Cryptocurrencies have quickly grown to become a mainstream part of daily life. As we’ve seen towards the end of 2020 and throughout the first quarter of 2021, the market for cryptocurrencies is a bullish one.
With just about everyone getting aboard the hype train, we’ve put together this guide to give you the lowdown on everything you need to know about cryptocurrencies.
What are Cryptocurrencies?
Essentially, cryptocurrencies are digital assets that do not exist in a physical form. They are instead used as a medium of exchange with proof of ownership being stored on an electronic ledger known as the blockchain.
Fiat currencies are issued by the central monetary body of their respective nations and backed by the full authority of their nation’s government. Cryptocurrencies on the other hand are distributed across various nodes on the blockchain network which allows them to exist outside the control of governments.
Are Cryptocurrencies Anonymous?
This decentralization has made digital currencies such as Bitcoin a popular medium of exchange for users of the deep web and some criminal elements. Prior to increased government oversight, Bitcoin enabled users to perform anonymous transactions.
Nowadays, Bitcoin transactions can actually be traced given the increased oversight from government authorities giving rise to the term pseudonymous.
However, generally speaking crypto transactions should not be treated as anonymous. Thus you should take all appropriate steps to protect your privacy when using cryptocurrency as a medium of exchange.
Types of Cryptocurrencies That You Can Buy
The most well-known examples of cryptocurrencies are Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), and Litecoin (LTC). While there are literally hundreds of other coins on the market, these are the most widely-circulated and accepted cryptocurrencies.
Bitcoin is by far the most popular and prized form of cryptocurrency on the market. Developed by the mysterious Satoshi Nakamoto, Bitcoin was intended to be used as an inflation currency that was free from government intervention.
With only 21 million Bitcoins available to be mined, there will technically never be an oversupply of Bitcoins on the market. Hence ensuring that inflation does not become a problem.
Bitcoin has been used by investors as a method of hedging against rising inflation. Given the events of 2020, governments around the world have been flooding the market with liquidity in order to keep their economies afloat.
Because of this, Bitcoin and an assortment of other cryptocurrencies have become increasingly in demand as a safe haven asset – giving rise to the term digital gold.
The silver to Bitcoin’s gold, Ethereum is a cryptocurrency developed by Vitalik Buterin that is powered by the Ether network.
While not as popular to Bitcoin, the utility offered by Ethereum vastly outstrips that of Bitcoin. The Ethereum network has the capability to power smart contracts, apps, and payment systems of all kinds.
Its open source nature grants it a remarkable amount of flexibility which is why countries such as Singapore have chosen to adopt Ethereum as its main cryptocurrency of choice.
Litecoin was first released in 2011 as an offshoot of Bitcoin. One of the main reasons why blockchain technology was so readily embraced was the ease in which it allowed funds to be transferred.
In the early days of the blockchain, funds could be transferred nearly instantaneously from one individual to another for free. However as the blockchain grew in length, processing times increased which slowed down the rate in which funds could be transferred.
Looking to rectify the situation, Google employee; Charlie Lee developed Litecoin. Being able to validate transactions 4 times faster than Bitcoin ensured that transactions performed on the network were processed within a much shorter span of time.
Thus allowing Litecoin to grow in popularity in recent times. While not as highly valued as BTC, Litecoin is gradually finding its footing in the world.
4: Ripple XRP
One of the most widely circulated cryptocurrencies in the world, XRP is the cryptocurrency on the Ripple network. Developed by Ripple Laboratories, XRP is specially designed to be used as a medium of transfer by companies looking to transfer vast quantities of funds quickly.
It should be noted that the Ripple network is used by a variety of financial institutions around the world. The speed in which transactions can be processed coupled with the scalability of the Ripple network makes this an obvious choice.
How Do You Get Cryptocurrencies?
The most obvious method of getting your hands on cryptocurrencies is by mining. Crypto mining is conducted by validating transactions on the blockchain. This system has the benefit of ensuring the blockchain remains healthy. Miners on the chain cooperate by verifying transactions and deleting false entries.
As an incentive, miners are rewarded with a unit of cryptocurrency which provides them with an incentive to maintain the integrity of the blockchain.
In the early days, cryptocurrency mining could be done with simple hardware that did not require much processing power. As the blockchain grew in length, the equations have become increasingly complex thus requiring increased processing power.
Hence if you’re looking to start mining cryptos, you might want to rethink that option. To be able to mine cryptocurrencies competitively, you’ll need to invest heavily in hardware and have access to cheap electricity.
Given the high barriers of entry to crypto mining, an easy way to obtain cryptocurrencies is to trade them on an exchange.
Sites such as Binance, Luno, and eToro all allow you to exchange fiat currencies for cryptos. This is not an endorsement for these services and is merely meant to give you an idea as to where you can start trading cryptocurrencies.
A word of warning though; trading in cryptocurrencies can be extremely risky if you’re unfamiliar with the market. Cryptos are traded 24 hours a day, 7 days a week and require constant monitoring if you’re looking to earn a profit trading them.
Also, be sure to only trade on proven websites that have a good record. All too often, investors have found themselves left with nothing in hand when an exchange suddenly goes under.
Where and How Do I Store My Cryptocurrencies?
Before you get started trading or mining cryptos, you’ll need to be able to store them. You obviously can’t use a physical wallet as it don’t exist in the physical form.
Instead, you’ll need to make use of what are called digital wallets. Digital wallets are electronic storage devices or service providers that safely encrypt and store your cryptocurrency keys.
To be clear, digital wallets do not actually hold cryptocurrencies. Instead, they safeguard what are known as private keys.
When performing a transaction, the receiver shares his/her public key with the sender – thus providing an address to send the funds to. In response, the sender verifies the transaction by sending over his/her private key. This in turn completes the transaction and facilitates the transfer of funds.
With that out of the way, let’s take a look at the two categories of digital wallets:
A hot wallet is usually an online service that stores your cryptocurrency keys for immediate use. Hot wallets are extremely useful as they allow you to easily access your cryptos from anywhere around the world.
Unfortunately, there are also a fair number of risks that come with using these services. The high value of cryptocurrencies makes hot wallets a popular target for hackers and scammers.
As a rule of thumb, you’d be better served keeping only a minimal amount of cryptocurrencies on your hot wallet.
In direct contrast to hot wallets, cold wallets store your crypto keys offline. These types of wallets come in a variety of shapes and sizes. From hard disks to a piece of paper, any method of storing your cryptocurrency offline is known as a cold wallet.
The clear advantage that a cold wallet has over a hot wallet is the level of security it provides. A hard disk and locked away in a safe is immune from any type of cyber attack as it is not connected to the internet.
The only way one would be able to access your cryptos is by breaking into the safe and physically taking the hard disk.
This is why cold wallets have become a popular method of storing large quantities of cryptocurrencies safely. However, if the device becomes damaged or goes missing it will become impossible to access the lost cryptocurrency.
Read more about crypto wallets here.
Now that we’ve given you an idea of how cryptocurrencies work and how they can be stored, obtained, and used – you’re ready to get started on your own.
Always remember to stay safe when investing and work with those that you trust.