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Lesson 1: What is Cryptocurrency

Lesson 1: What is Cryptocurrency

Crypto is transforming the financial world as we know it and can deliver financial services for the unbanked population. What is cryptocurrency, and how does it work?

Bitcoin and other new cryptocurrencies are now impossible to ignore. They have evolved from being a joke to viable investments. If your work is even remotely tied to emerging technologies or you simply use the internet daily, you had heard about cryptocurrency before.

Cryptocurrency will affect the way we live, work, act online, and make financial transactions. It is a brand-new world of trustless systems that is welcoming us all. And it is all driven by cryptocurrency and the technology it brings along – the blockchain technology. Are you in?

What is Cryptocurrency?

A cryptocurrency is a digital asset that uses computer code and blockchain technology. It is created to operate without a central entity, such as a bank, company, or government.

Cryptocurrency is commonly referred to as crypto because it uses cryptography, making it almost impossible to counterfeit or double-spend. This makes them invulnerable to government manipulation or interference.

Bitcoin, the first cryptocurrency, was created as a payment system for the internet. It is faster, cheaper, more resistant to censorship, and not subject to any central bank or government's manipulation. Its price corresponds to the simple economic principle of supply and demand.

There are many cryptocurrencies available today. Although cryptocurrencies can be used as payment, many are used as investment tools and for preserving wealth. The volatile nature of cryptocurrency attracts investors who use this technology for speculation. They buy the cryptocurrency hoping that the price will rise and make a profit.

Owning cryptocurrency does not involve any physical or tangible items. Cryptocurrency can be created through mining it or it can be bought from a cryptocurrency exchange. Crypto owners need to keep their funds on a digital cryptocurrency wallet. Investors are free to use it however they want, store it, or transfer it to another wallet without relying on a third party, as is the case within the traditional banking system.

Features of cryptocurrency

Cryptocurrencies were designed to function without the need for a central authority. Therefore, cryptocurrency benefits from this fast and invulnerable system. The main benefits that attract inexperienced users and investors to invest in cryptocurrencies are:

  • Cryptography is used to secure financial data. That’s why many refer to cryptocurrencies as simply “crypto". Cryptography is a technique for securing information and communications, and for that, it uses public-key cryptography. In cryptocurrency, the public key can be shared with others to send you cryptocurrency. Investors who buy the digital asset will also possess a private key, which cannot be shared with anyone. The private key is like a password. It protects your crypto assets and is used to sign transactions you initiate to other parties or recover cryptocurrency wallets from damaged devices.

  • Cryptocurrencies are transparent. Every crypto transaction is timestamped and recorded on the blockchain, creating a public chronology or provenance of ownership or custody. This ledger is available to anyone and can be used to verify transactions. Also, the code used in these protocols is open-source and freely available for review and modification.

  • The cryptocurrency system provides incentives to supporters. Cryptocurrency protocols are designed to ensure that all users act to maintain the system's integrity. Bitcoin miners, for example, must use computer power in order to verify transactions. Newly minted coins are distributed automatically to miners after they verify a block transaction. This is in order to compensate for the hard work that miners put in. This incentivizes miners to verify transactions and continues to work hard.

Pros and cons of cryptocurrency

The cryptocurrency concept inspires passionate opinions among investors and followers all over the world. Here are a few reasons why some individuals think it is a game-changing technology, while others think it's a passing fad.

Pros of cryptocurrencies

  • Security. Cryptocurrency transactions are anonymous, and it’s not tied to someone’s identity. It’s more secure to transact money over the internet using cryptocurrency than fiat money. That’s because hackers can steal your cryptocurrency only if they have access to the wallet's private keys.

  • Speed. Cryptocurrency transactions may only take a few minutes to be confirmed. After the transaction is confirmed, the recipient party can spend the funds. Traditional finance takes around a day to clear a transfer, and international transfers can take up to a few days, and they might be suspended during public holidays.

