Cryptocurrency, sometimes called crypto-currency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies don’t have a central issuing or regulating authority, instead using a decentralized system to record transactions and issue new units.
What is Cryptocurrency?
Cryptocurrency is a digital payment system that doesn’t rely on banks to verify transactions. It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.
Cryptocurrency received its name because it uses encryption to verify transactions. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers. The aim of encryption is to provide security and safety.
The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today. Much of the interest in cryptocurrencies is to trade for profit, with speculators at times driving prices skyward.
How Does Cryptocurrency Work?
Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders.
Miners create units of cryptocurrency through a process called mining, which uses computer power to solve complex mathematical problems and generate new coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.
Owning cryptocurrency does not give you anything tangible. You own a key that moves a record or unit of measure from one person to another without a trusted third party.
Bitcoin has existed since 2009. Developers continue to expand cryptocurrencies and blockchain applications in the financial sector. Companies and investors may trade bonds, stocks, and other financial assets using this technology.
Cryptocurrency Examples
There are thousands of cryptocurrencies. Some of the best known include:
Bitcoin:
Satoshi Nakamoto founded Bitcoin in 2009, making it the first cryptocurrency, and it remains the most commonly traded today. Many people believe Satoshi Nakamoto is a pseudonym for an individual or group whose precise identity remains unknown.
Ethereum:
Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.
Litecoin:
This currency is similar to Bitcoin. It has developed new innovations, including faster payments and processes that allow more transactions.
Ripple:
Ripple, founded in 2012, is a distributed ledger system that tracks different kinds of transactions, not just cryptocurrency. The company behind it has worked with various banks and financial institutions.
Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them from the original.
How to Buy Cryptocurrency?
You may be wondering how to buy cryptocurrency safely. There are typically three steps involved. These are:
Step 1: Choosing a platform
The first step is deciding which platform to use. You can choose a traditional broker or a dedicated cryptocurrency exchange:
- Traditional brokers. These are online brokers who offer ways to buy and sell cryptocurrency, as well as other financial assets like stocks, bonds, and ETFs. These platforms tend to offer lower trading costs but fewer crypto features.
- Cryptocurrency exchanges. There are many cryptocurrency exchanges to choose from, each offering different cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge asset-based fees.
When comparing different platforms, consider which cryptocurrencies are on offer, what fees they charge, their security features, storage and withdrawal options, and any educational resources.
Step 2: Funding your account
After choosing your platform, fund your account to begin trading. Most crypto exchanges allow users to purchase crypto using fiat (government-issued) currencies such as the US Dollar, British Pound, or Euro with a debit or credit card. Availability varies by platform.
Crypto purchases with credit cards are considered risky, and some exchanges don’t support them. Some credit card companies don’t allow crypto transactions either. This is because cryptocurrencies are highly volatile, and it is not advisable to risk going into debt — or potentially paying high credit card transaction fees — for certain assets.
Some platforms will also accept ACH transfers and wire transfers. The accepted payment methods and time taken for deposits or withdrawals differ per platform. Equally, the time taken for deposits to clear varies by payment method.
An important factor to consider is fees. These include potential deposit and withdrawal transaction fees plus trading fees. Fees will vary by payment method and platform, which is something to research at the outset.
Step 3: Placing an order
You can place an order via your broker’s or exchange’s web or mobile platform. If you are planning to buy cryptocurrencies, you can do so by selecting “buy,” choosing the order type, entering the amount of cryptocurrencies you want to purchase, and confirming the order. The same process applies to “sell” orders.
There are also other ways to invest in crypto. These include payment services like PayPal, Cash App, and Venmo, which allow users to buy, sell, or hold cryptocurrencies. In addition, there are the following investment vehicles:
- Bitcoin trusts: You can buy shares of Bitcoin trusts with a regular brokerage account. These vehicles give retail investors exposure to crypto through the stock market.
- Bitcoin mutual funds: There are Bitcoin ETFs and Bitcoin mutual funds to choose from.
- Blockchain stocks or ETFs: You can also indirectly invest in crypto through blockchain companies that specialize in the technology behind crypto and crypto transactions. Alternatively, you can buy stocks or ETFs of companies that use blockchain technology.
The best option for you will depend on your investment goals and risk appetite.
How to Store Cryptocurrency?
Once you have purchased cryptocurrency, you need to store it safely to protect it from hacks or theft.
Usually, users store cryptocurrency in crypto wallets, which are physical devices or online software that securely store the private keys to their cryptocurrencies. Some exchanges provide wallet services, making it easy for you to store directly through the platform. However, not all exchanges or brokers automatically provide wallet services for you.
There are different wallet providers to choose from. The terms “hot wallet” and “cold wallet” are used:
- Hot wallet storage: “hot wallets” refer to crypto storage that uses online software to protect the private keys to your assets.
- Cold wallet storage: Cold wallets, or hardware wallets, use offline devices to store your private keys securely.
Cold wallets usually charge fees. Hot wallets do not charge fees.
What Can You Buy With Cryptocurrency?
Developers launched Bitcoin as a medium for daily transactions, allowing people to buy everything from a cup of coffee to a computer or big-ticket items like real estate. The vision has not fully materialized. Institutions accept cryptocurrency, but large transactions remain rare. People can buy a wide variety of products from e-commerce websites using crypto. Examples include:
Technology and e-commerce sites:
Several companies that sell tech products accept crypto on their websites: newegg.com, AT&T, and Microsoft. Overstock, an e-commerce platform, was among the first sites to accept Bitcoin. Shopify, Rakuten, and Home Depot accept crypto.
Luxury goods:
Some luxury retailers accept crypto as a form of payment. Online luxury retailer Bitdials offers Rolex, Patek Philippe, and other high-end watches in return for Bitcoin.
