The world of Web 3.0 and cryptocurrencies is full of jargon, and much of it can be confusing. Amid the growing fascination for everything related to crypto, including its underlying technology, there’s a need for reliable, accurate information about crypto assets. So, what are cryptocurrencies?
Read on to learn more about them and to understand why you should care and how to invest in the lucrative market.
What is cryptocurrency, and how does it work?
A cryptocurrency, also called crypto, is a type of currency that exists virtually and uses cryptography to make transactions secure. Cryptocurrency derives its name from cryptography—the process of encrypting data to prevent unauthorized access.
Crypto is transferred from one person to another without the involvement of third parties like banks. The high-level encryption technology in these networks ensures that specific parties can buy, sell or transfer digital currency.
Cryptocurrencies operate without the involvement of a trusted third party (such as central banks). And blockchain is the underlying technology that makes it possible. On a blockchain, keeping a record of transactions involves the use of multiple computers or nodes in the network. Each computer has access to the record, which is constantly updated.
So, while crypto is stored, sold, or transferred, blockchain is the technology that guarantees that the record of transactions remains intact.
This means, by design, data on blockchains is beyond manipulation. Since hacking one node will not alter information stored on other computers in the network, cryptocurrencies on the blockchain are highly secure.
Why are cryptocurrencies so popular?
The best success story in the crypto world is of course Bitcoin. It is so successful that its value is often compared to gold. But what makes Bitcoin and other cryptos so popular? The answer lies in understanding that investors have made huge profits from the crypto market. Individuals who jumped in early raked in a lot of money before late adopters flooded the market.
Here are some of the advantages of cryptocurrencies and why they remain so popular among people:
- Low fees: Using cryptocurrency attracts minimal fees, especially when purchasing everyday goods and services.
- Less regulation: Cryptocurrencies exist without the control of governments and central banks, which makes them stable and free from influence.
- Profit potential: Cryptocurrencies such as Bitcoin have risen in popularity since rising demand fetches bigger profits for those who opt to sell.
- Futuristic potential: Crypto is seen as the future and is well-placed to take advantage of new trends.
- Flexibility in exchanging currencies: Crypto can be exchanged with almost every fiat currency at affordable rates.
What are the types of cryptocurrencies?
That is dependent on how they are counted. Bitcoin, stablecoins, privacy coins, altcoins, non-fungible tokens, governance tokens etc. The categories have a lot of overlap. What we can say with certainty is that whatever type of investment you are considering, there will be numerous projects/cryptos to support you.
What is cryptocurrency used for?
Cryptocurrencies have multiple applications in a plethora of sectors including edtech, gaming, IoT, Banking among many others. For privacy fans, crypto remains at the top of their trading priority. For others, NFTs, and other tokens with constant evolving uses have become a thing to look out for. Whether you believe is Web3, DeFi, Metaverse, Stable Coins or any other tech stack out there on the Blockchain, to enter or make use of the ecosystem, you’ll always need the local crypto. For instance, without ether, accessing the Ethereum blockchain and its functionalities like smart contacts is a tough task.
How do cryptocurrencies get value?
Like most things in life, the value of a crypto asset is largely dependent on demand and supply. Prices go up if demand for a particular cryptocurrency exceeds its supply. Supply, on the other hand, is predetermined for each coin.
Bitcoin, for instance, has a fixed maximum supply of 21 million, while the likes of Ethereum have no cap on supply. Some cryptos follow the mechanism of “burning” tokens to limit supply.
How do you get cryptocurrencies?
One answer is, by buying them. Another is mining. If you have adequate capital and technical know-how, you can consider crypto mining. Mining may sound like a great way to get coins without shelling out your money to buy them. But the cost of mining any coin is actually quite high because of the high computational power computers you will need to purchase. Besides, there is the disadvantage of significant damage to the environment caused by the use of fossil fuels. A less tedious and more accessible way of finding yourself some crypto is thus buying it from other users using fiat currencies.
A third way to earn crypto is by joining platforms that help you earn rewards in crypto. These platforms require users to complete actions such as staking, learning, or sharing content to earn crypto.
How do users increase the value of their crypto?
Traders and investors use the following ways to increase the value of crypto:
Buying low, selling high: Investors in crypto coins determine their value by buying when it’s cheap, holding it, and selling when demand rises.
Increasing utility: Another aspect that determines crypto value is the range of institutions that accept them as payment. The higher the acceptance, the higher the validity and value of crypto.
Media attention: Media coverage on crypto can drive an increase in investor attention and interest, which could cause a spike in demand.
What is cryptocurrency mining?
Mining cryptocurrency is how new units of crypto are created and added into circulation. During the mining process, miners rely on computing power to solve complex mathematical problems or puzzles. The resultant solution creates a new chain, with the coin in question offered as a reward.
However, creating new coins isn’t all there is to cryptocurrency mining. Computers on the cryptocurrency mining network play another significant role—validating transactions. Crypto miners (powerful computers) monitor and legitimize transactions, an important feature that secures the network from duplication or manipulation.
What are cryptocurrency wallets?
A cryptocurrency wallet is an application that facilitates the storage and retrieval of crypto assets. In the crypto world, users can own different types of coins, and having a wallet helps to keep them all in one place. With a crypto wallet, a user can be assured of safety and easy accessibility to crypto private keys.
How do you protect yourself while investing in cryptocurrencies?
Cryptocurrencies are not like fiat currencies. They are digital. So crypto investors face constant threats from malicious actors and malware. Here are some tips to protect yourself as a crypto investor.
- Invest in reputed platforms and coins to avoid scams.
- Manage your risks by only investing money you can afford to lose.
- Spread your funds out across different crypto portfolios. Don’t put all your money into only BTC or ETH. Diversify.
- Think long-term. Don’t panic and sell when prices plummet. The crypto market is volatile, and the best rewards may be earned from waiting.
- Secure a wallet or cold wallet to store your coins physically. Storing private keys digitally exposes you to risks in the event of an attack.
FAQs
How Do You Buy Cryptocurrencies?
To buy cryptocurrencies: Choose a reputable exchange, create an account, fund it, select the cryptocurrency, place an order, and transfer the purchased coins to a secure digital wallet.
What is cryptocurrency and how it works?
Cryptocurrency is a digital form of money that uses cryptography for secure transactions, operates independently of a central authority, and relies on blockchain technology to record and verify transactions.
What are the 4 types of cryptocurrency?
There are numerous types of cryptocurrencies, but four of the most well-known and widely used ones are Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), and Litecoin (LTC).
Is crypto real money?
Cryptocurrencies can be considered a form of digital or virtual money. While they have value and can be used for transactions, their acceptance and recognition as “real money” varies across different jurisdictions and institutions.
