All you need to know about cryptocurrency
Bitcoin is the most valuable and widely held crypto on the market, and with prices reeling in the crypto and stock markets, now could be a good time to buy if you’re comfortable with the risks and interested in investing.
What is CRYPTOCURRENCY?
Cryptocurrency (crypto) is a type of digital currency that generally exists only electronically. It is used to buy or sell things, but rather than being in the form of a physical note or coin, owners hold it in a digital wallet and buy or sell through an online exchange. You usually use your phone, computer, or a cryptocurrency ATM to buy cryptocurrency. Bitcoin and Ether are well-known cryptocurrencies, but there are many different cryptocurrencies, and new ones keep being created.
The thing that makes cryptocurrency unique is something called ‘blockchain technology’ which is what it uses to exist. All it means in real terms is that it’s based on a very complex, online network that is distributed across a lot of computers, meaning it is nearly impossible to counterfeit or double spend. It also means it exists outside the control of governments and central authorities, so these currencies are able to be maintained and valued solely by their users.
What Is a Blockchain?
A blockchain is a distributed database or ledger that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format. Blockchains are best known for their crucial role in cryptocurrency systems, such as Bitcoin, for maintaining a secure and decentralized record of transactions. The innovation with a blockchain is that it guarantees the fidelity and security of a record of data and generates trust without the need for a trusted third party.
Blockchain vs. cryptocurrency: Are they the same?
Decentralized platforms that require a coin can be enabled via blockchains. The blockchain is the distributed ledger technology that allows a network to maintain consensus. The network can track transactions and transfer value and information due to distributed consensus.
Blockchain technology can be conceived as a form of next-generation business process optimization software from a business standpoint. Collaborative technology, such as blockchain, promises to improve business procedures between firms, cutting the “cost of trust” dramatically. As a result, it may provide much better returns per dollar invested than most traditional internal investments.
Cryptocurrencies are the tokens used to convey value and pay for transactions within blockchain networks and offer network incentives. Furthermore, you might think of them as a blockchain tool that can be used to serve as a resource or service or even to digitize asset ownership.
Cryptocurrency examples
There are thousands of cryptocurrencies. Some of the best known include:
1. Bitcoin:
Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded. The currency was developed by Satoshi Nakamoto – widely believed to be a pseudonym for an individual or group of people whose precise identity remains unknown.
2. Ethereum:
Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.
3. Ripple:
Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track different kinds of transactions, not just cryptocurrency. The company behind it has worked with various banks and financial institutions.
Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them from the original.
4. Litecoin:
This currency is most similar to bitcoin but has moved more quickly to develop new innovations, including faster payments and processes to allow more transactions.
How does cryptocurrency work?
The majority of cryptocurrencies function without the backing of a central bank or government. Instead of relying on government guarantees, decentralized technology called blockchain underpins the operation of cryptocurrencies.
Cryptocurrencies do not exist as a stack of notes or coins. Instead, they live only on the internet. Consider them virtual tokens, the value of which is decided by market forces created by those seeking to purchase or sell them.
Cryptocurrency is formed through a processing known as mining, which entails employing computer processing power to solve complex mathematical problems to earn coins. Users can also purchase the currencies from brokers, which they can then store and spend using encrypted wallets.
Are cryptocurrencies legal?
Regulation has come into play worldwide with the growth of the crypto industry. Over the years, the United States has increasingly stepped up its overwatch of the space. The Securities and Exchange Commission (SEC) cracked down on initial coin offerings, or ICOs, after the mania of 2017 and 2018. The Commodity Futures Trading Commission (CFTC) and other U.S. agencies have also engaged in various capacities.
A U.S. has changed over time, based on evolving regulatory guidelines. The fifth Anti-Money Laundering Directive from the European Union, for example, entails that crypto buying, selling and other operations must comply with certain guidelines in certain regions.