  • Lower fees. The transaction costs for cryptocurrency are significantly lower than those in traditional financial institutions. Cryptocurrency storage is free, while many banks charge a monthly fee for deposits. International money transfers are cheaper when using cryptocurrency.

  • There are no barriers to getting started. Cryptocurrency users don't need a valid ID to use cryptocurrency. No credit checks are required.

Cons of cryptocurrencies

  • High volatility. Cryptocurrencies have volatile prices and this makes it difficult to use them as payment. Some cryptos can fluctuate around 10%-50% per day.

  • No insurance. Cryptocurrency doesn’t benefit from the insurance that the financial authorities offer to traditional banks and account holders. You cannot recover your money if you lose your money to fraud or any internet scam.

  • Transactions are irreversible. Accidental payments cannot be reverted, and senders can lose their money. All blockchain transactions are final.

  • It is easy to lose access. Investors can lose their wallet private keys and then they lose access to the funds. Some investors simply forget the password for their wallets. To sign transactions and upload them to the blockchain, you will need your private key. It’s recommended to keep the wallet’s private keys written on paper and stored in multiple secret locations.

How Cryptocurrency Works?

Inevitably, a cryptocurrency relies on a distributed network that uses blockchain technology, which is often regarded as a distributed ledger. This network is represented by a wide network of computers, which verifies and keeps track of all cryptocurrency transactions. The transactions in cryptocurrency protocols are combined in blocks and linked together to create a historical record that records everything that has happened on the blockchain.

Depending on the type of blockchain of each cryptocurrency project, new coins can be created as rewards for verifying transactions and adding them to new blocks. Some projects have their coins pre-mined, meaning they are all created all at once. Mining cryptocurrency involves computer power to solve complex mathematical problems. You can also purchase the cryptocurrency from brokers or cryptocurrency exchanges and store them in cryptographic wallets.

While Bitcoin is the first-ever created cryptocurrency, there are new coins and cryptocurrency projects emerging each day. Most projects try to improve upon the initial use cases of cryptocurrency, which is to use it as a peer-to-peer payment system. Many cryptocurrencies emerge every day and complement the traditional financial world.

Cryptocurrency examples

Bitcoin (BTC) is the first cryptocurrency ever created. To this day, we don’t know its true inventor. All we know is the pseudonym, Satoshi Nakamoto, used to release Bitcoin’s whitepaper and the nickname on BitcoinTalk, the first Bitcoin forum. With a few exceptions, the person running that account completely vanished. The one million Bitcoin mined by Nakamoto remains untouched to this day.

Related: Bitcoin prediction 2022, 2025, 2030

Ethereum (ETH) is the second cryptocurrency based on its market capitalization after Bitcoin. The Ethereum network is a decentralized computing platform that can run a wide variety of applications due to its smart contract feature. The Ethereum blockchain can be used for everything, from financial tools to games and complex databases. Its future potential is limited only by the imagination of developers. The Ethereum Foundation states that Ethereum is more than just a payment system. It is a marketplace for financial services, apps, and games that won't steal or censor your data. Ethereum was the first network to step into the universe of decentralized finance (DeFi).

Related: Ethereum prediction 2022, 2025, 2030

Using the examples of Bitcoin and Ethereum, many other new cryptocurrencies were created, with specific purposes, such as aiding international bank transfers, which used to be slow and expensive.

Cardano (ADA) is the native coin of the Cardano network, which was built as a competitor to Ethereum. Cardano's primary applications are identity management and traceability. This application can streamline and simplify processes that need data from multiple sources. This application can be used for tracking and auditing the manufacturing process of a product, from its origin to its finished goods, and potentially eliminating counterfeit goods.

Stellar Lumen (XLM), powers the Stellar payment network, which aims to unite the world’s financial infrastructure, connecting banks, payment systems, and individuals with near-instant and secure transfers.

Dogecoin (DOGE) started as a joke and a copy of Bitcoin. It is commonly referred to as a meme coin but has grown to be among the most valuable cryptocurrencies.

Ripple (XRP) is a cryptocurrency created to power the Ripple money transfer network, launched in 2012. The network aims to help traditional bank users to avoid the long wait times associated with bank transfers, especially international transfers of funds.

