Cryptocurrency leverages entire networks to secure its value, but there are still security concerns, and it continues to be a volatile investment.
Everyone talks about cryptocurrency right up until you ask them how it works. So if you've heard some of the wild success stories of crypto investors and think you might want to jump in, or you want a secure payment method, you should do a bit of homework first. This article will tell you everything a beginner needs to know about cryptocurrency – what it is, how you can get some, and the best ways to use it.
Cryptocurrency Relies on Entire Networks For Security
Cryptocurrency is a secure, digitally stored value. Essentially, it's money with no physical form that is not beholden to any government, bank, or corporation. Furthermore, crypto relies on incredibly complex cryptography to protect transaction data. Finally, it builds trust and avoids hacking attempts by leveraging the consensus of entire computer networks.
People Use Cryptocurrency To Buy And Invest
Like any other currency, people use crypto for goods and services in addition to investments. Crypto has become popular partially because it is a faster way to transfer value than check or wire transfer and can move funds to anywhere in the world where there is an internet-connected device with the right software.
At retailers, users will often pay using their crypto wallet - an app or device that transfers the currency right to the retailer's wallet. In the U.S., crypto debit cards like BitPay have arrived, which allow consumers to pay in U.S. dollars from converted cryptocurrency. Cryptocurrencies are convenient and fast, but they are not instantaneous. The transactions can take anywhere from a few minutes to over an hour but are still much faster than traditional banking methods.
Cryptocurrency is a high-risk investment.
Blockchain Technology is The Foundation of Cryptocurrency
A cryptocurrency derives its security from the technology that underlies its transaction records. The highly encrypted records are usually stored in blocks of data chained together one after another every time a new block is filled – a blockchain. The blockchain is a distributed database or ledger that simultaneously exists on every node (i.e., computer) in a computer network.
To make a change or addition to the ledger, a majority of the network's computing power must reach a consensus that the addition or alteration is legitimate. Different cryptocurrencies use various mechanisms to reach a consensus, but once they do, the blockchain updates and everyone can see the new version.
Reaching consensus and updating the blockchain is a process that is virtually impossible to hack. To duplicate, forge, or otherwise alter the transaction records would require control over 51% of the computing power of a network distributed around the world in thousands of nodes. Therefore, this arrangement creates trust in a system that does not rely on a 3rd party.
How Beginners Buy Cryptocurrency Through Online Exchanges
To buy crypto, you need to choose where and how you want to pay for it. Most beginners purchase cryptocurrency on centralized exchanges or online brokers using fiat currency. Buying from an exchange puts all the technical considerations in the hands of knowledgeable 3rd parties. The main drawback of exchanges and brokers is that their user data is vulnerable to hacking, posing the same problem as a traditional online bank.
There are over 19,000 cryptocurrencies available on 521 exchanges with a market cap of $1.74T. To narrow down the field, define your goals. Do you want a currency to pay for goods or services? Are you looking for an investment? Do you want to use decentralized apps stored on the blockchain? You can do basic research on cryptocurrencies online.
Crypto Wallets Hold Cryptocurrency
Cryptocurrencies require a private key to prove ownership. Losing the key is as good as losing a dollar bill. If you drop it and someone picks it up, they can go and spend it. Therefore, digital wallets exist to store these private keys. Many wallets exist on the exchanges themselves where people buy the cryptocurrency. They are accessed through the exchange's website when a user logs in.
Other "noncustodial" wallets remain with the user. They can be connected to the internet or reside in a completely offline device, inaccessible unless in person. These wallets are more secure than online ones but may not be as easy for beginners or have the incentives of a wallet curated by an exchange.
Cryptocurrency Holds Value But Presents High Risk To Investors
Cryptocurrency is here to stay, but it is still a new phenomenon. You're not alone if you feel that getting into crypto is like riding through the Wild West. However, like any fiat currency, you can use crypto to pay for goods and services and as an investment. The only difference is that it is all digital.
The cryptocurrency itself is virtually impossible to hack because of blockchain technology. Yet, online exchanges and wallets are vulnerable to cyberattacks, like traditional online banking or trading. For those who want a new currency, crypto can be faster, more reliable, and at least as secure as any other. For those seeking an investment, be prepared to take on risk.
Cryptocurrency is a high-risk investment. Period. However, it responds to old-fashioned methods of risk mitigation. Diversification and research are good places to start. Try to find out if there are already any big investors or if the founders inspire confidence. For example, Silvio Micali, an M.I.T. professor well-known in the industry, founded Algorand (ALGO).
Most cryptocurrencies are not sustainable. For example, Bitcoin alone requires more electricity to maintain its validation process than many countries. If you want to stick to cryptocurrencies with smaller carbon footprints, look for those with a "proof-of-stake" consensus mechanism – they require a minute fraction of the electricity.
Cryptocurrencies are not legal tender, though they are legal to use. In the U.S., they are taxed as property. When you sell, you'll pay capital gains tax. If someone pays your business for a good or service, you will be taxed on the value at acquisition.