What is Cryptocurrency? And Everything You Need to Know About It: The Ultimate Guide

When I first heard of cryptocurrency, I didn’t know what it was. I thought it was a digital money exchange platform like PayPal and Wise. Guess the surprise when I realized it was not only a system of digital exchange but an exchange of completely new currency.

I know you’re like me, you hear of cryptocurrency but don’t know what exactly it is, you know of people investing in it and you’d like to join and sing to the tune. Most people want to.

The crypto industry has been growing at a very high rate and lots of people have invested in it. Research reveals that one in five adults has invested or traded in cryptocurrency and I know you’d like to be among them.

If that’s you wondering, what cryptocurrency is, how it works, how to invest in it, and whether it’s safe to invest in it or not, don’t worry, here’s everything you need to know.

What is Cryptocurrency?

Cryptocurrency is a digital currency that does not rely on a centralized distribution of ledgers to verify transactions, unlike banks. It is a digital entry to an online database created through secure computer networking software. It is managed by a peer-to-peer network of free open-source computers, and software.

This currency is maintained using distributed ledgers which enhance transparency and anonymity through encryption to verify transactions. The transactions are recorded, stored, and transmitted using advanced coding in public registers.

The easiest way to get cryptocurrency for most people is to buy it.

Here are the most popular ones:

• Bitcoin — is the first, most popular, and most traded digital currency. It was created in 2009 by Satoshi Nakamoto (believed to be a Pseudonym)
• Ethereum — (ether/ ETH) is the second most traded after Bitcoin and has its own blockchain platforms. It was developed in 2015
• Litecoin — this currency is like Bitcoin but has moved to develop new innovations like fast payments and more transactions

What is the purpose of cryptocurrency?

The greatest move of the currency is that it put the power and responsibility of the currency in the holders’ hands, removing problems involved in traditional currencies. It solves real-world problems.

Due to their irreversible public transactions, unhackable and control by people, individuals and their currencies are more protected.

Here are four benefits you should care about:

• Everyone owns crypto; no one controls or regulates it
• The currency is impossible to forge
• Most transactions are confidential
• The currencies are secure, they aren’t prone to hacks; to hack and manipulate will need large amounts of power and money, which will become a worthless endeavor

How Does Cryptocurrency Work?

Cryptocurrency works more like PayPal or credit cards, only that you exchange digital assets for goods and services instead of using government-issued currency.

To make a transaction, you exchange currency using digital wallets (cryptocurrency wallets) which are software programs that allow you to transact using digital currencies.

Cryptocurrency runs on distributed ledgers called blockchains.

What Makes Cryptocurrency Different From Traditional Currency?

• Blockchain technology: Blockchain is a digital ledger of transactions (that are difficult to hack or alter ) maintained by a network of computers. The technology provides a way for individuals to transact with each other without an overseer.
• Cryptography: These are growing lists of records known as blocks. They make the blockchain secure. A network of computers verifies each transaction, and timestamps then add it to a growing endless chain of data that once recorded cannot be altered.

I can hear you asking, how does blockchain work? Using bitcoin as an example, this is how the distributed ledger technology/ blockchain works

1. The purchase or sale of bitcoins is made, and the transactions are transmitted to nodes, which are a powerful network of computers
2. Thousands of nodes around the world through computer algorithms vie to confirm transactions. This process is bitcoin mining. When a new block is completed, the miner gets awarded a bitcoin for their work from the minted bitcoin, and the network fee is passed to the buyer and seller. The fee normally rises or falls depending on the number of transactions
3. The purchase is cryptographically confirmed, and the sale is added to a block of distributed ledgers where a majority of the networks must confirm the sale
4. The block is then finally chained permanently to all previous blocks of bitcoin transactions using Hash, a cryptographic fingerprint

The concept of blockchain technology uses the concept of distributed computer systems that are established, maintained, and trusted by mutually suspicious groups.

Blockchain Technology: Pros and Cons

Pros

1. Decentralized — no government agency issues or controls cryptocurrency, and the lack of intermediaries cuts off the cost of transactions, besides, the blockchain is open 24 hours a day, 365 days a year.
2. Transparency and anonymity as the transactions are recorded across a network of computers and the address and history of the transactions are publicly viewable.
3. Accuracy and security as the transactions involve little human interaction and thus lower error risks. Confirmation by the majority of networks makes it difficult to manipulate.

