Cryptocurrency, or digital currency, is any type of currency that exists digitally or in actual form and is created with an encryption system. Digital currencies do not have a central issuing authority or regulator; instead, they use a decentralized system to record and conduct transactions.
What is cryptocurrency?
Digital currency is a digital payment system that does not rely on banks to verify transactions. Instead of the transportation of physical money in the real world, this system makes payments simply as digital entries in an online database. While cryptocurrency funds are transferred, transactions will be recorded in a public network called Blockchain. Cryptocurrencies will also be stored in digital wallets.
The name cryptocurrency or digital currency is because it uses encryption to confirm transactions. This means that advanced coding is involved in storing and transferring digital currency data between blockchain wallets. The purpose of this encryption is to provide security.
The first digital currency was Bitcoin (Bitcoin), which was established in 2009, and today it is the most known and most valuable digital currency. It is worth mentioning that investors are interested in digital currencies by trading for profit.
How does cryptocurrency work?
As mentioned earlier, digital currencies or cryptocurrencies run on a public distributed network called blockchain. A record of all transactions is kept in this network.
Digital currency units are created through mining, which is the use of computer power to solve complex mathematical problems and generate new digital currency. Users can also purchase currencies from brokers, then store and spend them using a digital currency wallet.
If you want to be one of the digital currency investors, you must first know that you will not be holding anything tangible. Instead, what you have is a key that allows you to receive or transfer any amount of your assets without the intervention of anyone else.
Although Bitcoin was created in 2009, digital currencies and applications of blockchain technology are still emerging financially, and more widespread applications are expected in the future. This technology will eventually make tradable assets, including bonds, stocks, and other financial assets.
Types of cryptocurrencies
Nowadays there are thousands of digital currencies. Some of the most famous ones are:
Founded in 2009, Bitcoin is the first and most popular digital currency in the crypto world. This currency was created by a person named Satoshi Nakamoto. But unfortunately, there is no information about this person's real identity.
Ethereum was created in 2015 and is one of the digital currencies that has its blockchain. Ethereum is the most popular digital currency after Bitcoin.
Litecoin is also a digital currency similar to Bitcoin, which works very quickly to develop its network to speed up payments and increase transactions.
Ripple is a distributed system on the blockchain network founded in 2012. This currency can be used to track various types of transactions, not just digital currency. Ripple developer company has cooperated with multiple banks and financial institutions.
How to buy cryptocurrency
Buying digital currency and investing in it requires basic knowledge. In the following, we show how to purchase cryptocurrencies with several steps.
Step 1: Choose a trading platform
The first step to buying cryptocurrency is deciding which trading platform to use. In general, you can choose between a traditional broker or a cryptocurrency exchange to trade:
1. Traditional Brokers: These brokers are online and offer ways to buy and sell cryptocurrencies and other financial assets such as stocks, bonds, and ETFs. With traditional brokers, side costs, including commissions, will be lower.
2. Digital currency exchange: Digital currency exchanges are another option for buying cryptocurrencies. Each of these exchanges has unique features. Using digital currency exchanges imposes more side costs on traders than brokers.
When comparing different trading platforms, you should consider transaction fees, security features, storage options, and how to withdraw assets.
Step 2: Fund your account
After choosing a trading platform, the next step is to fund the account to start a business. Most exchanges allow users to trade their desired digital currency using fiat (i.e., currencies such as US dollars, British pounds, or euros).
Step 3: Place an order
After choosing the desired trading platform and charging the account, you must create your order. For example, if you intend to buy digital currency, you can select the "Buy" option, enter the desired currency amount, and confirm the order. The exact process applies to "sell" orders.
Cryptocurrency storage and maintenance
After buying cryptocurrency, you should store it safely to protect it from hacking or theft. Cryptocurrency is usually stored in cryptocurrency wallets, physical devices, or online software to securely keep your cryptocurrency private keys. Some exchanges offer wallet services and make it easy for investors to deposit directly through the platform. However, not all exchanges or brokers automatically provide wallet services for investors.
There are different digital wallets to store and maintain the digital currency, which we will examine below.