Since crypto is a relatively new industry compared with others, legal clarity does not yet exist in terms of requirements for all areas of the space. Part of such clarity includes asset classification. Bitcoin and Ether areviewd as commodities, although categorization for numerous other assets remains unclear.
How to buy cryptocurrency
If you’re new to the world of crypto, figuring out how to buy Bitcoin, Dogecoin, Ethereum and other cryptocurrencies can be confusing at first. Thankfully, it’s pretty simple to learn the ropes. You can start investing in cryptocurrency by following these five easy steps.
1. 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 CRYPTO BROKER?
Generally speaking, crypto broker are individuals or firms that act as financial intermediaries for people that wish to exchange their crypto currency for a different one of for money. Usually, they would charge some kind of premium for the use of their platform.
It is safe to say that for larger amounts of money, crypto brokers are a much better option, as it is much safer to trade tour currency through them than through a crypto exchange platform. Of course, this does come at a certain fee, but it is better to make sure that the transaction is safe and legit than to turn into a scam where you will never see your money again.
There are various cryptocurrency brokers on the internet such as Bitpanda for example. They are the best option for beginners, as you can very easily and safely purchase some Bitcoin, Litecoin, Ethereum, and whichever other cryptocurrency you might be interested in.
If you wish to exchange with another user on the platform, the exchange takes place between not only the two users, but also the platform itself in order to ensure a safe transaction. You can also exchange fiat currencies this way for a cryptocurrency whether you are using Euro, USD, GPB, or whichever fiat currency.
2. 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.
3. Deposit cash to invest
Depending on the exchange, personal identification is required and may include pictures of a driver's license or Social Security card, as well as information about your employer and source of funds. The process is largely the same as setting up a typical brokerage account.
At most exchanges, you can connect your bank account directly or you can connect a debit or credit card. Although you can use a credit card to purchase cryptocurrency, cryptocurrency price volatility could inflate the overall cost of purchasing a coin when combined with a credit card's interest. Bitcoin is legal in the United States, but some banks may question or even stop deposits to crypto-related sites or exchanges.
Fees vary for deposits via a bank account, debit, or credit card, and exchanges also charge fees per transaction
4. Think about how to store your cryptocurrency
Many exchanges allow you to leave your investment within your account, which is easiest for most beginners. But if you want to further secure your digital assets, you can transfer them into a cryptocurrency wallet.
Are you going to keep your Bitcoin in a hot wallet or a cold wallet?
Understanding crypto wallet
Crypto wallets hold the private keys to your cryptocurrency and keep them safe. They come in several varieties, and they can be either physical devices, software programs or online services.
But like cryptocurrency, the concept of a crypto wallet is pretty abstract. Let’s take a closer look at these essential crypto tools and how they work.
What is crypto wallet
The first lesson of crypto wallets is that they are nothing like the billfold in your purse or back pocket, holding cash and credit cards. Rather, a crypto wallet is a form of digital storage to secure access to your crypto.
Cryptocurrency is a highly abstract store of value, without a physical token similar to cash’s coins and bills. It exists as nothing more than a string of code on a larger blockchain.
When you purchase Bitcoin (BTC), what do you actually own? A public key and a private key on the BTC blockchain.
Think of the public key as something like your bank account number—you can share it with anybody, but it doesn’t provide access to your money.
The private key is like a password to your bank account. Please don’t share it with anyone, or they could steal all your money.
If you lose your private key, you could lose access to your crypto. Likewise, the person who holds a private key has full access to the crypto. Keeping your private keys secure in a crypto wallet is essential.
“Coins and tokens are part of a blockchain system in the form of data, and the wallets serve as a means to access them,” says Martin Leinweber, digital asset product strategist at MarketVector Indexes.
How do crypto wallets works
A crypto wallet stores the public and private keys necessary to send, receive and store cryptocurrency.
When you buy cryptocurrency, the company you purchased it through probably gave you a wallet to hold the digital coins. This is called a hot wallet because it’s online and connected to the internet.
