Cryptocurrency is a popular topic and one you should understand if you want to be financially aware.
Whether you want to invest in crypto or explore a career as a crypto day trader, understanding the basics of cryptocurrency is the place to start.
This article is a beginner’s guide to understanding cryptocurrency, how it works, and how to invest in it.
What is Cryptocurrency?
Cryptocurrency is a word containing two major parts, crypto from the word “cryptography” and currency. Currencies represent a medium of exchange for payment of goods and services.
You’re familiar with currencies like the U.S. dollar and other government-issued currencies known as fiat money. As there are physical currencies, there are digital equivalents or virtual currencies.
A cryptocurrency is a virtual currency that works on the principles of cryptography and decentralization.
You can use your bank account or virtual card for online shopping because you have some virtual currencies online. A cryptocurrency is also a virtual currency designed to work as a medium of exchange.
Government-issued currencies are centralized, meaning the government controls them. But cryptocurrencies are decentralized and not under the government’s control.
These virtual currencies are built on the blockchain and are encoded using cryptography. Cryptography is the technique to ensure that crypto transactions are safe, valid, and verifiable on the blockchain.
The blockchain is the center of the crypto ecosystem. It is the system by which everything operates, from starting a transaction to verifying it to confirming and recording it.
Origin of Cryptocurrency
The first ever cryptocurrency, Bitcoin, was created by Satoshi Nakomoto, a name describing an anonymous person or group behind the invention of cryptocurrency.
Satoshi created Bitcoin in 2009 as a currency that can be used for online transactions but is not under the control of the government and financial organizations.
The reason for Satoshi’s mission was to help investors have total control of their assets at any time and any place.
This was inspired by the 2008 financial crisis, where many companies and banks went bankrupt and could not refund investors of their investments.
The crypto industry has since developed into a thriving ecosystem with as many types of financial services available in the traditional banking system.
Types of Cryptocurrencies
Cryptocurrencies are categorized into two main types; Bitcoin and altcoins. Bitcoin is the king of crypto coins and holds the largest market capitalization, making it the most valuable.
Altcoins are crypto coins, excluding Bitcoin. Any other coin aside from Bitcoin is termed an altcoin. Examples of altcoins include Ethereum (ETH), Tether (USDT), Litecoin (LTC), Binance coin (BNB), and Solana (SOL).
Crypto coins are designed to work on a particular blockchain. For example, Bitcoin works on the Bitcoin blockchain. Some coins don’t have their blockchain, but run on existing ones.
These coins are termed “tokens”. For example, Solana doesn’t have its blockchain, but operates using the Ethereum blockchain.
Some other coins have their blockchain, but these blockchains are upgraded versions of an original one. For example, Litecoin is built to work on an upgraded version of the Bitcoin blockchain.
These upgraded blockchains are only different from the original ones in certain areas, like the speed, or number of transactions per second.
Another unique type of coin is the stablecoin. These coins are pegged to the value of a fiat currency like the U.S. dollar. For example, Tether (USDT) is a stablecoin pegged to the value of the U.S. dollar. Crypto coins like Bitcoin and Ethereum are prone to rise and fall in price, but stablecoins always retain their prices.
Non-fungible tokens (NFTs) are also a form of cryptocurrency, but it’s different from crypto coins because they are not fungible. This means you can’t swap one NFT with another NFT and get the same thing.
For example, a 100-dollar bill can give you the equivalent of two 50-dollar bills. But one NFT cannot be exchanged at such equivalency, as they’re unique and non-fungible.
Properties of Cryptocurrency
Crypto coins have properties that define them from other virtual currencies, including the following.
There are two different types of crypto exchanges; the decentralized exchanges called dexes, e.g., Uniswap, and the centralized exchanges, e.g., Binance. Dexes operate the fully defined form of a crypto exchange because they’re fully decentralized. Nobody can freeze your account or stop you from doing any crypto transactions.
Crypto was designed using blockchain technology that prevents hackers from compromising the system. Furthermore, no single government can stop crypto from operating. However, crypto activities can be taxed or regulated to prevent corrupt practices like money laundering.
