What is Cryptocurrency? How It Works, Examples & Safe Investment Tips

Cryptocurrency, also spelled crypto, is any digital or virtual money that uses encryption to protect transactions. Cryptocurrencies record transactions and issue new units using a decentralized system; they do not have a central issuing or governing authority.

What is Cryptocurrency?

The digital payment mechanism known as cryptocurrency does not depend on traditional financial institutions to validate transactions. This decentralised system allows users worldwide to send and receive payments directly to one another. Bitcoin and other cryptocurrencies are not physical currency but digital records of transactions kept in a database. There is a public ledger that records every cryptocurrency transaction. Digital wallets are used to store cryptocurrency.

Cryptocurrency got its moniker because it employs encryption to validate transactions. The storage and transmission of cryptocurrency data between wallets and public ledgers requires sophisticated programming. Protecting sensitive information is the primary goal of encryption.

The first cryptocurrency was launched in 2009 and is still the most well-known today. Speculators may send prices soaring when they’re interested in making a profit, which is why many people are interested in cryptocurrencies.

How Does Cryptocurrency Work?

The blockchain is a decentralized public database that keeps track of all cryptocurrency transactions. This ledger is updated and maintained by the currency holders themselves.

Bitcoin and other cryptocurrencies are “mined” (produced) by putting processing power into solving complex mathematical problems. Users can also purchase these currencies through brokers and then use encrypted wallets to store and spend them. Cryptocurrency owners do not possess any physical assets. Your possession is a key that enables you to transfer a record or a unit of measurement from one individual to another without needing a reliable third party.

Cryptocurrencies and blockchain technology’s financial applications are still in their infancy, despite Bitcoin’s longevity; further usage is anticipated. The technology has the potential to facilitate the trading of bonds, stocks, and other financial assets in the future.

Cryptocurrency examples

There are thousands of cryptocurrencies. Some of the best-known include:

Bitcoin:

The first cryptocurrency was launched in 2009 and is still the most widely traded cryptocurrency today. Satoshi Nakamoto, whose real identity is a mystery, is thought by many to be a pseudonym for whoever created the cryptocurrency.

Ethereum:

Developed in 2015, Ethereum is a blockchain platform with its cryptocurrency, Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.

Litecoin:

This currency is similar to Bitcoin but has moved more quickly to develop innovations, including faster payments and processes to allow more transactions.

Ripple:

Blockchain technology startup Ripple launched in 2012. Its developer has experience collaborating with a wide range of banking and finance organizations, so you can use it to monitor more than just cryptocurrency transactions.

“Altcoins” is the collective noun for cryptocurrency alternatives to Bitcoin.

How to Buy Cryptocurrency

You may be wondering how to buy cryptocurrency safely. There are typically three steps involved. These are:

Step 1: Choosing a platform

The first step is deciding which platform to use. Generally, you can choose between a traditional broker or a dedicated cryptocurrency exchange:

• Traditional brokers. Online brokers provide trading options for bitcoin, equities, bonds, and ETFs. These platforms have reduced trading fees but fewer crypto features.
• Cryptocurrency exchanges. Many cryptocurrency exchanges offer different cryptocurrencies, wallet storage, interest-bearing accounts, and more. Many exchanges levy asset-based fees. Compare platforms based on their cryptocurrencies, fees, security, storage, withdrawal, and educational materials.

Step 2: Funding your account

Choose a platform, then fund your trade account. Many exchanges accept US dollars, British pounds, and euros for cryptocurrency purchases.

Credit cards are risky, so some bitcoin exchangers don’t accept them. Some credit card companies may not accept crypto. Loaning or paying hefty credit card fees with volatile cryptocurrencies is risky. Some services accept wires and ACH. Each platform handles deposits and withdrawals differently. Payment types affect deposit timeframes—cost matters.

Step 3: Placing an order

Brokers and exchanges accept web and mobile orders. Click “buy,” choose the order type, input the quantity, and confirm to buy cryptocurrency.

There are also other ways to invest in crypto. Payment systems like PayPal, Cash App, and Venmo let customers buy, sell, or keep bitcoins. Additional investing vehicles include:

• Bitcoin trusts: Regular brokerage accounts can buy Bitcoin trust shares, which are stock-market vehicles that expose individual investors to Bitcoin.
• Bitcoin mutual funds: There are Bitcoin ETFs and mutual funds from which to choose.
• Blockchain stocks or ETFs: You can indirectly invest in crypto through blockchain companies specializing in crypto technology and transactions.

How to store cryptocurrency

Cryptocurrency must be kept securely to prevent theft or hacking after purchase. Crypto wallets, whether physical hardware or web-based software, are the standard method for storing bitcoin and the private keys to those keys. You can keep your cryptocurrency easily on several exchanges because they offer wallet services. Not every broker or exchange will provide you with a wallet service.

You can select from many wallet providers. “Hot wallet” and “cold wallet” are phrases that are used:

• Hot wallet storage: “Hot wallets” refer to crypto storage that uses online software to protect the private keys to your assets.
• Cold wallet storage: Unlike hot wallets, cold wallets (hardware wallets) rely on offline electronic devices to securely store your private keys.

