What is cryptocurrency and how is it applied?

Cryptocurrency. Definition and description

Cryptocurrency is any kind of currency in digital or virtual form; Encryption (cryptography) is used to protect transactions in cryptocurrency. There is no central authority to issue or regulate cryptocurrencies. A decentralized system is used to record transactions and issue new units.

What is cryptocurrency?

Cryptocurrency is a digital payment system in which banks do not participate in the verification of transactions. It is a peer-to-peer system that allows any user, anywhere, to send and receive payments. Cryptocurrency payments exist exclusively digitally in an online database that describes specific transactions. They do not imply transactions with physical money that have circulation and the possibility of exchange in the real world. When transferring funds in cryptocurrency, transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.

The term Cryptocurrency has come into use due to the fact that encryption (cryptography) is used to verify transactions: advanced encryption is used to store and transfer cryptocurrency data between wallets and to public ledgers. The purpose of encryption is to ensure reliability and security.

The first cryptocurrency was Bitcoin, created in 2009 and the most famous to date. Trading cryptocurrencies is interesting in terms of making a profit; As a result of speculative actions, there are periodic jumps in prices for cryptocurrencies.

How is cryptocurrency used?

Cryptocurrencies are processed in a distributed public ledger – the blockchain, where records of all transactions are stored, updated by currency holders.

Cryptocurrency units (coins) are created during the mining process. This is a process in which the computing power of a computer is used to solve complex mathematical problems, resulting in the generation of coins. Users can also buy currency from brokers and then store and spend it using crypto wallets.

Cryptocurrency is not a tangible object, it is a key that allows you to move a record or unit of measurement from one person to another without a trusted third party.

Bitcoin has been around since 2009, however, financially, cryptocurrencies and the application of blockchain technology are still in their infancy; In the future, their rapid development is expected. In the future, cryptocurrencies can be used in trading transactions with stocks, bonds and other financial assets.

Examples of cryptocurrencies

There are thousands of cryptocurrencies out there. The most famous of them are listed below:

Bitcoin

Bitcoin, created in 2009, was the first cryptocurrency and still retains the highest popularity. The currency was developed by Satoshi Nakamoto - it is believed that this is a pseudonym of a person or group of people, and the exact identity of the developer remains unknown.

Ethereum (Ethereum)

The Ethereum blockchain platform was developed in 2015. It has its own cryptocurrency, Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.

Litecoin

This currency is most similar to Bitcoin, but it develops innovations more quickly, such as fast payments and processes that allow for more transactions.

Ripple

Ripple is a distributed ledger system founded in 2012. Ripple can be used to track different kinds of transactions, not just cryptocurrency. The developer of the Ripple platform has worked with various banks and financial institutions.

Cryptocurrencies other than Bitcoin are referred to by the generic term "altcoins" to distinguish them from the original.

How do I buy cryptocurrency?

The question may arise as to how to buy cryptocurrency safely. This usually happens in three stages.

Step 1. Platform Selection

The first step is to choose a platform to use. As a rule, you can choose between a traditional broker or a specialized cryptocurrency exchange.

• Traditional brokers. These are online brokers offering the purchase and sale of cryptocurrency, as well as other financial assets: stocks, bonds, ETFs. These platforms tend to offer lower trading fees but fewer crypto features.
• Cryptocurrency exchanges. There are a variety of cryptocurrency exchanges, each offering different cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge fees based on the assets being traded.

When comparing platforms, it's a good idea to look at tradable cryptocurrencies, fees, security features, storage and withdrawal options, and educational resources.

Step 2. Depositing funds into the account

The next step after choosing a platform is to fund your account so that you can start trading. Most cryptocurrency exchanges, depending on the platform, allow users to buy cryptocurrency with fiduciary (government-issued) currencies such as the US dollar, British pound, euro, as well as when paying with debit or credit cards.

Cryptocurrency purchases with credit card payments are considered risky, so not all exchanges are supported. Some credit card companies also do not allow cryptocurrency transactions. This is due to the extremely high volatility of cryptocurrencies – when trading certain assets, it is not recommended to take risks by borrowing or potentially paying high fees for credit card transactions.

Some platforms also accept ACH transfers (automated clearing house transfers) and bank transfers. Acceptable payment methods and deposit and withdrawal times vary by platform, while deposit clearing times vary by payment method.

An important factor to pay attention to is the size of the fees, which includes potential deposit and withdrawal fees, as well as trading fees. The fees vary depending on the payment method and platform. It is recommended to study this issue at the stage of choosing a platform.

Step 3: Placing an Order

Orders can be placed through the website or mobile application of the selected broker or exchange. To buy cryptocurrency, you need to select the "Buy" option, the type of order, specify the amount of the purchased cryptocurrency and confirm the order. Similarly, a sales order is placed.

There are other ways to invest in cryptocurrency. These include payment services such as PayPal, Cash App, and Venmo, which allow you to buy, sell, and store cryptocurrencies. In addition, there are the following investment instruments:

• Bitcoin trusts. Shares of Bitcoin trusts can be purchased in a regular brokerage account. Such tools provide individual investors with access to cryptocurrency through the stock market.
• Bitcoin mutual investment funds. There are Bitcoin-pegged ETFs as well as Bitcoin mutual investment funds.
• Blockchain stocks and ETFs. Indirectly, you can invest in cryptocurrency through blockchain companies that specialize in the technologies behind cryptocurrency mining and cryptocurrency transactions. Alternatively, you can buy shares or ETFs of companies that use blockchain technology.

The best option depends on your investment goals and risk appetite.

How do I store cryptocurrency?

