Crypto

What Is Cryptocurrency and How Does It Work?

What Is Cryptocurrency and How Does It Work?

What is a cryptocurrency and how does it work? What you should be aware of.

Cryptocurrencies allow you to buy and sell goods and services for a profit. Learn more about bitcoin, including what it is, how to buy it, and how to protect yourself.

1. What exactly is a cryptocurrency?

A cryptocurrency (or “crypto”) is a type of payment that may be sent around the world without the need for a central monetary authority such as a government or bank. Cryptocurrencies, on the other hand, are created using cryptographic processes that allow users to purchase, sell, and trade them safely.

Cryptocurrencies can be used to buy and sell goods and services, but they are most commonly employed as investment vehicles. Cryptocurrency is also a crucial aspect of the operation of some decentralized financial networks, where digital tokens serve as a transactional tool.

Bitcoin, the most popular cryptocurrency, has a history of price volatility. It reached an all-time high of over $65,000 in 2021 before reversing course.

2. How do I get started investing in cryptocurrencies?

While some cryptocurrencies, such as Bitcoin, can be purchased with US dollars, others require bitcoins or another cryptocurrency to be purchased.

You’ll need a “wallet” — an internet tool that can store your cryptocurrency — to buy cryptocurrencies. In general, you open an account on a cryptocurrency exchange and then use real money to purchase cryptocurrencies like Bitcoin or Ethereum.

What cryptocurrencies are available through online brokers?

There are a few online brokers that give access to both cryptocurrency and equities if you’re used to standard brokerage accounts. Robinhood, Webull, SoFi Active Investing, and TradeStation are among the online brokers analyzed. Look for pure-play cryptocurrency exchanges if you’re seeking an exchange that only deals with cryptocurrencies. These platforms, such as Coinbase, Gemini, and Kraken, don’t provide access to traditional assets like stocks and bonds, but they usually provide a larger range of cryptocurrencies and greater wallet features.

3. How many different types of cryptocurrencies are there? So, how much are they worth?

According to CoinMarketCap.com, a market research website, over 16,000 different cryptocurrencies are publicly traded. Cryptocurrencies are still on the rise. On Jan. 3, 2022, the total value of all cryptocurrencies was at $2.2 trillion, down from an all-time high of over $2.9 trillion just weeks before.

Cryptocurrencies with the highest market capitalization

According to CoinMarketCap, a cryptocurrency statistics and analytics firm, these are the top ten trading cryptocurrencies by market capitalization.

Market Capitalization and Cryptocurrency

Bitcoin= 883.4 billion dollars

Ethereum= $448.2 billion dollars

Binance Coin (BNB)= 86.9 billion dollars

Tether= 78.4 billion dollars

Solana= $52.9 billion in revenue

Cardano= $44.9 billion in revenue

US Dollar Coin= $42.7 billion in revenue

XRP= $39.8 billion in revenue

Terra= 33.5 billion dollars

Polkadot $29.6 billion in revenue

4. What is the appeal of cryptocurrencies?

For a variety of reasons, people invest in cryptocurrencies. Here are a few of the most well-known:

Supporters regard cryptocurrencies like Bitcoin as the currency of the future, and they’re rushing to buy them before they grow more valuable.

Some proponents prefer the idea that bitcoin frees central banks from controlling the money supply, as central banks tend to devalue money over time through inflation.

Others like the blockchain technology that underpins cryptocurrencies because it is a decentralized processing and recording system that is potentially more secure than traditional payment systems.

Some speculators are interested in cryptocurrencies because they are increasing in value, but they are unconcerned about the currencies’ long-term acceptance as a means of money transfer.

5. Is it wise to invest in cryptocurrencies?

Cryptocurrencies may appreciate, but many investors regard them as speculative investments rather than long-term investments. What is the explanation for this? Cryptocurrencies, like actual currencies, have no cash flow, thus for you to profit, someone else must pay more for the currency than you did.

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This is known as the “greater fool” investment theory. In contrast, a well-managed business grows in value over time by increasing profitability and cash flow.

Some prominent members of the investment world have warned potential investors to avoid them. Warren Buffett, the famed financier, made the following comparison between Bitcoin and paper checks:

“It’s a highly efficient method of sending money, and you can do it anonymously.” A check can also be used to send money. Is it true that cheques are worth a lot of money? Just because they can send money?”

For those who believe that cryptocurrencies like Bitcoin will be the currency of the future, it’s important to remember that a currency needs to be stable for merchants and customers to know what a fair price for goods is. Throughout much of their history, Bitcoin and other cryptocurrencies have been everything but stable. For example, after trading near $20,000 in December 2017, Bitcoin’s value plummeted to around $3,200 a year later. It was trading at record levels again by December 2020.

This price fluctuation is a problem. People are less inclined to spend and circulate bitcoins now if they are worth a lot more in the future, making them less viable as a currency. Why spend a Bitcoin if it could be worth three times its current value the following year?

6. Is it legal to use cryptocurrencies?

They are without a doubt lawful in the United States, while China has effectively outlawed their usage, and whether they are legal in other countries is ultimately a matter of national sovereignty. Also, think about how to protect yourself from scammers that see cryptocurrency as a way to defraud investors. Buyer beware, as always.

7. How do I safeguard myself?

If you’re interested in purchasing a cryptocurrency through an ICO, examine the fine print in the company’s prospectus for the following details:

Who is the company’s owner? A well-known and recognized owner is a good sign.

Is it being pursued by any other significant investors? If other well-known investors want a piece of the currency, it’s a good indicator.

Will you have a share in the company or will you only have access to cash or tokens? This is a crucial distinction to make. Owning a stake entitles you to a share of the company’s profits (you’re an owner), whilst purchasing tokens entitles you to utilize them like chips in a casino.

Is the currency already built, or is the company seeking funding to do so? The less dangerous a thing is, the further along it is.

Examining a prospectus can be time-consuming; the more information it has, the higher your chances of finding anything legitimate. However, even legitimacy does not guarantee that the currency will be successful. That’s a whole other subject that necessitates a great deal of market knowledge.

Beyond those worries, simply owning bitcoin puts you in danger of theft as hackers attempt to break into the computer networks that keep your money safe. In 2014, a well-known exchange went bankrupt after hackers stole hundreds of millions of dollars in bitcoins.

Those aren’t usual hazards associated with stock and mutual fund investments on major U.S. markets.

Should I invest in cryptocurrencies?

Cryptocurrency is a highly speculative and volatile investment. Investing in known firms’ stocks is often safer than investing in cryptocurrencies like Bitcoin.

The Author

Samuel Adeshina

Samuel is a financial reporter whose interests include blockchain, market, business, insurance, and Crypto to provide relevant information to all interested.