Cold wallets typically charge fees, while hot wallets don’t.

What can you buy with Cryptocurrency?

Initially, the idea behind Bitcoin was to provide a medium for everyday transactions, allowing people to purchase everything from a cup of coffee to a computer or even real estate. While more and more businesses are beginning to accept cryptocurrency, significant transactions using it are still in their infancy, so that hasn’t happened yet. Still, many goods may be purchased from online stores utilizing cryptocurrency. A few instances are as follows:

• Technology and e-commerce sites: Online stores like Newegg.com, AT&T, and Microsoft accept cryptocurrency as payment. The online retailer Overstock was one of the first to accept Bitcoin. Additionally, Home Depot, Rakuten, and Shopify all take it.
• Luxury goods: Some luxury retailers accept crypto as a form of payment. For example, online luxury retailer Bitdials offers Rolex, Patek Philippe, and other high-end watches in return for Bitcoin.
• Cars: Some car dealers – from mass-market brands to high-end luxury dealers – already accept cryptocurrency as payment.
• Insurance: Swiss insurance company AXA said in April 2021 that, except for life insurance, all its policies now accept Bitcoin as payment. Premier Shield Insurance is a US insurance provider that takes Bitcoin for premium payments. They offer plans for both cars and homes. With a cryptocurrency debit card, like BitPay in the US, you can buy bitcoin from stores that don’t take it directly.

Cryptocurrency fraud and cryptocurrency scams

Unfortunately, cryptocurrency crime is on the rise. Cryptocurrency scams include:

Fake websites: These are bogus sites that feature fake testimonials and crypto jargon and promise massive, guaranteed returns, provided you keep investing.

Virtual Ponzi schemes: By paying off existing investors with funds from new ones, cryptocurrency scammers give the impression of enormous profits from investments in digital currencies that do not exist. The owners of BitClub Network, a scam organization, amassed about $700 million until their indictment in December 2019.

Celebrity” endorsements: Scammers pretend to be famous people or millionaires online and offer to increase your investment in virtual currency, but they take your money instead. They may even spread false information about a prominent businessperson endorsing a cryptocurrency through online chat rooms or messaging applications. After the scammers have pushed up the price by encouraging investors to buy, they sell their interest, causing the currency’s value to decrease.

Romance scams: The Federal Bureau of Investigation has warned about a new kind of online dating fraud in which con artists use social media or dating apps to mislead unsuspecting victims into investing or trading virtual currencies. In the first seven months of 2021, the FBI’s Internet Crime Complaint Centre received over 1,800 reports of crypto-focused romance scams, with losses totaling $133 million.

Without proper safeguards, con artists might establish fake exchanges or pose as genuine virtual currency merchants to steal funds. Deceptive advertising for cryptocurrency retirement plans is another kind of crypto scam. The most basic type of cryptocurrency hacking is thieves gaining access to users’ digital wallets and stealing their virtual cash.

Is Cryptocurrency Safe?

Blockchain is a standard tool in the development of cryptocurrency. Blockchain technology records transactions into “blocks” and adds a timestamp to each one. The end product of this very challenging procedure is an immutable digital record of bitcoin transactions. Plus, a two-factor authentication procedure is necessary for transactions. For example, to initiate a transaction, you may be prompted to input your username and password. A verification code may be texted to your cell phone, which you must input.

Cryptocurrencies may be secure, but it doesn’t make them hack-proof. Crypto startup companies have taken a significant financial hit due to multiple high-profile attacks. The two most considerable cryptocurrency hacks of 2018 were the $534 million and $195 million attacks on Coincheck and BitGrail, respectively, by hackers. Investors could reap huge profits or suffer heavy losses due to these erratic movements.

Four tips to invest in cryptocurrency safely

According to Consumer Reports, all investments carry risk, but some experts consider cryptocurrency one of the riskier investment choices. These tips can help you make educated choices if you plan to invest in cryptocurrencies.

Research exchanges

Before you invest, learn about cryptocurrency exchanges. There are estimated to be over 500 exchanges to choose from. Do your research, read reviews, and talk with more experienced investors before proceeding.

Know how to store your digital currency.

If you buy cryptocurrency, you have to store it. You can keep it on an exchange or in a digital wallet. While there are different kinds of wallets, each has its benefits, technical requirements, and security. As with exchanges, you should investigate your storage choices before investing.

Diversify your investments

Diversification is key to any sound investment strategy, and this holds true when investing in cryptocurrency. Don’t put all your money in Bitcoin, for example, just because that’s the name you know. There are thousands of options, and it’s better to spread your investment across several currencies.

Prepare for volatility

The bitcoin market is unstable, so prepare for a roller coaster. Price swings will be extreme. If Bitcoin is too much for you, reconsider investing in it. Despite its popularity, Bitcoin is still young and speculative. Before investing, expect challenges. Be cautious with initial investments and do your research. A full-featured antivirus program is one of the best online security measures. Using bank-grade encryption, Kaspersky Internet Security protects online payments from malware, spyware, and data theft.