What is cryptocurrency? If I had to explain cryptocurrency in a single sentence, it would be, “it’s money you can use on the internet.” What does that mean? It means you can send and receive digital currency without involving any central authority or bank. You don’t have to stress about the different exchange rates from one country’s fiat currency into another’s or using multiple cards and accounts for online purchases – all you need is a bitcoin wallet and some coins.
Cryptocurrency, or cryptos, is a type of currency that uses digital files as money.
It has no physical parts such as banknotes or coins that can be carried around and hence, exists only in electronic form. Cryptocurrency is not reliant on central authorities such as banks or governments to uphold or maintain it, which is why it’s a decentralized currency.
It serves as ordinary money, and just like regular money, cryptocurrency is accepted as a means of payment and can be used to buy goods and services. It can also be transferred from one account to another and can be exchanged for tangible paper money. Individual ownership coins are stored in a ledger known as blockchains and secured by cryptography, which makes them hard to counterfeit or double-spent.
Investing in cryptos can indeed make you extremely rich, but they are a risky investment.
If you aim to gain experience or exposure to digital currency, then cryptos is definitely a good investment for you. A much safer alternative would be trading with the stocks of firms that deal with cryptocurrency.
The roots of cryptocurrency can be traced back to the 1890s with the invention of the blinding algorithm, which is all about secure and established digital transactions. In 2008, An anonymous group of people created a list of framework of the first cryptocurrency in the market today, known as Bitcoin.
The cryptocurrency’s use began in 2009 when its implementation was released to the world, but it took years before it was finally officially recognized as a means of payment by leading merchants. The first merchant to formally recognize it was WordPress in 2012.
The cryptocurrency rose to address the problems of centralization, confidentiality, and security associated with conventional currencies. It is used today in banking, insurance, and other business sectors.
Due to the increased need to improve the efficiency of today’s payment systems and the need to secure data, cryptocurrency has been growing at a compounded annual rate of 12.8% since 2021, and its market is estimated to reach $494 billion by 2030.
What Is Cryptocurrency – HOW CRYPTOS WORK
So, how does cryptocurrency work? Well, there are three ways to invest in cryptos: cryptocurrency mining, cryptocurrency exchanges, and investing and transacting.
1. Cryptocurrency Mining.
Mining cryptos is the main method of verifying transactions on a digital ledger for a blockchain, using adequate hardware and software resources. Miners are people on the internet who solve certain mathematical puzzles and are rewarded with bitcoins in exchange. A miner can earn cryptocurrency without having to put down money for it. The expansion of mining and increasing costs makes it very difficult for upcoming miners.
2. Cryptocurrency Exchanges.
A Cryptocurrency exchange is a website where individuals can buy cryptocurrencies from individual currency owners, brokers, or even from central exchanges. Coinbase is so far the most reliable and the best crypto exchange through either buying or selling of cryptocurrencies. Purchased cryptos can be stored in digital wallets, and they can either be cold or hot.
Hot cryptos mean the wallet is connected to the internet, making it easily accessible during transactions, but it is also prone to theft and fraud. Cold storage means it is not connected to the internet, hence hard to transact but safe. The best option for storing cryptocurrencies so far is in the cold wallet. A cold wallet costs between $50 and $150.
Cryptocurrency is the best option for large sums of money because when someone steals the device, they cannot access the money since only the owner has the access codes.
3. Investing and Transacting.
Once you own cryptocurrencies, you can either use them to buy goods and services, trade with them or exchange them for paper money. While purchasing goods, the easiest way is to use debit-card-type of transactions. You can use debit cards to withdraw money, just like at an ATM. You can also convert cryptocurrency to cash using banking accounts.
TYPES OF CRYPTOCURRENCIES
Cryptocurrency works outside of the banking system and uses different types of coins, with Bitcoin being the major player.
Bitcoin was the first world’s widely accepted type of cryptocurrency. Bitcoins are very popular and often considered a synonym for cryptocurrency. It uses blockchain technology to facilitate payments and digital transactions. Rather than using a central bank to control the money supply in an economy or third parties to participate in the verification of transactions, Bitcoin’s blockchains act as a public ledger for all the transactions carried out. Potential investors need to be aware that nowadays, bitcoins have become very expensive. In 2021, the cost of one Bitcoin was $68,000. However, you can buy a smaller fraction of it instead of buying the whole coin.
An altcoin is a term used for an alternative form of digital currency to Bitcoin. The altcoin was launched after Bitcoin’s success story. They are built to project themselves as a better replacement for Bitcoins. They aim to develop solutions for any perceived drawbacks of Bitcoins and become the newer and better version of Bitcoins. The most popular Altcoin is Ethereum, one of the fastest-growing cryptocurrencies in the market. Other examples of Altcoins include Lucky Block, Terra, and Shiba Inu.
