Cryptocurrency – The basics
Updated: Sep 1
While cryptocurrency is a relatively new concept, it seems to be taking over the investing world of today. But what is crypto? How does it work and what are the risks involved? Is crypto just a trend or does it have the potential to grow further? Is investing in crypto really a good idea? In this article, we go through the basics of cryptocurrency and the history of the most well-known crypto, the bitcoin.
What is cryptocurrency?
Cryptocurrency (or crypto) is a digital currency based on a blockchain technology secured by cryptography that is not controlled by any central institution. The blockchain works as a ledger of transactions, enforced by a disparate network of computers and ensures the integrity of the transactional data. Due to the fact that crypto is not controlled by central authorities, it also eliminates the middleman (i.e. bank) and allows the counterparties to transact directly between each other and thus, transaction fees are significantly lower if not none.
Essentially, crypto is a denomination of value in virtual tokens that can be digitally traded and can function as medium of exchange, unit of account or store of value.
The first and most famous cryptocurrency is Bitcoin, that was launched in January 2009 by an individual or group known as Satoshi Nakamoto. Due to the fixed number of bitcoins that will ever exist (21 million), inflation and manipulation are prevented.
Other well-known cryptocurrencies include Ethereum, Cardano, EOS, Litecoin etc.
Advantages and Disadvantages of Crypto
Easier, faster and cheaper transfers
A crypto user can easily transfer funds without the need for a middleman (i.e. bank). All transfers are secured by the use of public (at the user’s “wallet”) and private keys (only known to the owner and being used to sign the transactions) and various incentive systems, such as Proof of Work or Proof of Stake. Due to the lack of financial institutions in the equation, minimal processing fees are applied.
Protection from inflation
Most cryptocurrencies are released with a fixed amount of virtual coins. As the demand for these coins increases, their value also increases and prevents inflation.
Security and privacy
The blockchain is based on cryptographic puzzles that are almost impossible to decode. Pseudonyms that are unconnected to any user, account or stored data are being used to facilitate the need for anonymity and privacy of the end user. All the aforementioned, make cryptocurrencies less vulnerable to hacking attacks.
Use for illegal activities
Due to the high level of privacy and security, it is almost impossible for any authority to uncover a user. Crypto has been used as a means of exchange in numerous illegal activities, such as drug dealing. Crypto is also used for money laundering by concealing the source of illicitly obtained money.
Value can change significantly
The value of cryptocurrency is completely based on the laws of supply and demand. In short, if for any reason the users decide to stop using a cryptocurrency, its value will drop rapidly and will become worthless.
The process of mining crypto is highly energy-consuming due to the advanced technology required. As major crypto miners are in countries that still use coal for electricity production, the carbon footprint of these countries has increased rapidly.
Lack of refunds or cancellation policy
If funds are sent to the wrong wallet address or in the case of a dispute, the coin cannot be retrieved by the sender and this can easily be used to cheat people out of their money.
Susceptibility to hacks
Despite the fact that crypto is generally very secure, exchanges are not. Exchanges store the wallet data of users, which can be stolen by hackers that will, in turn, gain access to the users’ accounts. Although most exchanges are highly secure today, there is always the risk, even though minor, of a hack.
Should I invest in Cryptocurrency?
So, should someone invest in crypto given the volatility and fluctuations of the market? Is it safe or will my investment disappear in thin air? The short answer is – it depends. Crypto is a high-risk investment and there are several dos and don’ts to consider before investing your hard-earned money:
Be aware of the risks involved due to crypto’s volatility
Understand the technology behind the assets
Learn how the law of demand and supply affects the liquidity and stability of crypto
Research the exchange rates currently and historically
Learn how to store your crypto coins securely
Do not invest in a single cryptocurrency. Diversify your investment to lower the risk of volatility
Have in mind that investment returns are not secured
The Bottom Line
While crypto is relatively new, it has been proven historically that it has the potential to become a good long-term investment. However, investors should be cautious and understand the risks involved in crypto trading. If you are planning to invest in crypto, make sure you thoroughly understand how things work and have in mind that there is always the risk of volatility. Crypto trading comes with its own challenges and one shall be prepared for ups and downs.
History of Bitcoin
*DISCLAIMER: This article and its publication are intended to provide a brief introduction and act as a general guide. This is provided for information purposes only and cannot be utilized as a substitute for professional advice. This document does not represent a legal opinion and one must not rely on it without receiving independent advice based on the particular facts of its own case. No responsibility is accepted by the author or the publishers for any loss suffered from acting or refraining from acting based on the contents of this publication.
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