Cons

1. Criminals love cryptocurrency for payments due to the privacy it offers. They also target bitcoin holders for scams

2. Blockchain cryptocurrencies are highly volatile

3. Bitcoin mining uses a network of high-speed computers that consume a lot of energy

4. Bitcoin blockchains are slow. They process few transactions per second (only 7), compared to Visa credit card (processes 24000 transactions per second)

I can hear you asking, where do bitcoin and other cryptocurrencies come from? Let me explain

Cryptocurrency Mining: How it is Done

Cryptocurrencies are generated on the basis of algorithms by miners using powerful computers.

The mining process prevents double spending of the currency as the transactions are validated on a blockchain network.

This means the coins are gained through a process of solving complex cryptographic equations using sophisticated computers to verify the authenticity of the transaction on the network. The owners of the computers then receive newly created cryptocurrency as a reward. This is an energy-intensive process.

Coins are generated in the process of validating transactions and securing the network. The coins generated are used to reward the miners. Only validated crypto miners are allowed to mine and validate transactions.

Mining consumes large amounts of electricity and thus it’s environmentally unfriendly

How to invest in cryptocurrency

What comes to your mind when you think of investing in cryptocurrency? I know you are thinking of buying and holding one or more crypto coins until their value increases in dollar/ rupee terms. But others target the day trading route where they buy a currency, target a given percentage, let’s say 3%, and sell it as soon as the target is attained.

Direct buying is the most common way of adding crypto to your portfolio when it comes to cryptocurrency investment.

How to buy cryptocurrency

If you directly want to invest in crypto, then you can use a cryptocurrency exchange. There are three steps involved in safely investing in crypto.

Step 1. Choose the platform to use

You can choose between:

• Traditional online brokers — offer ways to buy and sell crypto and other financial assets like stocks, bonds, and ETFs. They offer lower trading costs but fewer crypto features.
• Cryptocurrency exchanges — offer different cryptocurrencies, interest-bearing account options, and wallet storage. Many exchanges charge asset-based fees.

However, when comparing different platforms, consider the currencies on offer, what fees they charge, security features, storage, and withdrawal options.

Step 2. Fund your account to begin trading

Crypto exchanges allow users to purchase currencies using fiats (government-issued currency) such as the US dollar, Euro, or British pound using debit or credit cards which vary across platforms.

An essential factor to consider is the deposit, withdrawal, or trading fee, which varies with payment method and platform.

Step 3. Place an order

If you plan to buy cryptocurrencies, select “buy”, choose the order type, the number of cryptocurrencies you want to buy, and confirm the order. The same procedure applies when you want to “sell” orders.

An order is placed via the broker’s, the exchange’s web, or mobile platform.

There are also other methods to invest in cryptocurrency

• Purchase directly and store one or more cryptocurrencies from established firms like Ethereum and bitcoin
• Invest in companies with a total or partial focus on cryptocurrency. They include cryptocurrency mining companies, mining hardware makers, and others like Paypal that support cryptocurrency
• Invest in cryptocurrency focused-funds if you don’t want to choose among individual-based companies
• Become a crypto miner or validator, it’s the direct way to invest as one is rewarded with crypto which they might hold as investments or exchange for another currency

The best and most circulated cryptocurrencies according to Nerdwallet

• Bitcoin is the first and most valuable
• Ethereum is the most commonly used to carry out more complex financial transactions than those supported by bitcoin
• Cardano is a competitor to Ethereum and is led by one of its co-founders
• Solana, a competitor to Ethereum and emphasizes speed and cost-effectiveness
• Dogecoin began as a joke and has grown to be among the most valuable currencies

The best cryptocurrency wallets

Crypto wallets are essential tools when trading in cryptocurrencies. Traders need them to store and validate transaction information securely. While some wallets provide support for a single cryptocurrency, many are multi-solution assets, they allow users to hold and trade multiple currencies.

The wallets do not physically store the blockchain assets, they store public and private keys. Public keys are strings of digital codes attached to a decentralized blockchain, like bank account numbers. Private keys are digital codes unique to an individual’s cryptocurrency wallet like ATM PIN codes. The private keys prove ownership of public keys.

