What is Cryptocurrency ? How does Cryptocurrency work ?
Cryptocurrency is a digital payment system that does not rely on banks to verify transactions. It is a peer-to-peer system that allows anyone anywhere to send and receive payments. Instead of being physical money that is carried around and exchanged in the real world, Cryptocurrency payments exist purely as digital entries to online databases that describe certain transactions. When you transfer Cryptocurrency funds, transactions are recorded in a public ledger. Cryptocurrencies are stored in digital wallets/e-wallets.
Cryptocurrency received its name because it uses encryption to verify transactions. This means advanced coding is involved in storing and sending Cryptocurrency data between wallets and to the public ledger. The purpose of encryption is to provide security and safety for every transaction.
The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today. Much of the interest in cryptocurrencies is in trading for profits, with speculators occasionally pushing the price up.
How do Cryptocurrencies work ?
Cryptocurrencies are created through a mining process. “Mining crypto is like mining gold, but instead of digging for gold, you need to solve cryptographic problems,”. “This cryptographic problem or puzzle was created by the creators of cryptocurrencies.”
But it’s not us humans who are solving this puzzle and mining cryptocurrencies. It is the computer or computer network that does this work.
There are cryptocurrency mining methods, known as proof of work and proof of ownership. “The proof-of-work method consists of special computers known as mining rigs, competing to be the first to solve complex mathematical problems called hashes. The hash difficulty keeps increasing over time, which means that the computers doing the mining have to get more and more powerful.”
With the proof-of-work method, miners confirm cryptocurrency transactions for inclusion in the blockchain. But it takes a lot of computing power to do this.
Bitcoin uses proof-of-work mining and has been criticized for having serious environmental consequences resulting in billions of pounds of carbon dioxide being emitted by powerful, high-energy consuming crypto-mining computers. It’s the same reason people say NFTs are bad for the environment. Alternatives to Cryptocurrencies have switched or are in the process of switching to alternative validation methods, such as proof of stake.
This method is a more environmentally friendly alternative to proof-of-work mining. It defines it as “a mechanism whereby miners use the cryptocurrency they already own to gain access to mining rights equivalent to the coins they own, which do not require a large use of energy.”
Examples of Cryptocurrencies ?
There are thousands of cryptocurrencies. Some of the most famous include :
Founded in 2009, Bitcoin was the first cryptocurrency and is still the most traded. This cryptocurrency was developed by Satoshi Nakamoto, widely believed to be a pseudonym for an individual or group of people whose exact identity is still unknown.
Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.
This currency is most similar to bitcoin but moves faster to develop new innovations, including faster payments and processes to allow for more transactions.
Ripple is a distributed ledger system founded in 2012. Ripple can be used to track many types of transactions, not just cryptocurrencies. The company behind it has worked with various banks and financial institutions.
Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to differentiate them from the real thing.
How to buy Cryptocurrencies
You may be wondering how to buy cryptocurrencies safely. There are usually three steps involved. This is :
Step 1 : Choose a Platform
The first step is to decide which platform to use. In general, you can choose between a traditional broker or a dedicated cryptocurrency exchange :
- Traditional brokers. These are online brokers that offer ways to buy and sell cryptocurrencies, as well as other financial assets such as stocks, bonds and ETFs. These platforms tend to offer lower trading fees but fewer crypto features.
- Cryptocurrency Exchange. There are many cryptocurrency exchanges to choose from, each offering a different cryptocurrency, wallet storage, interest account options, and more. Many exchanges charge asset-based fees.
When comparing platforms, consider which cryptocurrencies are offered, how much they charge, their security features, deposit and withdrawal options, and any educational resources.
Step 2 : Funding your account
Once you have chosen a platform, the next step is to fund your account so you can start trading. Most crypto exchanges allow users to buy crypto using fiat (i.e., government issued) currencies such as US Dollars, British Pounds, or Euros using their debit or credit card – although this varies by platform.
Purchasing Crypto with a credit card is considered risky, and some exchanges do not support it. Some credit card companies also do not allow crypto transactions. This is because cryptocurrencies are highly volatile, and it is not advisable to risk going into debt — or potentially paying high credit card transaction fees — for certain assets.
Some platforms will also accept ACH transfers and wire transfers. Accepted payment methods and time taken for deposits or withdrawals differ per platform. Likewise, the time it takes to clear a deposit varies by payment method.
An important factor to consider is cost. This includes potential deposit and withdrawal transaction fees plus trading fees. Fees will vary by payment method and platform, which should be researched from the outset.
Step 3 : Placing the order
You can place your order through the web or mobile platform of your broker or exchange. If you are planning to buy cryptocurrency, you can do so by selecting “buy”, choosing an order type, entering the amount of cryptocurrency you want to buy, and confirming the order. The same process applies to “sell” orders.
There are also other ways to invest in crypto. This includes payment services such as PayPal, Cash App, and Venmo, which allow users to buy, sell, or hold cryptocurrency. In addition, there are the following investment vehicles :
- Bitcoin Trust : You can buy Bitcoin trust shares with a regular brokerage account. This vehicle provides retail investors with exposure to crypto through the stock market.
- Bitcoin Mutual Funds : There are Bitcoin ETFs and Bitcoin mutual funds to choose from.
- Blockchain stocks or ETFs : you can also invest indirectly in crypto through blockchain companies that specialize in the technology behind crypto and crypto transactions. As an alternative, you can buy stocks or company ETFs that use blockchain technology.
The best choice for you will depend on your investment objectives and risk appetite.
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