Today, there are many Crytocurrency that are available and the number continues to grow in leaps and bounds. However, Bitcoin is the oldest and undoubtedly the most popular cryptocurrency with its importance being felt in various sectors of the digital world. Its value was as high as 20000$ in 2017 and it is now possible to buy anything using it and even play on stock markets.
The fact that cryptocurrency has become a preferred currency while making financial investments or transactions can be credited to its major advantage. What is that advantage that adds to cryptocurrency mysteries? Transactions with cryptocurrency can be made without having any intermediaries or shareholders. Cryptocurrency being taxed in certain countries offers a protective shield to investors. Why? That is because they can easily transact using digital currency under the government’s guarantee.
A Beginner’s Guide to Investing in Cryptocurrencies
Definition of Cryptocurrency
As mentioned above, cryptocurrency is a digital currency that is usually decentralized. The technology that it is based on is blockchain and its security is guaranteed by cryptography. Cryptocurrency or Crypto was named so because it makes use of encryption to ensure transactions are verified. In other words, encryption is the use of coding to store and transmit cryptocurrency data between digital wallets and public ledgers. A public ledger is a place where transactions are recorded when people transfer crypto funds.
How do Cryptocurrencies work?
When we are talking about a beginner’s guide to investing in cryptocurrency, we must talk about how cryptocurrencies work. Here’s how.
The distributed public ledger on which cryptocurrency runs is called a blockchain. It is in the blockchain that the record of all transactions is held.
Mining is the process through which units of cryptocurrency or digital coins are generated. It makes use of computing power to generate coins by solving complex mathematical problems.
Owning cryptocurrency is equal to owning a key with which you can move a unit of measurement from one person to the other without having a third party.
Cryptocurrency and blockchain technology are still in the evolving stage and can be used extensively in the future in the form of transactions of bonds and stocks or other financial assets.
Reasons behind the rising interest in cryptocurrency investment
In a beginner’s guide to investing in cryptocurrency, we must also talk about the reasons why people are increasingly investing in cryptocurrency. Here are the reasons:
- Diversifying Opportunities – People look for diversification opportunities when it comes to investing and a recluse from investing only in stocks and bonds. Investing in cryptocurrency offers opportunities for investors to diversify portfolios. This decision is based on the fact that digital assets are expected to rise and grow in the future.
- High Return On Investment – Some experts believe there is a rising interest in cryptocurrency investment because of its high return on investment potential.
- Freedom of transaction – Cryptocurrency investment offers investors with the freedom of transaction because it is easy to liquidate cryptocurrency.
- Reliability – Another reason why there is a rising interest in cryptocurrency investment is the reliability that crypto offers. Why is it reliable? That is because it is a stable currency form that is free from dilution from inflation.
- Ownership – There are many cryptocurrency tokens that provide ownership rights to people who use the same. That is why people increasingly invest in crypto.
Understanding the Cryptocurrency Basics
As we know, the technology on which cryptocurrency runs is called blockchain. To understand digital finance in a better way, let’s now learn what the consensus mechanism in blockchain is. It is nothing but a system of validating transactions and labelling them as authentic. Traders need to trust the coin they are trading and that trust is gained when the consensus mechanism lists the transactions of a coin that are valid. Cryptocurrencies such as Bitcoin, Ethereum, etc. also use this mechanism to ensure security.
Types of Cryptocurrencies
As mentioned above, Bitcoin is the most popular cryptocurrency that is increasingly used by crypto investors and is a representative of digital finance. But, what are the others? Let’s discuss them here in this section:
- Bitcoin – Bitcoin was founded in 2009 and is the most popular cryptocurrency to date. Being a decentralized online currency, it can be transferred on a Bitcoin network.
- Altcoin – Altcoin is a term coined for digital currencies that are alternatives to Bitcoin. Ether is the most common among altcoins that runs on the Ethereum blockchain network and whose smallest sub-unit goes by the name of Wei. Other altcoins are Terra, Lucky block, and Shiba Inu among others.
- Crypto tokens – Crypto tokens are different from crypto coins in that they cannot be mined, unlike crypto coins. They also don’t run on blockchain but as mentioned above crypto coins do. Crypto tokens are used for different products or services as compared to crypto coins.
Five steps to acquire cryptocurrencies through exchanges and wallets
Here are the five steps that you can use to acquire cryptocurrencies through exchanges and wallets:
- Select a Cryptocurrency Exchange – The first step is to select a cryptocurrency exchange that is secure enough to not let hackers steal your crypto. You should select a cryptocurrency exchange that is licensed in the country that you live in.
- Purchase a cryptocurrency – To purchase a cryptocurrency such as Bitcoin, you need to sign yourself up at a cryptocurrency exchange. Few of the exchanges provide a wallet and few don’t. If you don’t get a wallet from a currency exchange, you need to create one for yourself. Now that you have a wallet, all you need to do is buy Bitcoin and punch in the amount you want to invest.
- Observe the price trends of a cryptocurrency – Investing in cryptocurrency requires you to observe the price trends of a cryptocurrency so that you can make a well-informed decision. That is what you need to do in the third step.
- Trade on a Cryptocurrency Exchange – Although the return on investment is high, it is still a risky thing to trade on a cryptocurrency exchange. Therefore, it is crucial to research cryptocurrency exchanges thoroughly.