It is a block-chained decentralized platform that is used to develop, host, and run business applications. Users are entitled to use resources proportional to their stake instead of having to pay for every transaction. It does not use the mining concept, and block producers generate the required number of blocks and are rewarded by creating new EOS tokens for every block they produce.
4. Binance Coin.
It is a type of currency that facilitates tokens that are used to pay fees on the Binance exchange. Its purpose was to be a utility token for discounted trading fees in 2017. It has since expanded its uses to numerous applications such as travel bookings, entertainment, financial services, and online services.
5. USD Coin.
This is a more stable coin that is pegged to the US. The aim of creating a USD Coin is to create a fully digital dollar that does not require a bank account or that the holder has to live in a particular country. It’s also envisioned as everyday money merchants can spend via the internet. 1 USD Coin can be redeemed for US$1.
Tether is a stablecoin whose aim is to keep cryptocurrency valuations stable. It’s mostly preferred by crypto investors who want to keep cryptocurrency value stable while avoiding the extreme volatility of other cryptocurrencies.
MYTHS ABOUT CRYPTOCURRENCY
There are a lot of myths about cryptos that can discourage people from investing in them.
A common myth is that all cryptocurrencies are illegal and are only used by fraudulent people to scam people. The truth is that not all cryptocurrencies are illegal and most are actually legitimate and conducted with goodwill intentions.
Another false belief is that cryptocurrencies have no value, but cryptos were valued shortly in 2009 after Bitcoin’s launch into the world. Its demand, supply, and investor sentiments fluctuated and there was a rise.
The third lie is that cryptocurrency is not secure. Sometimes the security of cryptocurrency can be compromised, depending on the storage as some fraudsters can hack and steal one’s currencies. However, cold wallets are safe and secure, and one can transfer currencies from one account to another.
It is also believed that cryptocurrencies cause pollution to the environment. There is some truth in this because mining activities require massive amounts of energy, but some cryptocurrency companies are taking a step forward by using environmentally friendly energy sources.
Let’s review some of the most famous investors of cryptocurrencies.
Bitcoin is wildly popular among cryptocurrency enthusiasts and investors. Several wealthy business owners and entrepreneurs have had major investments in this digital asset. They include Barry Silbert, who is the founder and chief executive officer of Digital Currency Group. The group has invested in more than 165 blockchain and other cryptocurrency firms.
Michael Saylor, the co-founder, and CEO of business intelligence firm MicroStrategy believes that cryptocurrency is the next biggest investment. His company purchased more Bitcoins in December 2021, buying 1,434 bitcoins for $84 million. The company now has 122,478 bitcoins in total.
Cameron and Tyler Winklevoss are also heavily invested in cryptocurrency and are believed to be the first ones to reach billionaire status by investing in bitcoin. They hold 100,000 coins worth $4.8 billion as of December 2021.
Elon Musk, the CEO of Tesla has also invested in cryptocurrency and purchased $1.5 billion worth of bitcoin in 2021. They also began accepting cryptocurrency as a form of payment in the same year.
The cryptocurrency world took off in 2021, and noticeable growth has been seen so far.
The total capital for the market of all cryptocurrencies now exceeds $1.6 trillion, with over 300 million crypto users worldwide. These trends are likely to continue. Investors are often drawn to the cryptocurrency market due to the potential profit which can be realized.
For example, Ether appreciated from $8 per unit in January 2017, to almost $400 six months later. When political instabilities occur, the price of Bitcoin tends to increase. During Brazil’s political and economic uncertainty in both 2015 and 2016, Bitcoin prices increased by 322% and the wallet use grew by 461%.
Bitcoin prices increased in response to Brexit and Trump’s victories and continue to increase alongside Trump’s political controversies. Initial coin offerings are the newest phenomenon in the crypto investing space. They help companies or firms raise money to develop and create even better cryptocurrency technologies. Rather than issuing shares of ownership, they offer digital coins or tokens.
In 2022, former Mozilla CEO, Brendan Eich, raised $35 million from an Initial Coin Offering in less than 30 seconds, and Bancor Protocol also raised $153 million in under four minutes. In addition, blockchain-related projects have raised more than $1.6 billion through Initial Coin Offering to date, whereas venture capitalists have offered $550 million for cryptocurrency firms across more than 120 countries.
One of the courts of Justice in the EU argues that cryptocurrencies should be treated as government-backed currencies, and the holders are not subjected to taxes when selling or purchasing.
In other countries such as the UK and Germany, cryptocurrencies are treated as private money and are taxed outside commercial use. In Japan, cryptocurrencies were reclassified as a means of settlement of transactions and were not subjected to taxation. Previously cryptocurrencies were subjected to an 8% consumption tax