A Beginner Guide to
Stories about cryptocurrency are all over social media and traditional news outlets, but what is it, exactly? The answer is that cryptocurrency, or “crypto,” is a digital form of currency that exists outside of regulation by traditional authorities like registered banks or government departments. Most cryptocurrencies are backed by something called a blockchain, which is a type of technology that maintains a secure digital transaction record that shows who owns each piece of that form of cryptocurrency. Blockchains prevent counterfeit crypto, which was an issue with some earlier attempts at virtual currency. Individual pieces of different cryptocurrencies are known as tokens or coins, and they are created through a blockchain process called mining. Different kinds of crypto have different uses. Some are designed to be exchanged for goods or services, like the way more traditional kinds of currency are used. Others are meant to be used on the backend to help computer systems more efficiently carry out very complicated monetary transactions.
Most beginners chose to start buying cryptocurrency through exchanges. These exchanges are businesses that act as secure third parties to help ensure the validity of all transactions that take place on the exchange. Some brokers act more like traditional brokerage firms that oversee typical retirement and investment accounts. Some offer services beyond cryptocurrency, so there’s a chance that some beginners will find that they can purchase crypto through the same service they use to purchase stocks and other equities. Others are pure-play crypto exchanges that only function in the cryptocurrency world. They typically offer a wider range of cryptocurrencies for sale and have more options for storing your crypto purchases securely.
Like with all investments, there are pros and cons to cryptocurrency. Crypto does have quite a few benefits. Many investors believe that crypto is the financial instrument of the future and buying these currencies now means getting them at a low price they will never be at again. Other investors believe that since cryptocurrency exists outside the realm of central banks and governments, it is less likely to lose value due to inflation. It’s also believed by some that blockchain technology is more secure than traditional banking and less likely to be lost to fraud, software glitches, or bank errors. Other investors simply believe that this is the moment when cryptocurrency is gaining value and don’t care about its long-term viability as an investment tool. Another advantage of crypto is that some forms of it allow investors to earn money passively through staking, which is what happens when investors allow their holdings to be used to verify transactions along with a blockchain software protocol. Of course, staking carries its own risks.
On the other hand, crypto hasn’t yet seen widespread adoption by a majority of investors or businesses. If cryptocurrencies’ reach doesn’t grow, then early investors might not get the return on their investments they planned on. Cryptocurrencies also undergo rapid price fluctuations. While this means that investors can make a lot of money, it also leaves them vulnerable to losing their money. These price fluctuations also make it harder for cryptocurrencies to be used in the real world, since it’s hard to pin down a consistent daily exchange rate and therefore difficult to integrate them with traditional currency systems. Another concern is the environmental impact of cryptocurrencies that use mining protocols. For example, Bitcoin uses twice as much energy for mining its currency as every residential customer in the United States uses for lighting. Also, because cryptocurrency isn’t backed by registered banks or government agencies, there is very little oversight of it, and the industry could see crackdowns as governments catch up and put regulations in place.
Once cryptocurrency has been purchased by an individual or business, the purchaser must decide how to safely store it. Crypto requires a private key to establish ownership rights over the currency. If the key is lost, the owner can no longer access their investments. If someone else gets the key, they can take the cryptocurrency. Therefore, safe storage is essential. On-platform storage means that third-party businesses with cybersecurity experience oversee all safety concerns. However, if they have a security breach, then the investor could lose their crypto. That’s why some investors chose to use noncustodial wallets that are only under their control. Some noncustodial wallets are completely offline and use a physical device that must be safeguarded but reduces the chances that the crypto could be lost to hackers.
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