Related: Ripple prediction 2022, 2025, 2030

Litecoin (LTC) is a cryptocurrency created using the same Bitcoin code and shares many of its features, with some improvements. It is considered the first altcoin ever created, and it was a strong competitor to Bitcoin, but it lost some of its popularity as time went by.

Tron (TRX), or Tronix, is the native currency of the Tron network, created in 2017. The network aims to become a decentralized global platform for digital content creators and consumers. The creators will have the chance to earn from their published content and not rely on social media giants to act as intermediaries.

Polkadot (DOT) is the cryptocurrency powering the Polkadot protocol. The network uses multi-chain technology and aims to address the scalability, interoperability, and governance issues of other existing blockchain networks.

Chainlink (LINK) is the native coin of the Chainlink decentralized oracle network. The protocol is bound to play one important role in implementing real-world blockchain applications. Chainlink uses oracles to translate real-life off-chain data to the network’s smart contracts.

Other cryptocurrencies worth mentioning and researching for potential future investments are AAVE, NEO, Tezos (XTZ), Monero (XMR), DASH, Compound (COMP), NEO, and Yearn.Finance (YFI).

How to Invest in Cryptocurrency?

In the last few years, more investors got interested in the cryptocurrency market, especially during bullish times. However, the cryptocurrency space can be intimidating for those new to cryptocurrency investing.

Individuals can buy and hold cryptocurrency through an exchange or trade cryptocurrency CFDs through online brokers like CAPEX.

These are the most common ways to add crypto exposure to your portfolio, but when it comes to investing in cryptocurrency, you have a few different options:

  • Buy cryptocurrency directly. Investors can buy and hold cryptocurrency, using any of the available cryptocurrency exchanges.

  • Trade cryptocurrency CFDs. With CFDs (Contracts for difference), investors can speculate on the underlying asset's price movement, in this case, a specific cryptocurrency. CFDs are leveraged products, which means that you will not need to commit to the full value of the position. But bear in mind that leverage can increase both your profits and your losses.

  • Invest in cryptocurrency stocks: If you do not want to buy cryptocurrency directly, the easiest way to invest in cryptocurrency is to buy shares in a company with a financial stake or future in digital tokens and blockchain technology. Your options include cryptocurrency mining companies like RIOT Blockchain (RIOT), crypto exchanges like Coinbase (COIN), companies like Square (SQ) and PayPal (PYPL) that support cryptocurrency, tech companies like Nvidia (NVDA), and many others with varying levels of crypto exposure. You can also invest in companies like Tesla (TSLA) and MicroStrategy Incorporated (MSTR) that hold substantial amounts of cryptocurrency on their balance sheets.

  • Invest in crypto and blockchain-focused funds: If you do not want to choose among individual assets, then you can decide to invest in a thematic fund instead. Blockchain ETFs (Exchange Traded Funds) are exchange-traded funds that own the stocks of companies that use or develop blockchain technology. They tend to invest in a wider variety of assets than Bitcoin ETFs or crypto ETFs, which focus more narrowly on tracking the price of individual cryptocurrencies.

>> Learn more about Investing in Cryptocurrencies

How to buy cryptocurrency

How do you buy cryptocurrency online? With the help of the internet, anything is possible online and only requires a few steps. You will need to choose the right platform for you, fund your account, and place an order to buy or sell cryptocurrency.

Step 1. Choose your platform

Crypto account Capex
source: CAPEX.com

What type of investment do you want to make? If you're going to buy and hold cryptocurrency for a long time, you can choose a cryptocurrency exchange. If you're going to speculate on the price movement of cryptocurrencies, you can choose an online broker.

Owning crypto requires investors to have a crypto wallet, either within the exchange or a private wallet. The CFDs (contracts for difference) are stored in your account and are far more liquid when trading crypto. Unlike cryptocurrency exchanges, online CFDs brokers like CAPEX are regulated by financial authorities offering a higher level of data and funds protection.

