run up to 5% themselves, meaning you might lose 10% of your crypto purchase to fees.

Place Your Cryptocurrency Order

Once there is money in your account, you’re ready to place your first cryptocurrency order. There are hundreds of cryptocurrencies to choose from, ranging from well-known names like Bitcoin and Ethereum to more obscure cryptos like Theta Fuel or Holo.

When you decide on which cryptocurrency to purchase, you can enter its ticker symbol—Bitcoin, for instance is BTC—and how many coins you’d like to purchase. With most exchanges and brokers, you can purchase fractional shares of cryptocurrency, allowing you to buy a sliver of high-priced tokens like Bitcoin or Ethereum that otherwise take thousands to own.

How to mine cryptocurrency

Some cryptocurrencies like Bitcoin or Ethereum can be mined. In simple words, you can use your hardware to take part in the blockchain network and gain native tokens in return.

To put it into very simple terms, crypto mining is a process in which a machine performs certain tasks to obtain a little bit of cryptocurrency.

GPU mining

GPU mining is probably the most popular and well-known method of mining cryptocurrencies. If you google “cryptocurrency mining”, GPU rigs are going to be some of the first things that you’ll see.

Cloud miners, for example, use GPU rigs for their services. And these guys are professionals that sometimes have hundreds if not thousands of rigs, so they probably know what they’re doing, right?

CPU Mining

CPU mining utilizes processors to mine cryptocurrencies. It used to be a viable option back in the day, but currently, fewer and fewer people choose this method how to mine cryptocurrency daily.

There are a couple of reasons why that is. First of all, CPU mining is extremely slow. You could go on for months without noticing the smallest amount of revenue.

It’s also usually not worth it – you make very little amounts of money, but you probably spend ten times that amount on electricity and cooling. The problem mitigates itself by a bit if you can find a place that has nice cooling and cheap electricity bills, but that’s rarely the case.

So why do people still even use CPU mining, then? Basically because anyone with a desktop computer could do it.

The fact that it’s so easy to start cryptocurrency mining attracts new CPU miners every day. Some people that are looking for how to mine cryptocurrency don’t care about the details – they just want to start the process as soon as possible, and in any way possible.

Cloud Mining

If you’re looking for crypto mining ways, cloud mining is probably the most popular way to mine cryptocurrencies without having to lift a finger.

Cloud mining is a process where you pay someone (most often it’s a big corporation) a specific amount of money and “rent out” their mining machine called a “rig”, and the process of mining itself.

This rent lasts for an agreed-upon period, through which all of the earnings that the rig makes (minus the electricity and maintenance costs) are transferred to your cryptocurrency wallet.

The people (companies) that offer these cloud mining services usually have huge mining facilities with multiple farms (tens or hundreds of rigs stacked and operating together) at their disposal and know perfectly well how to mine cryptocurrency.

Cloud mining has become so popular mainly because it offers the possibility to participate in the world of cryptocurrencies for people who might not have enough money to buy their rigs or who perhaps simply aren’t interested in owning a rig.

There are two options of cloud mining – free and paid. Naturally, a lot of people that are looking for ways to mine cryptocurrency would gravitate towards the “free” options, but it does have its drawbacks (very slow mining speeds, extra conditions, etc.).

Paid cloud mining usually works like this:

You find a cloud mining host online. You check out the plans that the host offers – there are usually four or five of these plans, ranging from the cheapest to the most expensive one; some hosts even offer you the ability to create and customize your cloud mining plan.

Once you know what you want, you simply perform the transaction (meaning that you pay the host), register your cryptocurrency wallet code and that is how you make the first steps on how to mine cryptocurrency!

Different plans cost different amounts of money and last for a variety of periods. The standard plans can go anywhere from $500 up to $5000, and last from two years to a lifetime.

It is usually expected tat you’ll break even at around the half-a-year – one year mark, and then profit from that point onwards. No one can know for sure, though, because the prices of cryptocurrencies are very volatile and their prices tend to sway by quite a bit.

How to invest in cryptocurrency?

There are many cryptocurrencies on the market that have different fundamental values.

That’s why it’s important to have a strategy for investing in cryptocurrencies and to know how to manage your risk.

Beginner crypto investors may want to consider elements such as transaction fees, types of cryptocurrencies available on a platform, available education resources and other features that may align with their interests and goals.

There are many crypto exchanges from which to choose. Binance is the most popular crypto exchange all over the world. Others, like Coinbase, eToro and Gemini also offer easy, accessible and secure platforms for owning and conducting transactions with cryptocurrencies.

Take into consideration the role cryptocurrency will play in your portfolio. Because of the high volatility crypto assets should not allocate most of your investments.
Investors may also choose cryptocurrency as an inflation hedge. Experts say that since bond yields are not keeping up with inflation, cryptocurrencies can serve as a bond alternative.

What is the best cryptocurrency to invest in

Bitcoin is the most profitable crypto investment in case you are a lazy investor, not an active trader. While highly volatile, BTC still shows an amazing ability to recover after any falling. And at the end of each such cycle Bitcoin usually sets a new record of its price.

But active traders who are eager to spend hours on daily basis watching dozens of tokens can make significant profits from trading less known cryptocurrencies. High volatility seems more like an advantage in this scenario.

FAQ

What Is Cryptocurrency in Plain Words?

Cryptocurrencies are digital assets and decentralized systems that allow for secure online payments.

How Do You Get Cryptocurrency?

Anyone can purchase cryptocurrency from popular crypto exchanges such as Binance or Coinbase.

Why Does Cryptocurrency Exist?

Cryptocurrencies are a new paradigm for money. Their promise is to streamline existing financial architecture to make it faster and cheaper. Their technology and architecture decentralize existing monetary systems and make it possible for transacting parties to exchange value and money independently of intermediary institutions such as banks.

Can You Mine Cryptocurrency?

Cryptocurrencies are generated by mining. For example, Bitcoin is generated using Bitcoin mining.

The process involves downloading software that contains a partial or full history of transactions that have occurred in its network. Though anyone with a computer and an Internet connection can mine cryptocurrency, the energy- and resource-intensive nature of mining means that large firms dominate the industry.

What Are the Most Popular Cryptocurrencies?

Bitcoin is by far the most popular cryptocurrency followed by other cryptocurrencies such as Ethereum, Tether, Binance Coin, Solana, Avalanche, Polkadot and Cardano.

Are Cryptocurrencies Securities?

The SEC has said that Bitcoin and Ethereum, the top two cryptocurrencies by market cap, are not securities. It has not commented on the status of other cryptocurrencies.

What Is The Future of Cryptocurrency?

Bitcoin might become the new gold, while Ether and other altcoins will soon be popular enough to compete with fiat currencies in everydays global economy, many experts say.