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As of March 2023, more than 22,900 cryptocurrencies exist, with about $1.1 trillion in total market capitalisation.
Based on this number, you can say there are plenty of trading opportunities in the crypto market. Cryptocurrencies are a viable option if you’re looking for other assets to trade or invest in besides stocks, foreign exchange (forex), and commodities.
How do cryptocurrencies work? How are they created? If you want to buy and sell cryptos, how do you trade them?
This article tackles the basics of cryptocurrency and how you can buy, earn, and store these digital assets.
This article also offers tips on how to safely invest in cryptocurrency and what items you can buy with this digital currency.
What Is Crypto?
Cryptocurrency is a virtual currency operating on blockchain technology, a distributed ledger technology (DLT) that uses cryptography for security.
DLT is a digital system that simultaneously records asset transactions in multiple places.
Like traditional currencies, you can use cryptocurrencies to buy goods and services, transfer funds, and trade in markets.
However, cryptocurrencies are not backed by any physical commodity or government. Instead, they are decentralised and operate independently of a central bank, and their value depends on market supply and demand.
How Does Cryptocurrency Work?
Many cryptocurrencies are created through mining, a digital process that involves complex mathematical equations to validate and record blockchain transactions.
A blockchain is a DLT shared within a computer network and is best known for maintaining a decentralised and secure record of transactions in cryptocurrency systems.
Other blockchain uses include supply chain management, healthcare, decentralised finance (DeFi) applications, and non-fungible tokens (NFTs).
DeFi uses emerging technology to remove centralised institutions and third parties from financial transactions.
Meanwhile, NFTs are unique cryptographic tokens (any digitally transferable asset) similar to cryptocurrencies but cannot be replicated.
Cryptocurrency Examples
Some of the popular cryptocurrencies and their corresponding symbols are as follows:
- Bitcoin (BTC)
- Ethereum (ETH)
- Litecoin (LTC)
- XRP (XRP)
- Dogecoin (DOGE)
- Binance Coin (BNB)
- Cardano (ADA)
- Solana (SOL)
- Tether (USDT)
- USD Coin (USDC)
- Polkadot (DOT)
- Terra (LUNA)
What Is Bitcoin?
Bitcoin (BTC) is a cryptocurrency operating on a peer-to-peer (P2P) network and is the first and most popular cryptocurrency.
A P2P network connects two or more devices without a separate server computer.
Unlike traditional fiat currency, Bitcoin transactions get verified and recorded on the blockchain and operate without a central authority.
Fiat currency is a government-backed currency not backed by a physical commodity. Such currencies include the U.S. dollar (USD) and the British pound (GBP).
You can buy and sell Bitcoin on crypto exchanges and use it to purchase products and services from merchants accepting it as payment.
Bitcoin has high volatility, and its value can rapidly fluctuate depending on market conditions and news events.
If you’re an experienced trader or institutional investor, you can consider Bitcoin as a way to participate in the growing cryptocurrency ecosystem.
How to Buy Bitcoin?
You can purchase Bitcoin from a crypto exchange through a brokerage service or P2P marketplace that offers crypto trading.
To buy Bitcoin, follow these general steps:
- Choose a reputable and regulated cryptocurrency trading platform that lets you buy and sell Bitcoin.
- Create an account and provide the required personal identification documents for verification.
- Fund your account using bank transfer, credit or debit card, cryptocurrency, or another deposit method, depending on your platform or region.
- Navigate to the platform’s section, where you can select Bitcoin as the crypto asset to buy.
- Input the amount of Bitcoin to buy.
- Review your transaction details and confirm the purchase.
- After the transaction completes, the Bitcoin gets deposited to your chosen account. You can then transfer your funds to other crypto wallets or convert the crypto to fiat currency paid out to your bank account.
How to Earn Crypto
You can create cryptocurrency in several ways, including the following:
- Mining: This method involves solving complex math equations using specialised computer hardware to validate transactions on a blockchain network.
- Staking or lockup: This process requires holding or locking up a specific amount of cryptocurrency in a platform or wallet to support blockchain network operations.
In exchange, you earn rewards whose returns are typically higher than the interest rates offered by banks.
- Trading: Crypto trading involves selling and buying cryptocurrencies on trading platforms or exchanges. Trading can be profitable if you have a good grasp of market trends and can make informed trading decisions.
- Airdrops: A cryptocurrency airdrop is a marketing strategy involving sending coins or tokens to wallet addresses.
These promotional activities provide free cryptocurrencies to users who meet specific criteria.
- Crypto projects: These projects offer rewards to users who contribute to the blockchain community through activities like content creation, testing, or bug bounties (rewards to users who successfully discover and report vulnerabilities in the system).
How to Buy Cryptocurrency
The steps to buying cryptos are similar to those in purchasing Bitcoin mentioned earlier. Meanwhile, the following section discusses the channels where you can buy cryptos.
