What is Cryptocurrency – the meaning and the definition
Cryptocurrency, sometimes referred to as crypto-currency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies don’t have a central issuing or regulating authority, instead it uses a decentralised system to record transactions and issue new units.
What is cryptocurrency?
Cryptocurrency is a digital payment system that doesn’t rely on banks to verify transactions. It’s a peer-to-peer system that can enable anyone, anywhere to send and receive payments.
Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is then stored in a digital wallet. It is not a physical currency.
Cryptocurrency received its name because it uses encryption to verify transactions. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and public ledgers. The aim of encryption is to provide security and safety.
The first known cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today. Much of the interest in cryptocurrencies is to trade for profit. Prices can surge from time to time as risk takers work to drive prices upwards to maximise their potential profits.
How does cryptocurrency actually work?
Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders.
Units of cryptocurrency are created through a process often referred to as mining, which involves using computer power to solve complicated mathematical problems that generate coins. Users can buy the currencies from brokers, then store and spend them using their own cryptographic wallets.
When you own cryptocurrency, you don’t own anything physically. Essentially what you own is a key that allows you to move a record or a unit of measure from one person to another without a trusted third party.
Although Bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging in financial terms, and more uses are expected in the future. Transactions including bonds, stocks, and other financial assets could eventually be traded using the technology.
Examples of cryptocurrency
There are many different types of cryptocurrencies available today, in fact it is estimated there are thousands. Some of the more popular and best-known forms of cryptocurrencies include:
Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded today. The currency was developed by Satoshi Nakamoto – widely believed to be an alias for an individual or group of people whose precise identity remains unknown.
Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency on the market after Bitcoin.
This currency is similar to bitcoin but has moved more quickly to develop new innovations. These innovations include providing faster payments and process times which allows for more transactions.
Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track different kinds of transactions, not just cryptocurrency. The company behind it has worked with a number of banks and other financial institutions. Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them from the original cryptocurrencies.
How to manage the purchase of cryptocurrency safely
You may be wondering how to buy cryptocurrency safely; it is important you’re aware of what you’re purchasing before making any formal transaction. Typically, there are three steps involved when purchasing cryptocurrency.
The steps that are generally followed are:
Step 1: Choose a platform:
The first step is deciding which platform to use. Usually you would choose between a traditional broker or a dedicated cryptocurrency exchange:
These are online brokers who offer ways to buy and sell cryptocurrency, as well as other financial assets like stocks, bonds, and ETFs. These platforms tend to offer lower trading costs but fewer crypto features.
There are many cryptocurrency exchanges to choose from, each offering different cryptocurrencies, wallet storage and interest-bearing account options. Most exchanges charge asset-based fees and it is important to be aware of this when going through an exchange. When it comes to comparing different platforms, it is important that you consider which cryptocurrencies are on offer, what fees they charge, the security features, storage and importantly the withdrawal options.
Step 2: Funding your account
Once you have chosen your platform, the next step is to fund your account so you can begin trading. Most crypto exchanges allow users to purchase crypto using government-issued currencies such as the US Dollar, the British Pound, or the Euro using their debit or credit cards – although this varies depending on your location and who you bank with. Not all banks will allow you to purchase cryptocurrency using either their debit or credit card. If you’re interested in trading in cryptocurrency, it is important that you check with your bank.
Crypto purchases with credit cards are generally considered quite risky, and there are a number of exchanges that don’t actually support credit cards. Again, some credit card companies don’t allow crypto transactions either, which makes it important to first check if your provider will allow it. Some providers don’t allow the purchase because cryptocurrencies are highly volatile, and it is not advisable to risk going into debt for certain assets like cryptocurrency.
Some platforms will also accept electronic transfers and wire transfers. The accepted payment methods and transaction times for deposits or withdrawals will be different from platform to platform and it is important you check that before making a purchase or arranging to sell any cryptocurrency. At the same time, the time taken for deposits to clear varies by payment method and by exchange, again you should check this.
An important factor to consider is the fee structure. This includes fees on deposits as well as withdrawal transaction and trading fees. Fees will vary by payment method and platform, which is something to research at the outset.
Step 3: Placing an order
You can place an order via your broker or via your exchange’s web or mobile platform. If you are planning to buy cryptocurrencies, you can do so by selecting “buy,” choosing the order type, entering the number of cryptocurrencies you want to purchase, and confirming the order. The same process applies to “sell” orders.
There are also other ways to invest in crypto. These include payment services like PayPal, Cash App, and Venmo, which allow users to buy, sell, or hold cryptocurrencies. In addition, there are the following investment vehicles:
- Bitcoin trusts: You can buy shares of Bitcoin trusts with a regular brokerage account. These vehicles give retail investors 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 indirectly invest in crypto through blockchain companies that specialize in the technology behind crypto and crypto transactions. Alternatively, you can buy stocks or ETFs of companies that use blockchain technology.
When considering all of your options, you should base it on your investment strategy, your goals and you should always review the risk element of your purchase.
