Have you heard of Bitcoin or Ethereum? These are the most commonly talked about cryptocurrencies, yet there are thousands of other cryptocurrencies in circulation today.
So, what is cryptocurrency? How does it work? This article debunks the mystery around cryptocurrency and explains how you can invest in it and make profits.
Table of Contents
What is Cryptocurrency?
Also known as virtual currency or digital currency. It’s an internet-based mode of payment (digital money) built on a blockchain and secured through a process called cryptography. Blockchain technology makes it possible to transact safely with no third parties involved.
The aspect of decentralization ensures that no institution can control or manage cryptocurrency operations as it is in centralized financial institutions like banks. Also, no one can alter information once it’s recorded on the blockchain. The value of cryptocurrencies is not managed and determined by financial institutions or governments but by the tasks undertaken by Crypto users on the internet.
How Does Cryptocurrency Work?
From the definition, you know that cryptocurrencies operate on a decentralized system that runs on a cryptographic public ledger(blockchain). It records every transaction and stores it in the form of a block in the blockchain.
The unknown Santoshi Nakamoto invented the first cryptocurrency (Bitcoin). He planned to create a trust-free peer-to-peer network for transactions without involving a third party. In this project, only cryptographic proof would be required to complete a transaction, making it easier to transact even with strangers.
To make a transaction, you’ll need to have a Cryptocurrency wallet that can be accessed using a private key. The payment is made to the receiver’s public address as an encrypted transaction that is recorded and stored in the blockchain.
List of Cryptos
There are thousands of cryptocurrencies that have come up since the invention of Bitcoin. Some of the top cryptocurrencies traded in the market today are:
Bitcoin remains the most popular and the most used cryptocurrency in the world. With over ten years of existence, the value of Bitcoin has grown from $0 to $36,949.50 at the time of this writing. (Check the updated price of one Bitcoin). It’s now a global payment mode, having been accepted for use in several countries, including the United States.
Vitalik Buyer created it with the flexibility that allows the creation of decentralized apps (D-Apps) on its blockchain. This ability to host the D-Apps has facilitated its rise to second place among the most popular cryptocurrencies. The future of cryptocurrencies is in the decentralized finance (DeFi), which is facilitated by the D-Apps.
It’s a product of the Ripple company, launched in 2012 to conduct secure transactions of tokens that represent cryptocurrency, fiat currency, or any unit that has value. Its value has risen over the years, considering that many financial institutions like banks have embraced it.
It was created as a lighter version of Bitcoin that would work faster than Bitcoin while transacting larger amounts of cryptocurrency tokens. It also incorporated a new mining algorithm that is less complicated than that of Bitcoin. Other lighter cryptocurrencies have emerged using the same codebase that Litecoin uses.
Tether is categorized as a stablecoin whose primary goal is to bridge between fiat currencies and cryptocurrencies. It aims to offer stability for the Cryptocurrency valuations, transparency in the transactions, and low transaction charges to its users.
What is a Blockchain?
A blockchain is an unhackable online ledger that stores records of every cryptocurrency transaction carried out. As its name suggests, the blockchain is made up of “blocks,” which are records of transactions completed successfully, all arranged in a chain-like manner, one after another.
Once the transaction is initiated, it remains pending until a miner confirms it. They confirm that the transaction is legit and allows it to be stored on the blockchain. Miners, for example, Bitcoin miners, get bitcoins as rewards for confirming transactions.
What is Cryptocurrency Mining?
Cryptomining is a painstaking process, but the reward given after the mining process attracts investors, and many of them take part in the verification of transactions made in the blockchain. Cryptomining requires miners to confirm transactions by checking the authenticity of the information provided and then add it to the blockchain.
The mining process requires the miners to solve long, complicated mathematical problems to find a hash (product of cryptographic function) that connects the previous block with the new block that has information of the ongoing transaction. The miner who successfully solves the mathematical problem confirms the transaction and receives bitcoins as a reward.