Step 2. Fund your account

Fund your Capex account
Source: CAPEX WebTrader

After choosing the right type of cryptocurrency trading platform for you, you will need to fund the account. In the case of cryptocurrency exchanges, you can use credit or debit cards to buy cryptocurrency directly from the platform.

However, some credit card companies and banks don’t allow cryptocurrency transactions. Other limitations of the cryptocurrency exchanges include transaction fees, withdrawal fees, and imposing minimum amounts for funding and withdrawing funds. Online brokers offer multiple payment methods, including wire transfers, e-Wallet solutions, and the most popular money transfer options (View available payment methods in your country).

Step 3. Place an order

Buy Crypto with Capex
Source: CAPEX WebTrader

Investors can place buying and selling orders on the cryptocurrency exchange or the broker’s account. Most of these also have a mobile crypto app.

For instance, on the broker’s account, you can open a buy position (for the available cryptocurrencies) by simply selecting “Buy”. You can select the type of order you want to place as well as the amount you want to buy. After reviewing all the details, simply click on “Place order”. Note that more experienced investors can also use more Stop Loss and Take Profit options.

The same process applies to "sell" orders.

>> Learn more about Crypto trading platforms

How Can You Mine Cryptocurrency?

Some cryptocurrencies depend on the mining process to exist. However, many view crypto mining as simply a way to create new coins, which isn’t always the case. Cryptocurrency mining involves the validation of cryptocurrency transactions on a blockchain network and then adding them to a distributed blockchain.

Crypto mining also prevents double-spending of digital currency on a network. Similar to physical currencies, cryptocurrency can be spent only once at a time. This means that the digital ledger needs to be updated after every transaction. The main issue with digital currencies is that they are easy to manipulate. That’s why cryptos use a distributed ledger to allow only verified miners to add transactions on the digital ledger. This adds an extra responsibility to miners for securing the network against double-spending.

New coins are created to reward miners for validating each new block on the network and contributing to the network's security. Distributed ledgers do not have a central authority to verify them, so the mining process is essential for validating transactions. Participation in transaction validation increases miners' chances of winning new-minted coins.

However, only cryptocurrencies that use the proof-of-work (PoW) consensus mechanism can be mined. The most popular coins for mining are Bitcoin (BTC), Litecoin (LTC), Bitcoin Cash (BCH), Monero (XMR) and Dogecoin (DOGE). Ethereum was created to use the PoW consensus as well, but it’s planning to switch to the proof-of-stake algorithm by the end of 2022.

Computers that are capable of mining cryptocurrency require special software designed to solve complex cryptographic mathematic equations. In the beginning, Bitcoin and other cryptocurrencies could be mined using a personal computer. However, due to the increasing difficulty of the blockchain puzzles, more specialized GPU chips became a necessary investment for miners.

Mining cryptocurrency requires a specialized GPU or an application-specific integrated circuit (ASIC) for mining cryptocurrency. The mining rig should be always connected to an internet connection. Every crypto miner must also be a member of an online crypto mining pool.

How to Store Cryptocurrency?

Cryptocurrency must be stored and protected the same way you would protect your physical wealth from theft. In the case of crypto, if your wallet is connected to the internet, there is a risk of getting hacked.

Cryptocurrency is usually stored in crypto wallets. These are either physical devices or software that securely store your private keys. Some exchanges offer wallet services that make it simple to store your cryptocurrency directly on the platform. However, not all cryptocurrency exchanges or brokers, or exchanges provide wallet services.

When it comes to choosing the right cryptocurrency wallet, it’s up to each investor to research and select the best option. But the main two types of cryptocurrency wallets can be defined as "hot wallets" or "cold wallets".

A hot wallet is online software that protects the private keys of your digital assets. The cold wallet is often called a hardware wallet and uses offline electronic devices to secure your private keys. Unlike hot wallets, cold wallets are more likely to charge fees.

Is Cryptocurrency the Future of Finance?

