Are you new to the world of investing and want to learn more about the growing field of cryptocurrencies?
To start, this area doesn’t work in the same way as other investments, which can make the terminology and the process a bit complicated for those who are new to it.
So, here, you’ll be walked through what cryptocurrency is in jargon-free language, to help you assess if it’s the right investment option for you.
What Is Cryptocurrency?
Cryptocurrency is a type of digital money, and unlike cash or coins, it doesn’t exist physically. That is, you can’t withdraw it from a bank as it lives solely in the digital realm.
Most people are familiar with the first and most famous cryptocurrency, which is Bitcoin, which came into existence in 2009. Since then, there have been thousands of others, such as Ethereum and Litecoin.
What makes cryptocurrency so different from standard money is that it isn’t controlled by a bank or government. Instead, it exists on platforms such as CoinEx, and this allows investors to send it to and from each other without needing to go through a middleman or a bank.
What’s the Blockchain?
Cryptocurrency works using a technology called a blockchain, which is a public digital record book. Every time a person sends or receives cryptocurrency, it’s logged and thus it can’t be changed or erased, making the system very secure.
A simple way to think about this is that the blockchain is like a shared spreadsheet that updates automatically. That is, of course, assuming that the cryptocurrency is on-chain. Off-chain cryptocurrencies don’t have a digital record book, but you can get access to the trading records via the platform, rather than having public access.
How Do People Get Cryptocurrency?
When you’re brand new to cryptocurrency, you’ll usually buy it via an online exchange, which is a website or app where you can trade regularly for cryptocurrency. There’s also the process called mining, where powerful computers help verify transactions and earn cryptocurrency as a reward. Unless you have several million in the bank, you’re unlikely to be engaging in mining, as the computers required for it are expensive and the process is mind-bogglingly complicated!
How Do Wallets Work?
When you have cryptocurrency, you’ll need a digital wallet. This doesn’t store the money, but it stores special passwords called keys that will prove you own the cryptocurrency. Offline wallets are most secure but are harder to manage. Of course, you can have online wallets, which, as the name suggests, require access to the internet. It should be noted that if you lose the wallet keys, you lose access to your cryptocurrency permanently.
Why Is Cryptocurrency Seen as So Risky?
Cryptocurrency has value solely because people think it has value. Some cryptocurrencies will also have limits on how many coins can exist, which can make them feel very scarce and sought after. The prices can also change very quickly, and this volatility can make investing in this field incredibly risky, especially for those who are new to investments.
Then, as is the way with all things online, there are risks related to hacking, scams and a lack of clear rules around cryptocurrency in some countries. However, as time goes on and cryptocurrencies become more stable, many countries, including the United States and the EU, are looking to draw up written rules about how cryptocurrencies can be integrated into standard economic transactions.