To ensure that all transactions are legit and authentic, every transaction is subjected to thorough checking using either of these two validation techniques:
Proof of work
Proof of stake
Proof of Work Vs. Proof of Stake
Proof of work is the process where miners actively compete to solve complex mathematical problems in order to verify transactions on the blockchain.
Solving these blockchain puzzles can become very exhausting as it uses a lot of electricity and computer power. The rewards are not much compared to the high power costs and computing resources used in the race to solve the mathematical problems.
Proof of Stake requires lesser power to verify the transactions and can be used by any investor willing to stake an amount of cryptocurrency to gain eligibility to verify transactions. If you stake your cryptocurrencies and get chosen to verify transactions, you earn more cryptocurrencies as rewards.
The process of validating transactions using proof of stake is less complicated and efficient; therefore, transactions are verified faster. Verifying invalid transactions forfeits a part of the amount staked by the validator, and therefore fraud verifications are discouraged.
How Can You Use Cryptocurrency?
The use of cryptocurrency to make payments is still not very popular. However, several online retailers are embracing it and accepting payments using Bitcoin.
As of now, the most common way to use your crypto to pay for services is through gift cards. You can purchase gift cards from gifting outlets like eGifter and use the gift cards to access services in restaurants and product retailers.
Ways to use cryptocurrencies are evolving. Now, people in the US can use a BitPay card, which conveniently converts crypto assets to dollars and therefore uses it to make purchases in the local retail outlets.
How to Use Cryptocurrency
Your priority while shopping with your cryptocurrency should be your safety. Look out for secure ways to use your cryptocurrencies.
A BitPay card allows US residents to shop securely in local retailers that don’t accept cryptocurrency directly.
For those who accept cryptocurrency payment, you’ll need a secure crypto wallet that allows you to transact cryptocurrencies safely.
How to Invest in Cryptocurrency
To start investing in cryptocurrency, you’ll need to sign up on a cryptocurrency exchange where you can use your debit card to purchase popular cryptocurrencies like Bitcoin and Ethereum.
Exchanges charge a small fee to facilitate the purchases. Some of these exchanges have secure crypto wallets where you can store the cryptocurrency you purchase. If you’d like to buy alternative coins (altcoins), you can use your fiat currency to buy the popular cryptocurrencies, that is, Bitcoin and Ethereum, then use these cryptocurrencies to buy altcoins. Most exchanges do not allow the direct purchase of altcoins using fiat currencies.
You can also purchase cryptocurrencies on a crypto ATM. Find a crypto ATM near you and use it to buy Bitcoins and store them in your crypto wallet.
Before investing in cryptocurrency, you should consider the risk involved and weigh it against the possible returns. The Cryptocurrency market is very volatile as prices can rise and drop with high margins without warning.
For example, the price of Bitcoin in November 2020 was ranging around $18,000, and in January 2021, the price has doubled to over $36,000. That’s a very high spike in just one month.
If you have a high-risk tolerance and can easily move on for a huge loss, then cryptocurrencies are for you. The rewards are great when the market moves to the favorable side. It would be more sensible to invest money that you can afford to lose, and your life doesn’t depend on it.
There are factors to consider when choosing the best crypto exchange to buy your cryptocurrencies. For example, security features on the exchange charges applied, ease to set up and use, and the payment methods accepted.
We chose the three best places to invest your crypto depending on your needs. They are:
eToro – It’s the best broker where you can buy cryptocurrencies like Bitcoin using fiat currency in your eToro balance. It’s not a crypto exchange yet but offers crypto investment services as a broker. Visit eToro here –>
Coinbase– It’s the best crypto exchange where you can easily buy and sell your cryptocurrencies like Bitcoin and Ethereum. It also has a secure in-built wallet where you can store all your cryptocurrencies. Visit Coinbase here –>
Paxful – If you’re looking for peer-to-peer transactions, Paxful offers the best P2P services. It’s a marketplace for crypto traders, where buyers meet sellers and conduct transactions online. Visit Paxful here –>
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