Cryptocurrency has been trending recently and as a result, it has attracted the attention of many investors.
Cryptocurrency is essentially a digital medium of exchange that is secured by cryptographical functions which makes it almost impossible to counterfeit. It can be used to conduct financial transactions across the internet.
Bitcoin was the first cryptocurrency launched back in 2008. Fast forward to 2021, and it still ranks among the biggest and most popular forms of digital currency.
As the adoption of online payment systems continues to spread, the use of Bitcoin and other forms of cryptocurrencies like Ethereum, XRP, Bitcoin Cash, Litecoin, and many others, has also grown as recognized digital payment alternatives.
Cryptocurrencies are not controlled by any central authority. By nature, they leverage blockchain technology to gain transparency, and decentralization which make them immune to any external interference or government control.
Have you been pondering about cryptocurrency and whether it can fit in your investment portfolio? Without a basic understanding of digital currencies and blockchain technology, you might be overwhelmed with the basic concepts.
After reading our cryptocurrency guide, you will understand why it has been going mainstream these days.
How Does Cryptocurrency Work?
Cryptocurrencies are entirely digital; which eliminates the need for any physical bills or cash connected to your crypto transactions.
Instead, crypto owners can store their currency in a digital wallet, from where they can transact via an online exchange. You may even choose to store your wallet offline on any hardware device.
Cryptocurrencies can be used to pay for goods & services on the internet. Crypto holders could also trade their investments to make a profit.
While most currencies like the US dollar are backed by the full support of the U.S. government or a recognized central bank, decentralization remains the primary feature of cryptocurrency. Their value is backed, maintained, and supported by their users.
Since the birth of cryptocurrency, there have been several attempts to recreate a similar online decentralized cash system but they have failed.
To achieve this, you’ll need a web-based payment network of accounts, transactions, and balances, to realize digital cash. But how to prevent or resolve the issue of double-spending where a single user spends the same amount twice is a major hurdle that every payment network must overcome.
This is usually done by recording transactions and account balances on a central server.
All cryptocurrency transactions and account balances are recorded on the same decentralized blockchain ledger – a public transaction database that can be accessed by all crypto holders.
Whenever cryptocurrency is sold or bought, the transaction gets recorded on the blockchain.
While the blockchain is open for anyone to join and participate in, individual transaction data – including the account users involved – is usually secured with cryptography.
Moreover, there’s a digital validation and verification process required for every single transaction that gets added to the blockchain. This is done to prevent fraud.
A cryptocurrency blockchain is comparable to a ledger or bank balance sheet. Your digital currency comes with its unique blockchain, which can serve as a constantly re-verified ongoing record of every transaction made with that cryptocurrency.
But unlike a bank’s balance sheet or a ledger, cryptocurrency blockchains are distributed across the entire network of participants for the digital currency.
All cryptocurrency transactions are made known almost immediately to all members of the blockchain network. Confirmations, on the other hand, are made after a specific amount of time.
How to Buy Cryptocurrency?
One of the easiest ways to acquire Bitcoin, Ethereum, Litecoin, and other forms of cryptocurrency is to purchase them from an online exchange.
The best approach to buying cryptocurrency is to first determine what you want to do with the digital currency. You can then choose the one that is best suited to achieving your goals.
Perhaps you wish to purchase a new smartphone with your crypto; bitcoin would be the ideal option for this purpose as it is the most popular and widely accepted cryptocurrency. But if you’re looking to enjoy a virtual gaming experience, Ethereum would be a perfect choice.
And while there are a few other things you can do with cryptocurrency, you have limited purchasing power since crypto is not yet recognized by most online businesses.
Crypto is also an investment alternative for many people. It’s almost the same as buying and trading in public company stocks. People can buy and accumulate cryptocurrency over time if they anticipate an increase in value. This way, they can cash out for an increased profit later.
About Cryptocurrency Mining
Crypto mining is best described as the process of putting new digital coins into circulation. It is performed by using advanced computing to resolve complex algorithm issues.
Mining crypto is also an essential aspect of blockchain ledger development and maintenance.
Bitcoin mining is costly, painstaking, and only offers sporadic rewards. Almost anyone with the skills and resources can become a crypto miner. Thanks to the decentralized nature of cryptocurrency networks, there is no recognized authority assigned to regulate this task.
Nonetheless, crypto mining still generates a lot of attention from technologically inclined investors, especially because their efforts are eventually rewarded with crypto tokens.
Frequently Used Terms for Cryptocurrency
Below, we’ve identified some frequently used terms and concepts every crypto holder must familiarize themselves with:
- Blockchain: This refers to a type of digital database for recording cryptocurrency transactions. The data gets stored in blocks or groups.
New blocks or groups are created to continually serve as previous block extensions. This action
eventually forms a chain. Each blockchain can be used to store an ever-increasing amount of transaction data for specific cryptocurrencies.
- Bitcoin: The original cryptocurrency. Bitcoins are still widely recognized today.
- Wallet: This is where crypto holders get to store their digital currency.
- Exchange: The digital marketplace where you get to buy and trade cryptocurrency. Many exchanges also offer secure digital wallets to their users.
Is Crypto Safe?
Due to the public and decentralized features of blockchain ledger technology, cryptocurrency is inherently secure. Moreover, the encryption process backing every crypto transaction increases its overall security.
But that still doesn’t guarantee the complete safety of your digital investments. Cryptocurrency does not have the same governmental support or insurance protection as most other recognized currencies.
Unlike money saved in the bank, no official authority will cover your loss if the digital currency company fails.