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InvestPersonal Finance

What is Cryptocurrency?

By February 4, 2022 April 15th, 2022 No Comments

When you shop on an online store and pay with your credit card, your information is extracted and kept in a database. They, the seller, know exactly that it was YOU who made the purchase.

Cryptocurrency, utilizing the blockchain technology, also allows you to pay for goods and services online. However, unlike your credit or debit card, it gives you complete anonymity and privacy.

Let’s discuss more about what cryptocurrency is, how a decentralized cryptocurrency works, how to buy it, and more.

So what is Cryptocurrency?

Crypto is a form of digital currency, which only exists on the internet. It can be exchanged for foods, services, or in some cases, other kinds of crypto.

Because of its popularity, many big companies like Microsoft, AMC Theaters, or Starbucks have begun accepting them as a form of payment.

Cryptocurrency are secured by cryptography, which makes it extremely hard to counterfeit or double-spend, since every single unit is unique. It uses a technology called blockchain, which is a network that is spread across many different devices and records every transaction in a public ledger.

More about blockchain

In blockchain technology, information is stored inside blocks. There can be as many blocks as needed depending on how large the information is. Each block will be responsible to connect the block before and after it. These blocks make up a blockchain ledger.

When information is changed or there is new information, a new block is added that recorded the change in information or new information. All of the information are complete secured since a blockchain is a distributed ledger that is stored across many networks.

What are the different types of cryptocurrency? How much are they worth?

At the moment, there are currently a total of 15,082 different types of cryptocurrency, according to Coinmarketcap.com, a website that tracks the prices of digital currencies. Their total value combined is $2.6 trillion, which is just a little bit under the largest company – Apple’s market cap of $2.7 trillion.

The most notable digital currencies are Bitcoin, the first cryptocurrency ever, and Ethereum. They have market caps of $1 trillion and $543 billion, respectively.

Top 10 largest cryptocurrencies ranked by market cap

These are the 10 digital money with the largest market capitalizations on Coinmarketcap.com.

CurrencyMarket Capitalization
Bitcoin (BTC)$1 Trillion
Ethereum (ETH)$543 Billion
Binance Coin (BNB)$104 Billion
Tether (USDT)$73.6 Billion
Solana (SOL)$69.3 Billion
Cardano (ADA)$51.5 Billion
XRP (XRP)$46.8 Billion
USD Coin (USDC)$38.9 Billion
Polkadot (DOT)$36.3 Billion
DogeCoin (DOGE)$27.6 Billion

Why are cryptocurrencies popular?

Cryptocurrencies and cryptocurrency transaction are popular for a wide variety of reasons:

  • Cryptocurrencies are decentralized, so many people flock to them believing that crypto has the potential to remain stable in price even if their governments’ economies are facing turmoil.
  • Life changing profit is another reason. In 2008, a single bitcoin was worth 3.5 cents, now one bitcoin is $57,221. A lot of people are trying to buy newer cryptocurrencies in hope that they will go up in price like how bitcoin did.
  • It’s getting easier to get involved in cryptocurrency transactions. More and more companies such as Microsoft or AMC Theaters are adopting cryptocurrency as a form of payment, and because of that, more people are becoming aware of the technology.
  • Privacy and security. Because of blockchain technology, paying for stuff online with crypto assets is actually a lot safer than with traditional payment methods. Cryptocurrency owners can pay without revealing their identity or important information.

Is it worth it to invest in cryptocurrencies?

Before investing into any kind of cryptocurrencies, it is worth it to remember that just like real cash, cryptocurrencies generate no cash flow. Because of that, for any of these virtual currencies to increase in value, there has to be a demand for it, meaning people have to keep buying.

This means that the people who bought in early will profit off of the people who buy in later. Warren Buffet explains it best in one of his interviews with CNBC in 2020:

“They don’t reproduce, they can’t mail you a check, they can’t do anything, and what you hope is that somebody else comes along and pays you more money for them later on, but then that person’s got the problem.”

In other words, investing in crypto is not like investing in a company because if the company’s well managed, it can go up in value over time.

Another important factor to note about crypto is that it is very volatile. While it’s true that you can make a lot of money investing in crypto because of their potential for insane growth, the opposite is also true because they can lose their value just as quick.

