What is Cryptocurrency and How Does it Work for Investor?

If there’s anything more famous than Elon Musk, it’s his tweets. And cryptocurrency is a regular feature. 

Why is the world so obsessed with cryptocurrency?

Since its inception in 2009, over $7 trillion worth of Bitcoin has been transferred. Bitcoin is the most popular cryptocurrency in the world today. Someone under the pseudonym Satoshi Nakamoto invented it.

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    This outrageous number is only slated to increase in the near future, as the world awakens to the benefits of cryptocurrency.

    Some of the popular cryptocurrency examples are Ethereum, Bitcoin Cash, Litecoin and Dogecoin. CoinMarketCap.com reported that there are more than 8000 different cryptocurrencies in the world. These cryptos have a global market value of $2.24 trillion as of December 2021.

    But what exactly do you mean by cryptocurrency? How do you buy and sell cryptocurrency? Does cryptocurrency help investors?

    Well, here’s a breakdown of everything you need to know about crypto. This article is the ultimate guide to cryptocurrency for beginners. 

    If you’ve been scratching your head wondering ‘what is virtual currency?’, we’ve got your back.

    What is Cryptocurrency?

    The Internet is obsessed with crypto.

    Simply put, cryptocurrency is a decentralized form of digital money that can be exchanged over the internet. Decentralized means that there is no single authority that holds power over the cryptocurrency. 

    The government cannot issue or control any form of cryptocurrency. It is managed by what is called a ‘peer-to-peer’ system. This ensures that anyone across the globe can send and receive crypto payments. 

    In a cryptocurrency transaction, all the records are documented in a public ledger. Therefore, there is no need for banks if you want to transfer crypto online. The result is that you can transfer value globally, anytime, anywhere and for much lower fees. 

    The name cryptocurrency is derived from ‘encryption.’ It makes use of encryption for transactions and is stored in digital wallets. Cryptocurrency requires a fair bit of advanced coding and is usually made through a set of complicated algorithms.

    One of the most frequently asked questions about crypto is its safety issues. Is cryptocurrency safe?

    Well, cryptocurrency comes with a two-factor authentication process. It uses blockchain technology that is pretty much foolproof – it describes the way transactions are time-stamped and recorded into blocks.

    Despite this, cryptocurrencies face hackers. As recently as January 2022, hackers stole cryptocurrency worth $80 million from Qubit Finance.

    Additionally, cryptocurrency is known for its unpredictable nature. Since it is driven entirely by demand and supply, crypto is prone to equally great profits and losses. That makes it a volatile investment. 

    Does this mean that crypto is not safe? No. What it means is that crypto is hackable. You need to be careful when you invest in crypto, just like other investments. 

    Bitcoin was the first cryptocurrency, founded in 2009. It was the crypto that created a chain reaction and led other cryptocurrencies to follow.

    How to Invest in Cryptocurrency

    Ethereum is one of the most popular cryptocurrencies in the world right now.

    Investing in cryptocurrency requires three simple steps. Here’s a breakdown –

    Finding a platform – In order to trade in cryptocurrency, you need to select a platform. This is usually a traditional online broker or a cryptocurrency exchange. An online broker is cheaper but has fewer crypto features than exchanges. 

    On the other hand, cryptocurrency exchanges have several features. They offer interest-bearing accounts, and crypto-wallets and usually charge a fee based on your assets.

    Funding the account – Funding the account differs from the platform that you choose. Many crypto exchanges accept government-issued currencies like the Pound or the US Dollar. Since credit cards are considered a risky option, crypto exchanges may not always accept them. Moreover, it is risky to do transactions when you have debts because cryptocurrency is very volatile. 

    You can always opt for ACH or wire transfers. It usually depends on the platform that you choose to buy and sell cryptocurrency.

    A note: Keep the deposit and withdrawal transaction fees in mind. Cryptocurrencies also come with additional trading fees. 

    Securing an order – Placing an order is easy as you can do it on both your exchange’s and your broker’s web or mobile platforms. Select buy, choose the type of order you want and outline the number of cryptocurrencies you want. Confirm the crypto order – that’s all. A similar process takes place when you try to sell your orders.

    Now you know how to buy and sell cryptocurrency.

    How To Buy Cryptocurrency?

    Additionally, multiple payment services are now allowing users to buy and sell cryptocurrency. Among these are Elon Musk’s PayPal,  Cash App, American digital wallet Venmo and Shopify. These allow users to hold and trade in cryptocurrency. 