Where to Buy Crypto
If you want to buy cryptocurrencies, you can do so through the following services:
- Brokerage services: Crypto brokers provide a platform where you can buy and sell cryptocurrencies.
- Crypto exchanges: These exchanges are online platforms where you can trade cryptos using fiat currency or other cryptocurrencies.
Exchanges offer more trading instruments like crypto derivatives and have more complex functions than crypto brokerages.
- P2P marketplaces: These platforms allow sellers and buyers to directly trade cryptocurrencies without involving third-party exchanges.
How to Trade Crypto
Different platforms vary in how they let you trade cryptocurrency. However, the process generally follows these steps:
- Choose an exchange that supports cryptocurrency trading.
- Sign up on your chosen platform and verify your I.D.
- Deposit funds into your account through a payment method supported by your platform.
- Navigate to the platform’s trading section and select the cryptocurrency you want to trade.
- Choose to buy or sell the cryptocurrency and enter the amount to trade.
- Set your preferred price and order type. For example, choosing crypto options lets you buy or sell at a specific price or condition.
- Submit the order and wait for its execution. Depending on market conditions, your trade can execute immediately or take time to be filled.
- Monitor your transactions and modify your strategies as needed.
How to Store Cryptocurrency
After purchasing a cryptocurrency, you must store it safely to protect it from theft or hacking. Usually, you can store cryptocurrencies in crypto wallets, which are online software or physical devices for securely storing your cryptocurrencies’ private encryption keys.
Some exchanges offer wallet services to make it easy for you to store cryptos. However, not all brokers or exchanges have these services.
Different wallet providers can offer the following crypto wallet types:
- Hot wallet storage: These wallets provide crypto storage using online software to protect your assets’ private keys.
- Cold wallet storage: These wallets, also called hardware wallets, store your private keys in offline electronic devices.
Another difference between these wallets is that cold wallets typically charge fees, while hot wallets don’t.
What Can You Buy With Cryptocurrency?
Bitcoin was initially created as a medium for daily transactions, allowing you to purchase anything from a cup of coffee to a computer to real estate. However, large crypto transactions are rare despite the growing number of institutions accepting cryptocurrencies.
Still, buying a wide range of products from eCommerce websites using crypto is possible. Even banks such as Morgan Stanley and other Wall Street firms in New York have begun accepting cryptocurrency as an asset class.
Aside from banks and lenders, other services accepting cryptocurrencies as payment are discussed in the following sections.
Technology and eCommerce Sites
Many companies selling tech products accept crypto on their websites. These tech companies include Microsoft, AT&T, and Newegg.com. At the same time, popular eCommerce sites accepting cryptocurrencies include Shopify, Home Depot, and Rakuten.
Luxury Goods
Some luxury retailers accept cryptocurrencies as a form of payment. Major lifestyle and luxury fashion brands like Gucci, Hublot, Balenciaga, and Philipp Plein accept cryptocurrencies online and in-store for goods and memberships.
However, these brands opt for crypto payment gateways accepting digital currency from the payer on the brand’s behalf instead of accepting the crypto payment directly from the customer. That payment is then remitted to the brand in fiat currencies.
Cars
Several car dealers and brands accept cryptocurrency as payment. Such companies include BMW (Bayerische Motoren Werke A.G.), CryptoExchange, E-Z Rental Car, and Carriage Auto Group.
Also of interest are BitCars, a crypto-only dealership for unique oldies and premium cars, and HGregoire, an automotive chain well-known as one of the world’s first to allow buyers to purchase vehicles using virtual currency.
Insurance
In April 2021, the AXA insurance company started accepting Bitcoin as a payment form for insurance products aside from life insurance. Premier Shield Insurance, which sells auto and home insurance policies in the U.S., also accepts Bitcoin for premium payments.
Cryptocurrency Fraud and Cryptocurrency Scams
Despite the benefits cryptocurrencies provide, various crimes associated with these digital assets are rising. Some of these cryptocurrency scams are as follows:
- Fake websites: Bogus sites often feature crypto jargon and fake testimonials promising large, guaranteed returns if you keep investing.
Fraudsters also pose as legitimate digital currency exchanges or traders to trick would-be investors into giving them money.
- Virtual Ponzi schemes: Crypto scammers promote nonexistent digital currency investment opportunities and create an illusion of huge returns by paying off old investors using new investors’ money.
- “Celebrity” endorsements: Some criminals pretend to be billionaires or assume popular names promising to multiply your investment in a virtual currency but steal your money instead.
In some cases, these criminals spread rumours that a famous businessperson is endorsing a specific cryptocurrency. After encouraging enough investors to buy and drive the price up, the scammers sell their stake, reducing the currency’s value.
- Romance scams: Online dating scams are a trend wherein scammers persuade people they meet on social media or dating apps to trade or invest in virtual currencies.
Aside from the abovementioned scams, cryptocurrency hacking is another risk wherein criminals break into your digital wallet without authorisation and steal your money.
Is Cryptocurrency Safe?