Storing your cryptocurrency
Once you have purchased cryptocurrency, you need to store it safely to protect it from hacks or theft.
Generally speaking, cryptocurrency is stored in a crypto wallet, which are physical devices or online software used to store the private keys to your cryptocurrencies securely.
Some exchanges provide wallet services, making it easy for you to store directly through the platform. However, not all exchanges or brokers automatically provide wallet services for you.
There are different wallet providers to choose from. The terms “hot wallet” and “cold wallet” are used:
- Hot wallet storage: This refer to crypto storage that uses online software to protect the private keys to your assets.
- Cold wallet storage: Unlike hot wallets, cold wallets (also known as hardware wallets) rely on offline electronic devices to securely store your private keys. Typically, cold wallets tend to charge fees, while hot wallets don’t.
Making a purchase with cryptocurrency
When it was first launched, Bitcoin was intended to be a medium for daily transactions, making it possible to buy everything from a cup of coffee to a computer or even big-ticket items like a house or a car. Although this hasn’t quite materialised and, while the number of institutions accepting cryptocurrencies is growing, large transactions involving it are rare. Even so, it is possible to buy a wide variety of products from e-commerce websites using crypto. Here are some examples:
Technology and e-commerce sites:
Several companies that sell tech products accept crypto on their websites; an example is Microsoft. Overstock, an e-commerce platform, was among the first sites to accept Bitcoin. Shopify, Rakuten, and Home Depot also accept it.
Some luxury retailers will accept crypto as a form of payment, but it is always best to check with them first.
Similarly, some car dealers – from mass-market brands to high-end luxury dealers – are already accepting cryptocurrency as payment. But again you should check with them before arranging a purchase.
Spotting cryptocurrency fraud and cryptocurrency scams
Unfortunately, cryptocurrency crime is on the rise and more and more people are getting caught up and losing thousands and thousands of dollars. Some cryptocurrency scams include but are not limited to:
Fake websites are set up which sometimes feature fake testimonials and crypto jargon promising large guaranteed returns, provided you keep investing using the fake site. Often you will never be able to see your investment.
Virtual Ponzi schemes:
Cryptocurrency criminals promote non-existent opportunities to invest in digital currencies and create the illusion of huge returns by paying off old investors with new investors’ money.
Scammers pose online as billionaires or well-known names who promise to multiply your investment in a virtual currency but instead steal what you send. They may also use messaging apps or chat rooms to start rumours that a famous businessperson is backing a specific cryptocurrency. Once they have encouraged investors to buy and driven up the price, the scammers sell their stake, and the currency reduces in value.
Considering cryptocurrency and the safety aspect of investing
Cryptocurrencies are usually built using blockchain technology. Blockchain describes the way transactions are recorded into “blocks” and time stamped. It’s a complex and very technical process, but the result is a digital ledger of cryptocurrency transactions that’s hard for hackers to tamper with.
In addition, transactions require a two-factor authentication process. For instance, you might be asked to enter a username and password to start a transaction. Then, you might have to enter an authentication code sent via text to your personal mobile phone.
While securities are in place, that does not mean cryptocurrencies are un-hackable.
Unlike government-backed money, the value of virtual currencies is driven entirely by supply and demand. This can create wild swings that produce significant gains for investors and big losses. Cryptocurrency investments are subject to far less regulatory protection than traditional financial products like stocks, bonds, and mutual funds.
Ways to invest in cryptocurrency safely
According to Consumer Reports, all investments carry risk, but some experts consider cryptocurrency to be one of the riskier investment choices out there. If you are planning to invest in cryptocurrencies, these tips can help you make educated choices.
Before you invest, learn about cryptocurrency exchanges. It’s estimated that there are over 500 exchanges to choose from. So, it is very important that you research, read reviews, and talk with more experienced investors before moving forward and investing.
Know how to store your digital currency:
If you buy cryptocurrency, you have to store it. You can keep it on an exchange or in a digital wallet. While there are different kinds of wallets, each has its benefits, technical requirements, and security. As with exchanges, you should investigate your storage choices before investing.
Diversify your investments:
Diversification is key to any good investment strategy, and this holds true when you are investing in cryptocurrency. Don’t put all your money in Bitcoin, for example, just because that’s the name you know. There are thousands of options, and it’s better to spread your investment across several currencies.
Prepare for volatility:
The cryptocurrency market is highly volatile, so be prepared for ups and downs. You will see dramatic swings in prices. If your investment portfolio or mental wellbeing can’t handle that, cryptocurrency might not be a wise choice for you.
Cryptocurrency is all the rage right now, but remember, it is still in its relative infancy and is considered highly speculative. Investing in something new comes with challenges, so be prepared. If you plan to participate, do your research, and invest conservatively to start with.
Disclaimer: Information within this article has been sourced from a number of reputable online references. The purpose of sharing this information is to provide readers with additional information on cryptocurrencies and how to spot a cryptocurrency scam. Whilst this information is being shared on our platform, Kina Bank does not recognise cryptocurrency, nor do we help facilitate in the trading of any cryptocurrency.