“To avoid the risk that hackers might steal your online wallet, you can get a cold wallet which is not connected to the internet,” says Ric Edelman, founder of Digital Assets Council of Financial Professionals.
Cold wallets are essentially thumb drives or another type of hardware device. “Once you have one, you simply transfer your coins from your hot wallet to your cold wallet,” Edelman says.
Types of wallets
A wallet is a combination of a public address and a private key. The wallets can be categorized based on the method and location of storage in the following segments:
Hot and Cold Wallets
Internet connectivity defines a wallet in terms of hot or cold. Hot wallets are connected to the Internet and thus are less secure and pose more risks but are user-friendly. Cold wallets, on the other hand, are stored offline and don’t require internet connectivity. Thus, improving security and less risk. When compared to a safe or a vault, more substantial sums of money can be stored than that in a carry-around wallet. Hot wallets are more likely to be used for daily transactions, and cold wallets for more long-term holdings. Hot wallets are easy to set up, and the funds are quickly accessible. Traders conveniently use them. Cold wallets are hack resistant, and thus the cold storage is suitable for HODLers. As a protection method, only a small percent is stored in hot wallets while being able to trade directly from their cold storage devices.
Mobile Wallets
Mobile wallets are just like desktop wallets made for smartphones. They are quite convenient as it uses QR codes for transactions. They are suitable for daily operations but are vulnerable to malware infection. Encryption of mobile wallets is necessary. They are practical and can be used on the go but open to viruses. Some mobile wallets are Coinomi and Mycelium.
Paper Wallets
It is a physically printed QR coded form wallet. Some wallets allow downloading the code to generate new addresses offline. They are not prone to hacks, but the number of flaws has made them dangerous. A major flaw is not being able to send partial funds. Thus, it can’t be reused. They used to be very popular for cold storage, but not after hardware wallets came onto the scene. All in all, if stringent security precautions are taken, then paper wallets can be set up.
Desktop Wallets
These are installable software packs available for operating systems and are becoming serious with time. Anti-virus is required because a system connected to the Internet poses fundamental security issues. Instead of keeping cryptos on an exchange, desktop wallets for bitcoins should be used. They are the third most secure way to store cryptocurrencies and the best method for cold storage in a completely clean system. They are easy to use, give privacy and anonymity, and involve no third party. Regular backing up of the computer is needed. Popular desktop wallets are Exodus, Bitcoin core, Electrum, etc.
Web Wallets
As the name suggests, these wallets are accessed by internet browsers. The private keys are held in some web wallets and are prone to DDOS attacks. They can be hosted or non-hosted. Non-hosted is preferred as funds are always in control. They are the least secure wallets. They are not the same as hot wallets. They are ideal for small investments and allow quick transactions. Some of these are MetaMask and Coinbase
Hardware wallets
Hardware wallets are hardware devices that individually handle public addresses and keys. It looks like a USB with an OLED screen and side buttons. It is a battery-less device and can be connected to a PC and accessed by native desktop apps. It costs up to 70-150 dollars, but it is worth it. They have received a mixed response. They are more secure than hot wallets and user-friendlier than paper wallets but less than web and desktop wallets. They are available in different forms and offer reasonable amounts of control. They are difficult for beginners to use when the investment is significant. The Most popular hardware wallets are Ledger Nano S and Trezor.
What will change when cryptocurrency investments become regulated?
There is a big report that details everything that's being changed, but we understand most people don't want to spend their time reading through that! So, here's a summary of the key things:
- Anyone advertising an investment in Crypto in the UK will have to have clear risk warnings on their adverts, like the rest of us already do!
- Cryptocurrencies and trading platforms will be banned from ‘inducing to invest’. In normal people language, that means they can’t offer you cashback, a referral scheme or an incentive to invest with them.
- On the platforms themselves, there needs to be adequate risk warnings throughout so when someone goes to invest, they’re clearly reminded about the risks before making their decision.
- They can only send promotions to you directly if you are classified as a certified, sophisticated investor, which discounts most of us already