While the total number of people on the planet is going to surpass 8 billion by 2032, it is estimated that around 2 billion people don't have a bank account. Those people are not part of the global economic system and cannot access basic banking services such as credit or debit cards, lending, or borrowing money. They are strangers to financial investments, and things will not change unless there is a simpler way to provide them access to the financial world.

Luckily, thanks to blockchain technology, starting in the cryptocurrency space only requires a mobile device and an internet connection.

Blockchain technology and cryptocurrency have many financial applications. New projects are emerging almost every day, and they all bring new and innovative ways use cases to the blockchain space.

The world's financial institutions are well-aware of the threat posed by these big blockchain networks and are all researching ways to be part of this trend. The most important central banks in the world have already started deploying pilot programs to launch their own digital currencies. Governments are researching how these new financial instruments can be used and work to issue regulations that will protect the users.

Whatever the future of finance is, it will surely include blockchain technology and some form of digital currency that is easy to use and accessible to the masses.

Final words about Cryptocurrency

When talking about cryptocurrency as an investment, each investor must try to understand the project and its utility for those directly using the coin. While cryptocurrencies might be a good fit in a diverse portfolio, it is unlikely that you will want to put all of your money into cryptocurrency.

Because cryptocurrencies are still new, it is difficult to understand their risks. Most technical analyses rely on poor and non-existing price history. Nobody can forecast what will happen with the price of a digital asset in the future. Simply put, there is not enough historical data to predict how cryptocurrencies’ prices will fluctuate, especially when trying to correlate them with the price of other assets. This makes it difficult to create a balanced portfolio that maximizes returns while minimizing risk.

The growing trend of cryptocurrency projects cannot be ignored, and many investors, including banks and CEOs of companies, believe that cryptocurrency should be part of everyone's portfolio. Before investing in cryptocurrency, it is important to understand what cryptocurrency is and how it works.

FAQs:

Is Cryptocurrency Safe?

Cryptocurrency is a safe digital asset, and it provides more security than the traditional banking system, as it uses blockchain technology to verify and register all transactions.

What is a Cryptocurrency fraud or scam?

Cryptocurrency is a digital currency that relies on a decentralized computer network to exist. There are thousands of cryptocurrency projects, and each investor should carefully research the project he wants to invest in. While nobody can tell if a project is legit or if it’s trying to scam people, these projects tend to have poorly designed websites and disappear pretty fast after they are launched. The developers behind fraudulent crypto projects are always anonymous.

What is Crypto staking?

Crypto staking refers to the underlying algorithm used by the blockchain network of a project. Blockchain using the proof-of-stake (PoS) consensus mechanism requires coin holders to stake their funds to help the blockchain validate transactions and create new blocks on the network. Investors that participate in crypto staking are rewarded for their efforts.

What is a Crypto market cap?

The cryptocurrency market capitalization represents the total value of the existing coins at a given point in time. To calculate a token’s market cap, you would need to multiply the total number of coins by the current price of one coin.

What is a Crypto wallet?

A cryptocurrency wallet is a piece of software that is used to store cryptocurrencies. Depending on the cryptocurrency and its technology, some coins and tokens can be stored in the same crypto wallet.

What is Cryptocurrency exchange?

Cryptocurrency exchanges are platforms used for buying and selling cryptocurrencies. Depending on the type of exchange and the listed cryptos, you can trade one cryptocurrency for another, or you can even buy them with fiat money, using your credit or debit card.

Uvedené informace zpracovala společnost CAPEX.com a nepředstavují investiční doporučení. Uvedené informace poskytujeme v rámci naší marketingové komunikace pouze pro informační účely, nebyly připraveny v souladu s právními předpisy upravujícími šíření nezávislého investičního průzkumu a nevztahuje se na ně zákaz obchodování před šířením investičního výzkumu.

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Společnost Key Way Investments Ltd proto nebere žádnou odpovědnost za ztráty obchodování z důvodu použití a obsahu zde uvedených informací. Minulá výkonnost a předpovědi nejsou spolehlivým ukazatelem budoucích výsledků.
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