Fast and cost-effective payment method
With crypto, you can receive or send funds to someone from another continent in a few minutes. And most of these crypto transactions are completed with a very low fee compared to the cost of an international wire transfer.
Crypto transactions cannot be undone once processed. In addition, the details of a crypto transaction cannot be altered. These two characteristics make crypto transactions immutable and secure.
Store of Value
Because of cryptocurrency’s potential to increase in value as its demand increases, it is considered a store of value and an important financial asset for investment. High-performing crypto coins can help you hedge against inflation while yielding good returns.
Medium of Exchange
Some companies accept crypto coins like Bitcoin and Dogecoin as a means of payment for some products and services. For example, Tesla is accepting Dogecoin for buying some of its merch. Many businesses also accept Bitcoin, such as Home Depot and Starbucks.
Is Crypto Legal?
In most countries, it is legal to trade or mine crypto. However, each country has its regulations concerning cryptocurrencies.
Some countries are crypto-friendly, while others are not so much. For example, there are countries like Malta, where capital gains on crypto trading are tax-free. Other countries, such as China and Morocco, ban crypto mining due to its environmental effects.
Because crypto is a relatively new industry, legal clarity on crypto activities is not fully fleshed out. For instance, Bitcoin and Ethereum are classified as commodities, but other crypto financial assets are yet to be defined.
How to Invest in Crypto
If you’re ready to begin investing in crypto, there is more than one way to do it. Here are four different ways to invest in crypto assets.
Buy crypto coins directly
This is the most common way of investing in crypto. First, choose the coin you want to invest in; it could be Bitcoin, Ethereum, or any other of your choice. Then, you buy the coin from a crypto exchange, a marketplace for buying and selling crypto coins and tokens.
Invest in companies that invest in cryptocurrency
If you’re skeptical about investing in a crypto coin directly, you can consider investing in a crypto company or one that supports crypto. Such include companies like Microstrategy (MSTR), Coinbase (COIN), Robinhood (HOOD) and so on.
Invest in crypto-based funds
If investing in individual crypto companies does not sound appealing, consider crypto-based funds. You can invest in crypto exchange-traded funds (ETFs) such as ProShares Bitcoin Strategy ETF and Bitwise Crypto Industry Innovators.
Invest in a crypto-focused Roth IRA
If you want to leverage the tax benefits of an individual retirement account and invest in crypto simultaneously, consider owning a crypto Roth IRA.
How to Buy Cryptocurrency
If you choose to invest in cryptocurrency directly, you need to know how to buy it from a crypto exchange. Here’s a step-by-step guide on how to buy crypto coins on an exchange.
Choose your preferred crypto exchange
It’s best to select a crypto exchange that is well known and has a good reputation.
Create an account on the exchange and complete the KYC process
KYC is an acronym for “Know Your Customers,” and every platform offering a service is required to do it. You’ll be asked for personal information like your I.D. card and email to verify your identity and connect you to the platform.
Fund your account
Add your bank account or connect your debit or credit card to fund your account with fiat money.
Decide which coin to buy
After funding your account, navigate to the spot market and use the search box to find the crypto coin you want to buy.
Set a buy order for the coin
You can buy crypto coins through either market or limit orders. However, it’s advisable to use the limit order as you can decide on a good entry price compared to a market order where you buy a coin at the current price it’s trading at.
After identifying the coin, tap on the “buy” icon and enter the necessary information required, including what price to buy the coin and what amount to buy.
Crypto is a volatile asset that is subject to sharp price fluctuations, so do your due diligence before investing. Once you’ve purchased a coin, you can either hold it for the long term or trade it by selling it when the asset price rises.
Whichever way you want to go about investing, ensure you invest only a moderate percentage of your funds in crypto.
Cryptocurrencies are seen in monetary terms as a medium of exchange, and because it’s a store of value, they are regarded as an investment option. Compared to the stock market, the crypto market is still young, but many believe it to be the future of money.
Many properties make crypto an appealing option for investors; it’s easy to use, fast, costs less, independent of the government, and functional as a payment method.
If you’re ready to start investing in crypto, ensure you start with a small amount and keep in mind that although crypto can offer a high return on investment, it can also be a risky investment.