What is Cryptocurrency?

What is Crypto?

Cryptocurrency, also known as crypto, is a form of digital currency that only exists virtually and uses cryptography to keep transactions secure and prevent counterfeiting. Cryptocurrency doesn’t have a central issuing authority, like a Federal Reserve; instead, transactions and new units are recorded in a decentralized system called a blockchain.

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A blockchain is a public record of all existing cryptocurrency transactions, like a bank ledger or balance sheet. A series of transactions are grouped together in numerical order in blocks. Before a block can be added to the chain, it must be verified, making it difficult to forge transaction histories. Each type of cryptocurrency has its own blockchain, an ongoing list of transactions made using that currency.

Cryptocurrency enters the market via a process called mining, which is completed by powerful computers that use sophisticated, specialized software that solve complex math problems. Mining requires a huge amount of computing power, and while it can be done by an individual, it typically takes place in huge warehouses full of designated machines. The process of mining cryptocurrency is not a quick one, but those who own the computers that do the mining are rewarded for their work with crypto tokens—small amounts of cryptocurrency that add up over time.

It might be easier to conceptualize cryptocurrency by thinking of it as a type of investment, or a chip at a casino. Like an investment in the stock market, the value of an amount of cryptocurrency can fluctuate over time. Some users may simply purchase an amount of crypto and then sell it later if they’ve made a profit. Others may treat it like a chip at a casino, using crypto to make purchases online in peer-to-peer transactions. Like at a casino, when it’s time to cash out, the remaining chips (or amount of cryptocurrency) is exchanged for cash.

How Do I Buy Cryptocurrency?

To buy cryptocurrency of any type, you usually must sign up for an exchange, which will enable you to buy, sell, or hold digital currency. These exchanges are comparable to online stock brokerage services. The type of exchange you choose depends on your own personal preferences; some require personal identification in order to adhere to Know Your Customer laws, which are in place to prevent money laundering. Other exchanges allow their users to operate anonymously, which can be attractive both to those with more nefarious intent and the unbanked population of the world, like refugees and those who live in places without financial infrastructure.

Once you’ve decided on an exchange, you’ll need to create an account and connect it to a payment option. Many exchanges will ask that you also upload a copy of your drivers’ license or social security card and will not let you proceed until your identity is confirmed.

You can buy almost any type of cryptocurrency in the same manner that you would purchase a stock through a brokerage. Many exchanges will let user deposit a set amount into their account on a weekly or monthly basis, to be used for the purchase of cryptocurrency.

Digital assets are frequently stored outside an exchange in what’s called a digital wallet. These crypto wallets work by allowing you to ensure that you have privacy and control over your digital funds. Keeping this currency away from an exchange may offer some protection in case the exchange gets hacked. Think of it like keeping your money in your mattress, instead of in a bank.

• Hot Wallet. An online digital wallet is called a hot wallet and is accessed through an internet enabled device like a phone, tablet, or computer.
• Cold Wallet. This type of digital wallet is not connected to the internet and uses a private key to access a user’s data about their crypto holdings. These are typically considered to be more private and safer than a hot wallet, because they are less susceptible to hacking.
• Paper Wallet. A secure option for the storage of digital currency is a type of cold wallet known as a paper wallet. The only way to access your cryptocurrency is with a code that is typically printed on a piece of paper. These wallets are generally used for high-security and long term crypto investments.
• Hardware Wallet. This type of cold wallet is usually a USB flash drive that stores the keys to access your cryptocurrency. This information is securely stored offline and is typically unaffected by software hacks that might otherwise disable your computer.

When you’re buying cryptocurrency, think about how you want to store it. If you plan to buy and sell with regularity, a hot wallet may provide the greatest ease of access. If you plan to sit on your investment for the long term, you might prefer a cold wallet like a paper or hardware wallet.

What are the Different Types of Cryptocurrency?

The major players in cryptocurrency are Bitcoin and Ethereum. Bitcoin is considered the first form of cryptocurrency and was created due to the desire for a decentralized form of currency that wasn’t reliant on traditional banks. Other forms of crypto, commonly known as alt-coins, were created because users wanted to build upon the success of Bitcoin and improve any perceived imperfections. Ethereum is the world’s second largest form of cryptocurrency and has a legion of devoted investors who prefer it to Bitcoin.

Other types of alt-coins may be named based on how they’re mined—like LiteCoin and ZCash—their intent to provide some market stability—like USD Coin—or even internet memes, the most well-known being Dogecoin.

Why Do I Need Cryptocurrency?

You may find that crypto is not for you. Digital currency is currently generating a lot of chatter as an investment, but it’s not a necessity.

If you’re interested in a newer generation of currency and investing, you might purchase some cryptocurrency and use it for online purchases. Many users find that crypto transactions are fast and secure, and because no centralized banks or credit unions are involved, there are no processing fees, which can bring down the overall cost of a purchase. Some users have made a lot of money investing in crypto, but there is a fair amount of risk involved as the market is incredibly volatile. However, if your tolerance for risk is higher than most, you may want to try a crypto investment.

If you consider yourself a more fiscally cautious person, cryptocurrency may not be for you. Some people are taken in by scams on fake crypto exchanges. Others are fooled by social engineering scams; a scammer will claim to be the IRS or a credit card company in an attempt to get an unsuspecting person to hand over their digital currency.

While cryptocurrency is experiencing a rise in popularity and is enjoying some time in the headlines, it’s not a fiscal necessity. Most major retailers don’t accept cryptocurrency in transactions. There are, of course, a few exceptions but for the time being they are few and far between.

If cryptocurrency has piqued your interest as an investment or to conduct peer-to-peer transactions, make sure that you’re comfortable and cautious as you move forward with your new venture.