Cryptocurrencies, also known as crypto-currency or simply crypto, refer to digital or virtual currencies that leverage cryptography for transaction security. These forms of currency operate through a decentralized system, without a central authority for issuance or regulation, and are used to record transactions and generate new units.
What is cryptocurrency?
Cryptocurrency is a digital payment system that operates independently of banks to verify transactions, utilizing a peer-to-peer network to facilitate payments. Unlike physical currency, cryptocurrency exists purely as digital entries within an online database that describes specific transactions. These transactions are recorded in a public ledger when cryptocurrency funds are transferred, and are stored in digital wallets.
The term "cryptocurrency" is derived from the fact that it uses encryption to secure transactions. Sophisticated coding is involved in transmitting and storing cryptocurrency data between wallets and public ledgers, with the goal of ensuring security and safety.
The first and most well-known cryptocurrency is Bitcoin, which was established in 2009. Cryptocurrencies have garnered significant interest from traders seeking to profit, with speculation often driving prices to unprecedented levels.
How does cryptocurrency work?
Cryptocurrencies operate on a distributed public ledger known as the blockchain, which is a continuously updated record of all transactions held by currency holders.
The process of creating units of cryptocurrency is called mining, which involves using computer power to solve complex mathematical problems that generate coins. Users can also purchase cryptocurrencies from brokers and store them in cryptographic wallets for spending.
Owning cryptocurrency does not give ownership of any tangible asset, but rather a key that enables the transfer of a record or unit of measurement between individuals without the need for a trusted third party.
Despite the fact that Bitcoin has been in existence since 2009, cryptocurrencies and blockchain technology are still emerging in financial terms, with more applications expected in the future. The technology could eventually be used to trade financial assets such as bonds and stocks.
Cryptocurrency examples
There are numerous cryptocurrencies available, with some of the most well-known including:
Bitcoin:
Established in 2009, Bitcoin was the first cryptocurrency and remains the most widely traded. The currency was created by Satoshi Nakamoto, whose true identity is unknown but is believed to be a pseudonym for an individual or group.
Ethereum:
Launched in 2015, Ethereum is a blockchain platform that has its own cryptocurrency, called Ether (ETH) or Ethereum. It is the second most popular cryptocurrency after Bitcoin.
Litecoin:
Similar to Bitcoin, Litecoin has focused on developing new innovations, including quicker payments and processes to allow more transactions.
Ripple:
Ripple is a distributed ledger system that was founded in 2012. It can be used to track various types of transactions, not just cryptocurrencies. The company has partnered with numerous banks and financial institutions.
Collectively, non-Bitcoin cryptocurrencies are referred to as "altcoins" to distinguish them from the original.
How to buy cryptocurrency
If you're wondering how to safely buy cryptocurrency, there are typically three steps involved:
Step 1: Choose a platform
First, you need to decide on a platform. You can choose between a traditional broker or a dedicated cryptocurrency exchange. Traditional brokers offer ways to buy and sell cryptocurrency as well as other financial assets, while cryptocurrency exchanges offer different cryptocurrencies, wallet storage, interest-bearing accounts, and more. When comparing different platforms, consider which cryptocurrencies are on offer, the fees they charge, their security features, storage and withdrawal options, and any educational resources.
Step 2: Fund your account
Once you've chosen your platform, the next step is to fund your account so you can start trading. Most crypto exchanges allow users to purchase crypto using fiat currencies such as the US Dollar, the British Pound, or the Euro using their debit or credit cards, although this varies by platform. Some platforms also accept ACH transfers and wire transfers. An important factor to consider is fees, which include potential deposit and withdrawal transaction fees and trading fees. Fees will vary by payment method and platform.
Step 3: Place an order
You can place an order via your broker's or exchange's web or mobile platform. To buy cryptocurrencies, select "buy," choose the order type, enter the amount of cryptocurrencies you want to purchase, and confirm the order. The same process applies to "sell" orders.
Other ways to invest in crypto include payment services like PayPal, Cash App, and Venmo, Bitcoin trusts and mutual funds, and blockchain stocks or ETFs. The best option for you will depend on your investment goals and risk appetite. It's important to do your research and be aware of the risks involved in cryptocurrency investing.
How to store cryptocurrency
After purchasing cryptocurrency, it is important to securely store it to protect it from hacks or theft. The most common method of storing cryptocurrency is using crypto wallets, which can be physical devices or online software that store your private keys. Some exchanges provide wallet services, but not all do.
There are two types of wallets: hot and cold wallets. Hot wallets use online software to store your private keys, while cold wallets (also known as hardware wallets) use offline electronic devices.
Cold wallets are generally considered more secure, but they may come with fees, while hot wallets typically do not. When choosing a wallet provider, it is important to consider factors such as security features, ease of use, and fees.