What is Cryptocurrency and how does it work?

Cryptocurrency is like digital money that doesn’t need banks to work. It lets people send and receive payments directly to each other, without any middlemen. Instead of having coins or notes, it’s all online.

When you send cryptocurrency, it’s recorded in a big online book called a ledger. This ledger keeps track of all transactions and is open for everyone to see. Your cryptocurrency is kept safe in a digital wallet.

The name “cryptocurrency” comes from the fact that it uses special codes to stay secure. This makes it hard for anyone to mess with the transactions.

Bitcoin was the first cryptocurrency, starting in 2009. It’s the most famous one, and many people buy and sell it to make money.

How does cryptocurrency work?

Cryptocurrency works through something called blockchain, which is like a big online ledger that keeps track of all transactions. It’s not controlled by any single person or organization but by lots of people all over the world.

New cryptocurrency is created through a process called mining, where powerful computers solve complicated math problems to earn coins. You can also buy cryptocurrency from brokers and then store and use it with digital wallets.

When you own cryptocurrency, you don’t have physical coins or notes. Instead, you have a special key that lets you move your digital money from one person to another without needing a bank.

Even though Bitcoin started in 2009, cryptocurrency and blockchain technology are still new and evolving. In the future, we might use them for even more things, like trading stocks or bonds.

Here are some examples of cryptocurrencies:

1. Bitcoin: Bitcoin was the first cryptocurrency, created in 2009. It’s the most popular and widely traded cryptocurrency. Its creator, Satoshi Nakamoto, is still unknown.
2. Ethereum: Ethereum came around in 2015. It’s not just a cryptocurrency but also a platform for building other digital applications. Its currency is called Ether (ETH) or Ethereum.
3. Litecoin: Litecoin is similar to Bitcoin but focuses on faster transactions and more innovation. It was created to be a quicker and lighter version of Bitcoin.
4. Ripple: Ripple, founded in 2012, is more than just a cryptocurrency. It’s a system for tracking different types of transactions, not only in cryptocurrencies but also in other assets. Ripple has collaborated with many banks and financial institutions.

Here’s how you can safely buy cryptocurrency:

Step 1: Choose a platform:

Decide whether you want to use a traditional broker or a cryptocurrency exchange. Traditional brokers offer a variety of financial assets along with cryptocurrencies, while exchanges focus solely on cryptocurrencies. Consider factors like available cryptocurrencies, fees, security features, and educational resources when choosing a platform.

Step 2: Fund your account:

After choosing a platform, fund your account to start trading. Most crypto exchanges accept fiat currencies like USD, GBP, or EUR for buying cryptocurrencies. You can use debit or credit cards for this, but it’s considered risky due to high volatility and potential fees. Some platforms also accept ACH transfers and wire transfers. Keep in mind that deposit and withdrawal methods and times vary between platforms.

Step 3: Place an order:

Once your account is funded, you can place an order through the platform’s website or mobile app. Select “buy,” choose the order type, enter the amount of cryptocurrency you want to purchase, and confirm the order. The same process applies to selling cryptocurrencies.

There are other ways to invest in crypto as well:

• Payment services like PayPal, Cash App, and Venmo allow buying, selling, and holding cryptocurrencies.
• Bitcoin trusts offer exposure to crypto through the stock market. You can buy shares of Bitcoin trusts with a regular brokerage account.
• Bitcoin mutual funds, such as Bitcoin ETFs, are also available.
• You can indirectly invest in crypto through blockchain companies or buy stocks or ETFs of companies using blockchain technology.

After buying cryptocurrency, you need to keep it safe from hackers or theft. You can store it in crypto wallets, which can be physical devices or online software that securely stores your private keys.

Some exchanges offer wallet services, but not all of them do. There are two types of wallets:

1. Hot wallets: These use online software to protect your private keys. They’re convenient but may have some fees.
2. Cold wallets: Also called hardware wallets, these use offline devices to store your private keys securely. They’re more secure but might have higher fees.

You can choose the type of wallet that works best for you based on your needs and preferences.

Cryptocurrency fraud is becoming more common, and it’s important to stay cautious. Here are some common scams:

1. Fake Websites: Be wary of websites that promise big returns on your cryptocurrency investments. They might use fake testimonials and technical jargon to lure you in.
2. Ponzi Schemes: These scams promise high returns but actually use new investors’ money to pay off older investors. One such scheme, BitClub Network, raised over $700 million before being shut down.
3. “Celebrity” Endorsements: Scammers pretend to be famous people endorsing cryptocurrency investments. They might use messaging apps or chat rooms to spread rumors and manipulate prices.
4. Romance Scams: Scammers on dating apps or social media convince people to invest in cryptocurrencies. The FBI received over 1,800 reports of such scams in the first seven months of 2021, resulting in losses of $133 million.
5. Fake Traders and Exchanges: Fraudsters pose as legitimate traders or set up fake exchanges to steal money from unsuspecting investors.
6. IRA Scams: Some scammers pitch fraudulent retirement accounts based on cryptocurrencies.
7. Hacking: Criminals may break into digital wallets to steal cryptocurrency.