    You can also opt for investment vehicles like blockchain stocks or ETFs (exchange-traded funds), Bitcoin mutual funds and trusts.

    Many payment getaways like PayPal now accept Bitcoin as an option.

    There’s another question that’s a rage on the internet – how to invest in crypto? There are primarily five ways in which you can invest in crypto –

    • Become a crypto miner or validator yourself – Miners and validators win rewards in cryptocurrency. They can then choose to hold or part with their crypto investments, or even exchange them for a different currency.
    • Cryptocurrency IRA – IRA stands for Individual Retirement Account and comes with a host of tax benefits. You can choose a cryptocurrency IRA that provides more secure storage and saves you (to an extent) from taxes.
    • Crypto funds – These include ETFs and crypto investment funds. These funds invest in cryptocurrency directly or in crypto-focused companies. Some crypto funds may also invest in derivative securities like futures contracts.
    • Crypto companies – Many people opt to invest in companies with a focus on crypto. This includes companies that either support crypto or those mine cryptos. 
    • Buy crypto directly – The most straightforward answer to the question “How do I invest in crypto?” is buying crypto directly. You can either buy the popular, well-established ones like Ethereum or opt for more unknown cryptos. 

    If you’re looking for a cryptocurrency to invest in, make sure you have an outline of your investment goals and risk appetite.

    How does Cryptocurrency Work?

    A regular bookkeeper maintains and records all transactions in their notebook. This has handmade entries of debit and credit.

    If you’re wondering how cryptocurrency works, well they work in a similar fashion. However, here the ledger is public. This is a blockchain.

    How crypto works: complex coding, anonymity and a public ledger.

    Blockchain is a public ledger that holds the records of all transactions made by holders of cryptocurrency.

    Computers across the world store copies of the blockchain. Every grouping of crypto transactions becomes a block. It is chained (hence the name) to the already existing ledger.

    You cannot change or reverse a block once it is added to the ledger. This is what makes blockchains immutable and reliable.

    Several pre-existing blockchains can have cryptos. Some may even have their own blockchains, like the popular Ethereum and Bitcoin.

    Cryptocurrencies have public ledgers – this means anyone can see your transactions. It is why they come with a private key and a public key. A private key helps you process your transactions while a public key helps others identify you.

    However, it also provides anonymity. Anonymity and cryptos have had a long tryst – no one knows exactly who Satoshi Nakamoto is. The transactions in a crypto wallet are open for everyone to see but nobody knows who controls the wallet. 

    Where to Buy Cryptocurrency?

    Crypto comes with multiple investment options.

    ‘Where can I buy cryptocurrency?’ The answer to that is either a broker or an exchange. However, several platforms now offer and accept payments in crypto.

    One good example of where to buy crypto is Coinbase. Coinbase allows you to purchase cryptos like Ethereum Classic, Litecoin, Stellar Lumens and Bitcoin. 

    On Coinbase, you don’t need to buy the whole coin, as it can be expensive. It allows the user to buy portions of coins in as little increments as 2 euros. 

    Here is a list of the top 10 crypto exchanges where you can trade cryptocurrencies:

    1. Binance US
    2. Gemini
    3. Coinbase
    4. Robinhood
    5. SoFi Active Investing 
    6. Cash App
    7. Bisq
    8. Kraken
    9. BitMart
    10. Crypto.com

    Conclusion: The Future of Finance?

    The bottom line: cryptocurrency is here to stay.

    Elon Musk’s frequent tweets on cryptocurrency tell us one thing: the internet is still debating its uses. However, we have good reason to believe that cryptocurrency is the future of finance. 

    Crypto is the first powerful alternative to banking. With cryptocurrency, the world now has access to a more universal concept of currency. One that is the fastest, safest and cheapest today. Most people end up Googling how to invest in crypto because of the endless possibilities.

    Another major tipping point in favour of cryptocurrency is the equal opportunity it provides. It is more accessible than your average currency because all you need is a working smartphone and the internet.

    Suffice to say, cryptocurrency is the future of finance. It will grow exponentially in the near future, so learn all about it while it is still a (somewhat) rare commodity. Despite its volatility, once you know how crypto works, there is no going back.

    Debaduti Dey (or Debo) borrows her personality from fictional characters. She juggles multiple books (series, films, animes) and can be found clicking random catto pictures.