That being said, it is still a good idea to invest in cryptocurrencies if you know the technology behind them well and have a good plan for when things go South. Furthermore, not only will you have the potential to make lots of profit off of them, you also have another method to store your money safely.

So depending on your investment style, how much you know about the technology, and how much you are gonna use them, cryptocurrencies might or might not be the right choice for you.

How do I buy cryptocurrency?

You can buy the more popular virtual currencies on large cryptocurrency exchanges such as Binance or Coinbase. However, other virtual currencies can only be acquired through paying with Bitcoin or other crypto.

Before thinking of buying anything, you will need a place to store them first. This is known as a wallet. It stores your private keys (or passwords that will give you access to the cryptocurrencies that you own) and allows you to do cryptocurrency transactions.

One of the easiest ways to create a wallet is to sign up for Coinbase.com and download the app Coinbase Wallet. Then you can log into Coinbase Wallet with your Coinbase.com credentials and voila!

Another way to set up a wallet is through Metamask – an extension for your browser if you are on a computer or an app if you use Android.

After you have downloaded and installed Metamask, it will ask you to either import a wallet by entering a 12 phrase sequence in the right order or create a new one. If you haven’t already, you can easily create a new wallet with Metamask as the process is pretty simple and self explanatory.

Once you are done creating your wallet, the next step is to head to any of the big cryptocurrency exchanges such as Coinbase.com, Robinhood, and Crypto.com to buy your first crypto.

Pro Tip: New to Coinbase? Sign up to Coinbase through the free Swagbucks rewards app and get a free $30 cash bonus.

Why do governments hate cryptocurrency?

Even though cryptocurrency was banned in some countries, including China, Vietnam, and Russia, crypto assets and cryptocurrency transactions are still legal in most countries.

However, for the countries that accept cryptocurrency, their governments are still keeping a close watch since there are good reasons to be wary about this new type of asset.

1. Cryptocurrency undermines the role of a central bank

The money that we are using today around the world, like the US Dollars or Euros, belongs to a group of currency called fiat currency. Fiat currencies are backed and issued by a country’s government and central bank.

Unlike fiat currency, a cryptocurrency such as bitcoin can be created by anyone, as long as supply last and that person complete all the work required to produce a bitcoin.

Furthermore, with fiat currency, there are intermediaries, such as banks, the governments, and financial institutions who regulate the flow of money, who it is being distributed to, what is it used for.

Bitcoin and other cryptocurrencies have the potential to disrupt this system since the peer-to-peer transfers of cryptocurrency between two individuals are kept on a blockchain ledger and require no intermediaries.

2. Cryptocurrency can be used for illegal activities

Because of the anonymity it provides and the lack of intervention from financial regulators, cryptocurrency is the perfect form of payments for criminals to conceal their activities.

One of the most famous examples of this is the involvement of bitcoin in the Silk Road website. Silk Road, created by Ross Ulbricht – an American hacker, is a famous hub on the dark web that facilitates illegal drugs, guns, and illegal services transactions.

Since most of the transactions on the Silk Road use cryptocurrency, it was extremely difficult for law enforcement to investigate the parties involved in these illegal activities. However, the FBI was able to crack down the notorious website in the end and seized 69,000 Bitcoins that were tied to Ulbricht.

3. Cryptocurrency as an asset is not as regulated as other traditional form of investment

Financial institutions around the world are still trying to regulate cryptocurrency in the present day, more than a decade after the introduction of bitcoin and bitcoin network.

One important aspect of cryptocurrency is how it is run on the blockchain technology and how transactions are stored on a separate ledger that is unique to each type of cryptocurrency. With more than 15,000 types of cryptocurrency on the market right now, it is nearly impossible to come with monetary policies and tax regulations for it.

What is cryptocurrency mining?

Cryptocurrency mining is a process in which a new unit of cryptocurrency is created and added to the circulation. However, it is not as simple as it sounds.

To create a new cryptocurrency, for example a bitcoin, we need to go through the “mining” process. Mining involves using a computer with advanced hardware to solve extremely long and complicated mathematical equations.

The first computer to solve the equation is awarded with a “new block” in the blockchain ledger, which contains the transaction information of all of the bitcoins previously created. This “new block” is more commonly known as proof of work. Proof of work exists to verify transactions and make sure that each unit of bitcoin is part of the blockchain.

