All About Cryptocurrency
Over the last few decades, as we slowly transition to more convenient digital transactions, it has become less necessary for the money we own to be visible and tangible. First, with credit cards and then, more recently, with online banking and other digital and mobile payment applications. With these, the exchange of goods and services with fiat money becomes transactions validated by a digital spreadsheet between the seller and our banks or the digital payment services we use.
And finally, we’re here: Cryptocurrency.
Pushing the boundaries of cashless transactions further, cryptocurrency is a decentralized and completely virtual currency. It eliminates the need for a bank and physical or fiat money as all its transactions happen in a digital space. But how does it work? Why are more and more people getting into it? And, perhaps, more importantly, why is it the next step in the evolution of trade and finance?
How do Cryptocurrencies work?
When we transfer money via online banking apps, the banks involved in this transfer keep separate records of it with a corresponding unique code in a virtual spreadsheet. In cryptocurrency, instead of multiple entities keeping separate records of the same transaction, this is uploaded in a secure, enormous virtual ledger that can be accessed by anyone within the network. This digital public ledger is called the blockchain.
Every time there’s a crypto transaction, the blockchain records its details in a single block including the details of the one that precedes it. This means that if one tries to hack a single block to fake a transaction, the rest of the blockchain will not add up. And because everyone has access to the blockchain, discrepancies like this can easily be found, and the hacker will have to tamper with millions of other copies of the blockchain to succeed. This makes every transaction in crypto open and traceable, and therefore less susceptible to fraud.
The different types of cryptocurrencies
If you want to start investing in cryptocurrency, the first thing you have to do is to decide which coins and tokens you’d like to own. There are thousands of different coins and tokens and they have unique qualities that we may want to consider, but what’s the difference between coins and tokens anyway?
Coins — like Bitcoin, Ethereum, and Stablecoin — are the native currency of a blockchain. Meanwhile, tokens may not be necessarily created for one particular blockchain but they are able to use other blockchains, most commonly Ethereum’s. “Coins and tokens,” GoBankingRates writes, “both represent a store of value, much like fiat currency, such as dollars, euros, yen, etc. But there’s a crucial difference: digital coins are a form of money, while digital tokens represent something that can be assigned a price.”
Tokens can be value tokens, security tokens, or utility tokens. It is worth noting that Bitcoin, commonly considered as the digital gold for its value and scarcity, is a value token, but that’s because coins can be tokens but not all tokens are coins. Security tokens, on the other hand, are “tokens [that] are created as investments,” Blockchain Council writes. Holders of these tokens are rewarded by the issuing company with additional coins whenever it earns profit. Meanwhile, utility tokens are created for specific perks. Basically digital coupons, utility tokens may be used to avail special discounts on products and services.
How to invest in Crypto?
Once you’ve decided to enter the world of DeFi the next thing to do is to pick coins to purchase to start investing, and where. There are many popular cryptocurrency exchange platforms to choose from, such as Coinbase and Bitfinex that allows you to buy Bitcoin and Ethereum using your debit card.
If you pick Coinbase, you’ll automatically get a crypto wallet after signing up. You may keep your purchased crypto assets in this wallet which is necessary to trade as it stores your crypto portfolio’s distinct code and tracks your transactions and your assets’ growth. The most basic advice out there is of course to buy crypto while it’s low and use it while it’s value is high. Then, you may also choose to be a liquidity provider and grow your assets through distributed transaction fees or gas fees collected by your liquidity pool. But it would be wise to not place your eggs in one basket. Diversify your investments and keep enough fiat money on you. Investing in cryptocurrency can be a very exciting venture and it has paid off for a lot of people, but try not to sacrifice your financial health, especially when you’re just beginning.
How safe is Cryptocurrency?
Aside from the recently much-discussed environmental impact of cryptocurrency’s technology and the recent plummet of its value, there still certainly are things you need to watch out for should you decide to join the DeFi global community.
One of which is its volatility. Crypto’s technology is just a decade old and still has much room to grow. And because it’s exclusively digital, different coins’ values remain very speculative and get easily affected by the news; one may get shocked at how fickle the worth of their coins can get in a matter of days, even more so amidst a global economic downturn. Users need to practice caution when it comes to digitizing their assets. Make sure you keep enough of your fiat money because although the number of companies and services that accept crypto is growing, it is still not accepted as payment in most.
Next, because it’s open source, it remains to be a target of fraudulent schemes. Statistics are on crypto’s side on this one but it doesn’t mean there aren’t a few instances where fraudsters succeed in seeping through the cracks. And because decentralized finance exists outside the regulation of our governments, it means it lacks the protection of the world’s standard currencies. So, yes, the blockchain technology is inherently secure, but it doesn’t mean investing in crypto is completely safe and riskless. Like in any other investment, big losses are possible, but so are great wins.
What is the future of Cryptocurrency?
Because of its increasing popularity and impact on the global economy as well as the environment, crypto users should be on the lookout for changes, especially those coming from governments and players of traditional trade. In a new article, Yahoo! Finance infers that regulation and the entry of institutional investors may be imminent, as well as its becoming mainstream and its improvement to becoming a more viable and stable investment option.
Cryptocurrency is a new technology, but it’s steadily kept its momentum with no signs of stopping anytime soon. Whether you want to be part of it now or adopt it once it reaches its projected maturation is your call.