Cryptocurrencies can be a safe investment to a certain degree. Blockchain technology involves a relatively complex process of recording transactions into “blocks,” resulting in a digital ledger that hackers may find difficult to tamper with.
Blockchain transactions usually require a two-factor authentication process. For example, after you enter your username and password to start a transaction, the platform may prompt you to input an authentication code sent as text to your smartphone.
Despite these security measures, a determined hacker can still break into your cryptocurrency account.
Additionally, cryptocurrency investments have significantly less regulatory protection than traditional financial instruments like stocks, mutual funds, and bonds.
Therefore, you must take reasonable steps to protect your account and have a risk management strategy to help minimise your losses.
Tips to Invest in Cryptocurrency Safely
If you want to invest in cryptos safely, read the tips below to help you make educated decisions.
Research Exchanges
Nearly 600 cryptocurrency exchanges exist worldwide. Before you invest in cryptocurrencies, research these cryptocurrency exchanges to know which ones suit your trading needs.
You can also get insights and advice from experienced crypto investors and read reviews before choosing an exchange to trade in.
Know How to Store Your Digital Currency
Whenever you buy cryptocurrency, you must store it in a secure place, such as a digital wallet.
Like exchanges, wallets come in different kinds and have varying benefits, security, and technical requirements. Therefore, you should research your crypto storage options before investing.
Diversify Your Investments
Diversification is a risk management method that involves mixing various investments in your portfolio. When you put this concept into cryptocurrency, diversification means you shouldn’t put all your money in one crypto.
For example, in addition to Bitcoin, consider investing in altcoins (alternative cryptos other than Bitcoin) such as Ethereum (or Ether) and Litecoin or in stablecoins. This way, you spread your investment across several currencies, helping you manage risk.
Stablecoins are cryptocurrencies whose value is pegged to a reference asset, such as a commodity or currency.
Prepare for Volatility
The cryptocurrency market is highly volatile, so prepare for massive ups and downs in price movement. If your funds and mental or physical well-being cannot handle such risks, cryptocurrency may not be your best choice.
For example, Ethereum’s planned “Merge” software update may prompt more people to use this cryptocurrency’s blockchain. If you invest in Ethereum, this news can significantly affect its price.
Still, if you have the funds, discipline, and risk management strategy, cryptocurrency can give you a chance to profit.
FAQs
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Is crypto a good investment?
Cryptocurrency is often associated with several risks, such as loss of capital, lack of government regulations, and susceptibility to hacks and fraud. If these risks are not worth your investment, cryptos may not be for you.
On the other hand, understanding and managing these risks may improve your chances of earning money from cryptocurrencies.
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Why are cryptos crashing?
In 2022, one of the world’s largest cryptocurrency exchanges, FTX (Futures Exchange), went bankrupt. Due to cryptocurrency’s extreme volatility, FTX’s downfall became one of the primary reasons for the market’s downturn.
FTX’s bankruptcy did not only trigger a considerable market sell-off. The event also reduced the crypto market’s liquidity (ease of converting assets into cash).
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How do I earn rewards on crypto?
You can earn rewards on cryptocurrency holdings through rewards-bearing accounts or lending services. Some ways to earn cryptocurrency rewards are as follows:
- Some platforms allow you to earn rewards by lending cryptocurrency to other investors or locking up (restricting) cryptocurrency transfers for a specific period.
- Some crypto products may offer fixed reward rates. Others offer variable rates that change according to market conditions.
Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial advice. It is not intended to be a recommendation to buy or sell any financial instrument or engage in any investment activity.
While we strive to provide accurate and up-to-date information, we do not guarantee its completeness or accuracy. We rely on various sources for the information presented, and we cannot guarantee the reliability or accuracy of these sources.
The information provided here does not necessarily reflect the products or services offered by our company. Any mention of financial products or services is for informational purposes only and should not be considered an endorsement.
All investments involve risk, including the potential for loss of principal.
This information should not be considered as financial advice. You should always seek professional financial advice from a qualified advisor before making any investment decisions.
References
- Blockchain Facts: What Is It, How It Works, and How It Can Be Used
https://www.investopedia.com/terms/b/blockchain.asp
- What Is Decentralized Finance (DeFi) and How Does It Work?
https://www.investopedia.com/decentralized-finance-defi-5113835
- Non-Fungible Token (NFT): What It Means and How It Works
https://www.investopedia.com/non-fungible-tokens-nft-5115211
- Fiat vs. Representative Money: What’s the Difference?
https://www.investopedia.com/ask/answers/041615/what-difference-between-fiat-money-and-representative-money.asp
- Cryptocurrency Airdrop: What Is It and How Does It Work
https://www.investopedia.com/terms/a/airdrop-cryptocurrency.asp
- What Is Diversification? Definition as Investing Strategy
https://www.investopedia.com/terms/d/diversification.asp
- Stablecoins: Definition, How They Work, and Types
https://www.investopedia.com/terms/s/stablecoin.asp