Once a proof of work is created and awarded, the winner receives one bitcoin and the entire thing begins once again, until a new winner is determined.

How do I mine cryptocurrency?

There are many different methods to mine cryptocurrency, whether or not a method is right for you depends on your location, budget, and the type of cryptocurrency you are trying to acquired.

Mining using CPU and GPU

The more popular methods to mine cryptocurrency, CPU and GPU mining are the go-to methods for most miners. Both the CPU (central processing unit) and GPU (graphic processing unit) are essential components of a computer so they are easier to integrate.

To start mining, miners only need to set up and sign up for a mining software like NiceHash on their computer and they should be good to go. Optionally, miners can install monitoring software such as MSI Afterburner to monitor their hardware’s activities.

Between the two, GPU mining is more popular because it is faster due to higher computer power. However, it also costs a lot more energy so unless you have access to cheap electricity, this might not be the ideal option for you.

Cloud Mining

For miners who don’t have access to expansive hardware such as the CPU or GPU, they can employ the service of major corporation and mining facilities to earn crypto. This is the easiest method to set up but the benefits you reap can be considerably lessen by the cost to borrow mining rigs.

Prebuilt mining rigs

With the Bobcat mining device, this is one of the most exciting ways to mine and make money off of cryptocurrency.

Unlike other mining rigs, the Bobcat is a Wi-Fi hotspot modem that leverages the computational power of any devices connected to it (be it smartphones or computers) to mine a cryptocurrency called Helium (HNT).

To make the most out of this method, find an area where stable internet is an issue, then place your Bobcat in an attraction destination in that area, offer your Wifi for free and you should be good to go!

Also, you can place your Bobcat in multiple areas that are close to each other to build an even bigger network that could mine crypto even faster, hence, making you even more money. Seriously, look into it!

How to protect yourself when you own cryptocurrency?

Okay, the most important thing that every cryptocurrency owner should be aware of is how to protect themselves and their assets.

To make sure that your crypto are best protected, make sure to do the following:

1. Buy cryptocurrency on crypto exchanges that gives you full ownership of what you own.

Now what does this mean? Well, with the rise in popularity of Bitcoin and other crypto, stock brokerages such as Robinhood and Webull have begun allowing the trading of a number of digital currencies on their platform.

However, when you buy off of these brokerages, you risk not having full ownership of the coins you own. When you pay them for the coins, instead of giving you full ownership (the proof of work, or a block in the blockchain), they assign your portfolio with an amount of that coin that is equal to what you spent.

This means that you can’t use the coins that you own on Robinhood for example to pay for goods or services, you would have to sell them for money, then use that money to pay.

Why buy something with your hard earned money if you can just “partially” own it?

2. Keep your private keys somewhere safe and never reveal them to anyone.

Your private keys are basically the passwords you use to access your wallet which stores your crypto. If someone else has access to the password, they can access your wallet and do anything they want with it, including stealing your crypto by transferring them from your wallet to their very own.

3. Make sure you do your due diligence on the cryptocurrency you own, and ask yourself some questions before investing.

Who owns the company? If you see that there are well known investors or institutions investing, that is usually a safer bet.

How developed is it? Look at how developed the cryptocurrency and its blockchain technology are. The further developed the product, the safer it is to invest in it since it is common for companies to go out of funds and go under while developing a coin.

How transparent is it? It is very important for a cryptocurrency to be transparent since it is decentralized and unregulated. That means if a developer is withholding information from you, there could be something shady going on.

Final Thoughts on Cryptocurrency

Cryptocurrency is an exciting asset to own since over the years, we have heard so many crazy stories of people actually becoming millionaires overnight because the coin they own is double, triple, x10 or even x100 in value. For example, Bitcoin cash (BCH) went from $260 per coin in December to $1500 in May.

However, if they can break so fast to the upside, that means they can just be as volatile when going down. Many coins have made people millions, but many coins also made people go broke when the coin creator ran away with all the money (look into the SquidGame coin case if you want an example).

Before you invest into any type of cryptocurrency, make sure that you know how to protect your cryptocurrency wallet, verifying transactions, understand the company/technology well, and your exit strategy.

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