After the purchase, it is necessary to ensure reliable storage of cryptocurrency, guaranteeing protection against hacking and theft. Usually, cryptocurrency is stored in crypto wallets. These are physical devices or online programs used to securely store the private keys to cryptocurrencies. Some exchanges provide wallet services, thanks to which the storage of cryptocurrency funds is carried out directly by the platform itself, but not all exchanges and brokers automatically provide such services.

What can I buy with cryptocurrency?

Bitcoin was originally conceived as a means for daily transactions, allowing you to buy anything from a cup of coffee to a computer or even expensive items such as real estate. These plans have not yet been fully implemented. Despite the growing number of institutions accepting cryptocurrencies, large transactions using cryptocurrencies are quite rare. However, cryptocurrency can be used to buy a variety of products on e-commerce sites. Here are some examples.

Websites of technology companies and e-commerce

On the websites of individual companies selling technology products, you can pay in cryptocurrency. Examples are newegg.com, AT&T, and Microsoft. The Overstock e-commerce platform was one of the first sites to accept Bitcoin. In addition, bitcoins can be used to pay for purchases on Shopify, Rakuten, and Home Depot sites.

Luxuries

Some luxury retailers accept cryptocurrency as a form of payment. For example, online luxury retailer Bitdials offers Rolex, Patek Philippe, and other exclusive watches for Bitcoin.

Machinery

Some car dealers, from mainstream brand sellers to luxury dealers, also accept cryptocurrency as payment.

Insurance

In April 2021, Swiss insurance company AXA announced that it was starting to accept Bitcoin as a payment method for all insurance programs, with the exception of life insurance (due to regulatory issues). Premier Shield Insurance, a company that sells real estate and car insurance policies in the United States, also accepts bitcoin to pay premiums.

To pay with cryptocurrency in a store that does not accept it directly, you can use a cryptocurrency debit card, such as BitPay in the United States.

Cryptocurrency Scams

Unfortunately, there has been an increase in cryptocurrency-related crimes. Cryptocurrency-related scams can take one of the following forms.

Fake websites. Scam sites with fake testimonials and crypto jargon promising huge guaranteed returns if you invest incessantly.

Virtual pyramid schemes. Cryptocurrency scammers advertise non-existent opportunities to invest in digital currencies, creating the illusion of huge profits, while paying off earlier investors with the money of new investors. The BitClub Network scam scheme raised more than $700 million before its members were indicted in December 2019.

Support for cryptocurrency by pseudo-billionaires. Pretending to be billionaires and famous personalities on the Internet, scammers promise to increase investments in virtual currency, but in fact they appropriate funds sent by users. To spread the word that a well-known businessman supports a certain cryptocurrency, scammers can also use messaging apps or chat rooms. As a result, investors start buying cryptocurrency, the price rises, and then the scammers sell their share, and the price of the currency falls.

Online dating scams. The FBI reports an emerging trend of online dating scams, where users of dating apps or social networks are persuaded to start investing or trading virtual currencies. In the first seven months of 2021, the FBI's Internet Fraud Complaint Center received more than 1800 reports of cryptocurrency-related online dating scams; At the same time, losses reached $ 133 million.

Scammers can also impersonate real virtual currency merchants or create fake exchanges to trick users into giving them money. Another type of cryptocurrency scam is deceptive offers to sell individual retirement accounts in cryptocurrencies. Then there is the hacking of cryptocurrency wallets and the theft of virtual currency.

Is cryptocurrency safe?

Cryptocurrencies are usually based on the use of blockchain technology, which describes a way to record transactions in blocks with an indication of time. This is a rather complex technical process, which results in a digital ledger of cryptocurrency transactions that is sufficiently resistant to hacking.

In addition, two-factor authentication is required to make transactions. For example, you may need to enter a username and password to start a transaction. Then, you may have to enter the authentication code sent as a text message to your mobile phone.

However, all these security measures do not exclude the possibility of hacking cryptocurrencies. Several major hacks have cost cryptocurrency startups dearly. The two biggest crypto hacks in 2018 are the $534 million Coincheck crypto wallet hack and the $195 million BitGrail crypto exchange.

Unlike state-backed money, the value of virtual currencies is entirely determined by supply and demand. This can cause sharp fluctuations that can bring investors both significant profits and significant losses. In addition, cryptocurrency investments are much less subject to regulatory protections than traditional financial products such as stocks, bonds, and mutual funds.

Recommendations for safe investment in cryptocurrency

According to consumer reports, all investments involve risk, but a number of experts consider cryptocurrency to be one of the riskiest investment options. If you are planning to invest in cryptocurrencies, the following tips will help you make an informed choice.

Analyze existing exchanges

Before you start investing, learn as much as you can about cryptocurrency exchanges. It is estimated that there are more than 500 exchanges. To get started, conduct an analysis, read reviews and consult with more experienced investors.

Learn how to store digital currency

The purchased cryptocurrency can be stored either on an exchange or in a digital wallet. There are different types of wallets, each of them has its own advantages, technical requirements and level of security. As with exchanges, it's a good idea to research the different options for storing cryptocurrency before you start investing.

Diversify your investments

Diversification is the key to a successful investment strategy. This is also true for cryptocurrency investments. For example, you shouldn't invest all your money in bitcoin just because it's a well-known name. There are thousands of investment options out there, and it's better to spread funds across multiple currencies.

Be prepared for high volatility

The cryptocurrency market is highly volatile, so be prepared for sharp fluctuations in currency prices. If your investment portfolio or mental well-being is not able to withstand such fluctuations, cryptocurrency may not be the best choice.

Cryptocurrency is now in vogue, but the cryptocurrency market is still in its infancy, and the currency itself is considered highly speculative. Investing in something new is often fraught with challenges, so be prepared, do your research, and invest conservatively in the early stages.