Here’s our pick for the best wallets:

• Coinbase wallet — best for beginners as it’s secure and backed up by a well-known exchange. The wallet is easy to use and excellent for beginners with no experience with crypto, it supports over 500 crypto assets
• Electrum wallet — best for bitcoin due to its extensive security features and a high degree of customizability
• Mycelium — is best for mobiles because of its strong focus on security and advanced transaction history
• Ledger Nano X — the best offline crypto wallet. It has high-security standards and is capable of mobile trading. It is the most well-known hardware wallet available today
• Exodus — best for desktops due to its transaction speeds and ease of use. It’s the most visually attractive wallet available today

Crypto wallets can be grouped into two:

1. Hot wallets.

Hot wallets are digital tools always connected to the internet. They are software accessible from any device, phone, or desktop to monitor and trade your currency.

Their greatest advantage is their convenience unless they are limited to a specific device. Due to their online availability, they are prone to cyber-attacks.

2. Cold wallets.

They are offline hardware pieces like a USB drive or sheet of paper that store your private keys offline. They are highly secured since they can’t be hacked but are a threat on the part of the owner in case they lose the hardware and there is no backup, this means they automatically lose the crypto.

What to look for in a crypto wallet

Here are questions you should ask yourself.

1. What do I want to trade? Do you need to buy and store one or you’re interested in different types of cryptocurrencies? The wallets you choose should support the currencies you are interested in
2. How often do I trade? Hot wallets are the best for active traders due to their speed, however, active traders may also benefit from cold wallets by using them as a savings account for their bulk currency
3. How much am I willing to spend? When contemplating accumulating large amounts of crypto, cold wallets are the best, unlike most hot wallets which require you to pay upfront costs to own the wallet( although most of them are free)
4. What do I need to do with the wallet? If you need to passively trade in crypto, look out for wallets that allow crypto lending, staking, and deposits

Generally, you should however look for:

• How many currencies are supported, the more, the better
• Customer care support, as a newbie you might need 24/7 support
• Accessibility interface, it doesn’t need to be complicated to navigate through
• Hardware wallet compatibility

According to CoinMarketCap, these are the 5 largest trading cryptocurrencies by market capitalization

1. Bitcoin - $761.1 billion
2. Ethereum - $334.8 billion
3. Tether - $78.7 billion
4. BNB - $65.8 billion
5. USD coin - $52.5 billion

Are cryptocurrencies safe to invest in?

Cryptocurrencies are built using blockchain technology, which makes it hard for hackers to alter.

Besides, transactions require a two-factor authentication process.

Unlike government-backed money, virtual currencies’ value is driven by supply and demand. Cryptocurrency investments are far less affected by regulatory protection.

The legality of cryptocurrency depends on an individual country. For instance, China has banned it and it’s developing its own cryptocurrency.

Here are four tips to guide you invest in cryptocurrency safely

All investments carry a risk, but cryptocurrency investment is considered one of the riskier investments out here, here are tips to help you make educated choices before you dive in

1. Do in-depth research about currency exchanges (understand how they work), and talk with more experienced investors before moving forward
2. Know which wallets you prefer, and understand how they work to store your currency before making a choice
3. Diversify your investments across several currencies, it’s a security measure in case a currency develops problems.
4. Prepare for volatility in the market

Cryptocurrency frauds and scams

Cryptocurrency crime has been on the rise in recent years, here are some of its scams

• Fake websites which feature fake testimonials and promise high guaranteed returns, provided you keep investing
• Virtual Ponzi schemes where non-existence opportunities are promoted by criminals, with the creation of the illusion of high returns and paying off old investors with new investors’ money. One of the scams, the Bitclub network, raised $722 million dollars before they were caught in 2019.
• “Celebrity” endorsements where scammers pose as wealthy or well-known names and promise profits but instead steal what you send.
• Romance scams. Tricksters persuade meeting on dating on social media to invest in virtual currency, they pose as legit traders but end up stealing from you in bogus exchanges

If you are contemplating investing in less popular crypto products, here are additional questions:

• Who’s heading the project? If it’s a well-known identifiable leader, it’s a positive sign
• Are there other trusted investors in it, if yes, it’s a good sign
• Will you own a portion of the company or it’s just the tokens? Owning a portion means you participate in its earnings as an owner while buying the tokens means you are entitled to use them as chips in a casino
• How’s the nature of currency development-wise? The more developed it is the less risky it is

Take time to combine through the prospectus. The more details it has, the more the chance it is legit, however, legitimacy does not mean the currency will succeed.

Now that you’ve learned:

• What is cryptocurrency
• How it works
• How to invest in it
• Cryptocurrency frauds and scams

It’s the best time to dive in right away.