Investing In Cryptocurrency: The Ultimate Guide
The cryptocurrency market has become a global phenomenon. Bitcoin, the first and most important cryptocurrency up until now, has shot up like a rocket in value, and traders and investors from all over the world are taking notice. Some investors have made millions, and even billions of dollars by investing in cryptocurrencies. If you’re adverse to risk and volatility, investing in this market may not be your cup of tea. But if you’re one of those with a little extra money that you aren’t afraid to risk, we have the information you need to get started.
Before buying cryptocurrency, it’s a good idea to understand what they’re all about (by the way, it’s also spelled crypto currency). What is Bitcoin, what are cryptocurrencies, where did they come from, and what do you need to know before investing in them? These are just a few of the questions you should be asking yourself.
What is Cryptocurrency?
Cryptocurrency is tough concept to understand because it’s a relatively new idea. In a nutshell, it’s a digital currency that uses encryption for security. Unlike money, it’s not issued by a centralized authority, which theoretically makes it immune to any government interference or manipulation. For some investors, keeping government interference out of the equation is a good thing, but cryptocurrency’s “de-centralization” and anonymous nature also make it well-suited for nefarious enterprises.
Benefits of Cryptocurrencies
Like almost everything else in this world, cryptocurrencies have their advantages and their drawbacks, their positives and their negatives.
- Certainly the biggest benefit is the ability to transfer funds quickly between two people or parties with minimal processing fees. Banks often charge steep wire transfer fees, but these exorbitant fees can be reduced dramatically with cryptocurrency. Some major financial institutions are now seeing the potential for lowering customer transaction costs by making payment processing and fund transfers more efficient. Plus, as an added bonus, the “block chains” used to store these transactions can help limit the threat from hackers.
- Since transactions are anonymous, users can send and receive while maintaining their privacy.
- Cryptocurrencies are very volatile, meaning it’s possible to make a large amount of profit very quickly.
- Blockchain technology is still in its infancy, but new measures are being developed every day to improve blockchain security while also offering new and better tools and services for users. This new technology may revolutionize the way we pay for products or services.
Where Can You Buy Cryptocurrencies?
If you’re wondering how to buy Bitcoin and Ethereum, or how to buy Ripple with Bitcoin, you do that through cryptocurrency exchanges. The biggest exchange is Coinbase, but you can only buy a few of the higher priced cryptocurrencies there. If you want to buy some of the lower-priced altcoins, you need to buy Bitcoin, Ethereum, or Litecoin on a site like Coinbase, transfer it to an exchange such as Binance, and then exchange it for Ripple or any of the other digital currencies they offer.
Deficiencies of Crypto Currencies
- Privacy of transactions is great, but privacy also means illegal activities can occur on the networks.
- Since cryptocurrencies aren’t stored in a centralized location, such as a bank, a digital currency balance can be completely wiped out by something as simple as a computer crash if there are no backup copies of the balances. Fortunately, there are ways to increase security for digital currencies, specifically digital wallets.
- The volatility of cryptocurrencies can cause the price to rise quickly, resulting in huge gains. But with volatility also comes high risk. The price can drop just as quickly, with the result being large losses.
What is a Blockchain and How Does It Work?
It has been said by some that the blockchain technology is the best invention since the internet. With a blockchain there’s no need to involve a centralized authority in a value exchange, such as a financial institution or bank. So how does the blockchain actually work?
Let’s say two people made a $10 bet as to which baseball team would win the game. Once the game was over, it would be time for the winner of the bet to collect his money. But how would they collect it? There are three possible ways for the winner to collect.
- They could simply trust the other party to pay the $10.
- They could write up a contract, with each person agreeing to pay the $10 if they lost the bet.
- They could involve a third party who would hold $10 from each of the two betters, and then give the money to the winner of the bet. Unfortunately, none of these methods of payment are foolproof.
None of these methods of payment are totally secure.
- Trusting someone to pay can result in the loser simply refusing to pay.
- Even if there’s a signed contract between the two, it still doesn’t mean the loser will pay. The winner could certainly take the loser to court, but even if they win the case, it still doesn’t mean a payment will be made. There will also be court fees in addition to possible collection fees.
- The third party could simply run off with the money.
With a blockchain, both parties could transfer money into a program that is running on the blockchain. Then, once a winner is automatically declared, the total amount will automatically be transferred to the winner.
The blockchain’s most known program or application is Bitcoin, a digital currency that is used to exchange goods and services, just like the USD (United States Dollar), CNY (Chinese Yuan), EUR (Euro), or other currencies are used to exchange money for goods and services. Bitcoin is a way for one internet user to transfer a digital property to another internet user in a safe and secure way, where everyone knows that the transfer has taken place, and where no user can challenge the legitimacy of the exchange.
What is a Bitcoin?
A single Bitcoin is one unit of BTC (Bitcoin Digital Currency). Just like a US dollar has no value in and of itself, a Bitcoin also has no inherent value. The value comes from our agreement to accept the US dollar or Bitcoin (or other type of currency) in exchange for products or services. The blockchain uses a digital file or ledger to keep track of all Bitcoin transactions. Again, this blockchain ledger or file is not stored in a centralized location like a bank, it is distributed among a network of private computers all over the world.
What are Blockchain Nodes?
Each individual computer is a “node” in the blockchain computer network and keeps a copy of the ledger or file. If Sue wants to send Bitcoins to Sam, Sue enters the amount she wants to send, and Sue’s account will decrease by that amount while Sam’s will increase by that amount. Each node in the computer network will receive a message regarding this transaction and update their account balances for Sue and Sam accordingly. The blockchain is therefore a system that allows many connected computers, or nodes, to maintain one secure and updated ledger.
What is a Digital Wallet?
A digital wallet is a computer program that allows users to store or exchange their Bitcoins. Using the digital currency in their wallets, users can perform transactions on the blockchain. Each wallet is protected by an encryption system that uses both a private and public key that are unique, but different and connected. These encrypted keys help ensure that only the account holder can send Bitcoins from their account. When a user sends Bitcoins from their account, a string of text that includes both the transaction request and the user’s private key is used to authenticate the transaction. This prevents potential hackers from changing the user’s transaction request. In addition to digital wallets there are desktop wallets, paper wallets, and hardware wallets, which can be more secure than digital wallets.
What are the Benefits of Blockchain Technology?
- De-centralization. You have total control over your account and its value. There is no third party, such as a bank, that can limit your access to it.
- Low transaction fees. The cost to perform a transaction is very low and a transaction can be to or from anywhere in the world.
- Transactions are fast. value can be transferred in a few minutes and can be secure in just a few hours.
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