Since the emergence of Bitcoin, cryptocurrencies have become a very popular subject in the whole world. Since 2009, various cryptocurrencies have been developed. Bitcoin price has reached new heights, and overall cryptocurrency market capitalization has reached around $2 Trillion.
Everyone is talking about it. But if you think it’s too technical for you, you have come to the right spot. This article will make you understand cryptocurrency in simple words. It is not rocket science. You just have to know some basics of cryptocurrency and blockchain technology and you will be good to go!
What is cryptocurrency?
A cryptocurrency is a kind of digital currency that is produced by the use of computer code. It operates independently of centralized banking systems and government structures.
Cryptography is the core component of cryptocurrencies; it is used to secure transactions and works with the help of codes. In January 2009, Bitcoin, the first and by far most well-known cryptocurrency, was released. There are already over 5000 different cryptocurrencies available on the Internet.
Cryptocurrencies were initially used as digital money to buy goods and services online, but now after institutional investors such as MicroStrategy, Tesla and Paypal have recognized the potential of cryptocurrencies, people have also started to see it as an investment tool.
What makes cryptocurrency different from fiat currencies?
The main difference between cryptocurrencies and fiat currencies is that cryptocurrencies use blockchain technology to create a distributed network. You can buy and sell them like fiat currencies. They do not require third-party interruptions and are highly transparent and unique. Cryptocurrencies are traded in a peer-to-peer network which makes it one of the most promising technologies.
What is blockchain?
The distribution of data of cryptocurrency transactions is in the form of blocks, and each block is then combined together in chains, which makes a blockchain. Completed blocks are recorded and uploaded to the blockchain, and they include the most recent transactions.
As an open, permanent, and verifiable record, they are kept in chronological sequence. Blockchains are managed by an ever-changing network of market players that follow a specified process for verifying new blocks.
Every ‘node’ or computer linked to the network downloads a copy of the blockchain automatically. This eliminates the need for centralized record-keeping and allows everyone to keep track of transactions.
With this blockchain technology, a record is generated that cannot be modified. Satoshi Nakamoto, the creator of Bitcoin, is credited with inventing the blockchain idea. Beyond digital cash and money, this notion has inspired a variety of additional uses.
What is cryptocurrency mining?
Cryptocurrency mining is a method of producing new cryptocurrencies by solving difficult and complex mathematical problems. Of course, when a person trades a cryptocurrency, the transaction is recorded on a distributed ledger known as the blockchain. However, the process is only complete when a “miner” confirms that the transaction is valid. After that, the transaction is permanently recorded in the blockchain for all to see, and the process of a transaction is then complete.
Miners must solve difficult equations as part of this verification procedure. They are competing with one another to solve the problem effectively. Those who complete the task first are compensated with a portion of the transaction as a reward for their efforts. Every successful transaction results in the introduction of new coins into circulation.
It is, however, quite expensive. It requires the use of high-performance computers and consumes a huge amount of electricity.
How to trade cryptocurrencies?
Look at the following steps to trade cryptocurrencies easily.
- Cryptocurrency Exchange or Brokerage: You will need a cryptocurrency exchange account. There are many cryptocurrency exchanges working today. You can choose such a cryptocurrency exchange that fits you best. Coinbase, Gemini, eToro are some of the most popular ones.
- Fund Your Account: Once you have created an account on a cryptocurrency exchange, you will need to connect your bank account to fund your cryptocurrency account.
- Choose your Crypto: After funding your account, you can buy any cryptocurrency you like. You can buy ethereum, Bitcoin, and other cryptocurrencies.
- Cryptocurrency Wallet: To store the cryptocurrency you bought, a cryptocurrency wallet is needed. Most exchanges provide an in-built cryptocurrency wallet known as a software wallet, but hardware wallets are mostly recommended because they provide better security.
- Build your Strategy: Once you are done with buying cryptocurrency, you will have to come up with a strategy to protect yourself from losing money or getting scammed. For that, you will have to do your own research and learn about the market conditions.
Some of the things you need to know before you invest in cryptocurrencies:
- Always put in money that you can afford to lose.
- Diversification is important. Always put your eggs in different baskets so that you don’t lose all at once.
- Researching about the market and crypto coin you are investing in is a must.
- Don’t trust everything you see on social media.
- Never let anyone trick you into buying or selling.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.