Types of digital wallets
Online wallets (Hot wallets)
An online wallet, as the name suggests, uses online software to protect the private keys of your assets.
Offline wallets (Cold wallets)
Unlike online wallets, offline or hardware wallets rely on offline electronic devices to securely store private keys.
Are cryptocurrencies safe?
Digital currencies are usually traded on the blockchain network. However, how to record transactions in the blockchain is a relatively complex technical process that makes it very difficult for hackers to access it.
Additionally, all cryptocurrency transactions require a two-step authentication process. For example, you may be asked to enter a username and password to initiate a transaction. Then, you will be asked to confirm your transaction with the help of an authentication code sent to your mobile phone via SMS. As a result, digital currency transactions are mainly safe and safe from the risk of hacking and information theft.
Advantages and disadvantages of cryptocurrency
Digital currencies were introduced to revolutionize the financial infrastructure. However, every evolution and revolution will involve advantages and disadvantages. At the current stage of digital currency development, there are many differences between the theoretical ideal of a decentralized system and its practical implementation.
Some of the advantages and disadvantages of digital currencies are as follow:
Advantages of digital currencies
1. Digital currencies represent a new, decentralized paradigm for money. In this system, centralized intermediaries such as banks and financial institutions are not necessary to enforce trust between the two parties.
2. Digital currencies make transferring money between two parties easier without needing a trusted third party such as a bank or credit card company. Such decentralized transfers are secured using public and private keys and various algorithms such as Proof of Work (PoW) or Proof of Stake (PoS).
3. Since digital currencies do not use third-party intermediaries, transfers between two trading parties are faster than standard money transfers.
4. Investing in digital currencies leads to profit. The digital currency market has enjoyed a high value over the past decade, and this financial value dramatically contributes to the profitability of investors.
5. One of the most prominent uses of digital currency is remittances with high amounts and low fees in the shortest possible time. Currently, cryptocurrencies such as Bitcoin serve as intermediary currencies to facilitate the transfer of money across borders. Thus, a fiat currency is converted into Bitcoin (or other digital currency), which is transferred across borders and subsequently converted into the destination fiat currency. This method makes the money transfer process more straightforward and cheaper.
Disadvantages of digital currencies
1. Digital currencies are nicknames. They travel a digital trail during the transaction that agencies like the Federal Bureau of Investigation (FBI) will have no restrictions on deciphering. Such an issue allows governments or federal authorities to track the financial transactions of ordinary citizens.
2. Digital currencies have become famous for criminals due to nefarious activities such as money laundering and illegal purchases. Digital currencies are also a favorite tool of hackers who use them for ransomware activities.
3. In theory, digital currencies are decentralized, but in reality, their ownership is highly centralized. For example, an MIT study found that just 11,000 investors own roughly 45% of Bitcoin's value.
4. A common misconception about cryptocurrencies is that anyone can mine them using a computer with an internet connection. However, mining digital currencies requires significant energy. Expensive energy costs combined with the unpredictability of the mining process have concentrated the mining business among large corporations whose revenues reach billions of dollars.
5. Although blockchain is a very secure network, other digital currency repositories such as exchanges and wallets can be hacked. Many cryptocurrency exchanges and wallets have been hacked over the years, resulting in the theft of millions of dollars "coin."
6. Digital currencies in the public markets suffer from extreme price fluctuations. For example, Bitcoin has experienced extreme volatility in its value. This popular digital currency rose from $7,575 to $17,738 in December 2017. Therefore, some economists consider digital currencies as short-term or speculative bubbles.
Is cryptocurrency a profitable investment?
Unlike Representative Money, the value of cryptocurrencies is driven entirely by supply and demand. This issue can create unpredictable fluctuations that will benefit investors significantly; However, possible losses cannot be ignored.
Cryptocurrency is a somewhat risky investment, no matter how you trade it. In general, you need to know, for high-risk investments, you should involve a small part of your capital.
There are other ways to manage risk in your cryptocurrency portfolio, including diversifying the range of cryptocurrencies you buy. Digital currency assets may rise or fall at different rates and over different periods, so you can protect yourself from losses in one of your sources by investing in several different types of digital currency you have
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