- Invest in a P2P Platform – If you are just starting out trading, it is better to invest in a good P2P platform as they enable cryptocurrency buying and selling more easily.
Importance of security measures to protect one’s digital assets
Possessing digital assets also brings with it some security risks such as digital theft and regulatory uncertainty. Therefore, it is important to secure your digital assets in a decentralized digital world. Since cybercriminals wreak havoc in the world of digital finance, it becomes increasingly important to secure your digital assets from phishing and cyber-attacks.
There are certain best practices that can be followed to ward off evil in the digital landscape. They are the creation of strong passwords, the enablement of multi-factor authentication, and the usage of safe backup methods. In addition to this, you need to be alert so that phishing attacks can be avoided.
The Rise of Cryptocurrency: A Global Phenomenon
As mentioned above, cryptocurrency got a kick-start with Bitcoin being introduced in 2009 by an individual or an entity going by the pseudonym, Satoshi Nakamoto. The 2008 financial crisis which compelled the world to look for an alternative to the traditional banking system gave birth to Bitcoin.
As a result, Bitcoin was released in the form of a white paper named “Bitcoin: A Peer-to-Peer Electronic Cash System”. This was followed by the launch of Ethereum in 2015. Ethereum brought the concept of smart contracts to the crypto world. Slowly but steadily other cryptocurrencies or altcoins such as Litecoin, Ripple, and Cardano came into existence.
The introduction of Bitcoin, Ethereum, and altcoins made the rise of cryptocurrency: a global phenomenon. From being restricted to a niche group of investors, it soon became available to individual investors. Since 2014 big companies such as Overstock, Mastercard, Visa, and Paypal have also embraced cryptocurrencies especially Bitcoin as a mode of payment. Even central banks around the world have adopted elements of cryptocurrency to develop what are called Central Bank Digital Currencies or CBDCs.
Cryptocurrency shows good potential of changing the way the economy runs thus making the rise of cryptocurrency: a global phenomenon. And why not? Since it eliminates the need to have intermediaries and transcends geographical borders, it is slowly getting accepted as an alternative financial system.
The Impact that Cryptocurrency has on the financial world
The impact of cryptocurrencies will be clear if we see its total market capitalization which stands at USD 2.3 trillion as of May 2023. Cryptocurrency’s biggest impact on the world of digital finance is the disruption it has caused by posing a challenge to the traditional banking system. It has changed the way transactions and investments are carried out shifting the focus to cryptocurrency exchanges from the traditional banks.
The rise of cryptocurrency has forced banks to innovate and use technology to stay up-to-date owing to increased competition. There is, however, uncertainty in the cryptocurrency market which has kept banks from entering it thus, giving crypto the power to dominate as of now. The uncertainty is mainly due to the lack of uniform regulations around the world as some countries have completely banned cryptocurrencies while other countries like El Salvador have accepted cryptocurrency as an official currency.
Opportunities and Challenges posed while integrating cryptocurrencies into the financial world
Integrating cryptocurrencies into the financial world presents some opportunities and challenges. Let’s look at the same in this section.
- Bringing the unbanked population into the financial world – Integration of cryptocurrencies into the financial world enables the unbanked population to enter the financial world by making use of smartphones. It makes financial transactions more accessible eliminating the need for using traditional banking infrastructure.
- Cost-effective global transactions – Since cryptocurrencies do not require intermediaries to facilitate transactions, global transactions become cost-effective and more efficient.
- Safe and transparent transactions – Since blockchain is the technology on which cryptocurrency runs, transactions are automatically safe and transparent thus making investors trust financial institutions.
- Entrepreneurship in the Digital Economy – Cryptocurrency integration into the financial system enables entrepreneurs to innovate and come up with better products and services. Entrepreneurs can take part in economic growth and also creates jobs for people thus empowering the digital economy.
- Regulatory challenges – Government and regulatory bodies struggle in creating comprehensive regulatory frameworks to prevent money laundering and remove the risks associated with cryptocurrencies. The protection of consumers needs an adaptable regulatory framework. As far as consumers are concerned, they should conduct thorough research on cryptocurrency before investing and not make any decisions driven by emotions.
- Price Fluctuations – Cryptocurrency markets are known to be highly volatile which results in significant price fluctuations. Management of price volatility is crucial to gaining the trust of investors in cryptocurrency. As an investor, you should therefore invest only that amount that you can afford to lose.
- Scalability Issues – The fact that existing blockchain networks face challenges in the form of high transaction fees and slower processing times requires overcoming such scalability issues. Overcoming scalability issues will help in the smoother integration of cryptocurrencies into the financial world.
- Cyberattacks – Cyberattacks are a growing concern for digital investors who are hell-bent on protecting their digital assets and wallets. Following the best practices mentioned above may help prevent cyber-attacks. For example, opting for a crypto exchange with a solid track record and diversifying your investments. Diversifying investments is necessary so that the risks spread across various coins and tokens.
CBDCs or digital currencies issued by the Central Banks have the potential of shaping the future of finance if designed properly. They have the potential to offer more safety and security, and more strength while lowering costs as compared to private forms of digital currency. That is because crypto assets that are unbacked are increasingly volatile.
This is how cryptocurrency is changing the financial world
If you are wondering how cryptocurrency is changing the world, you must know about DeFi. Tracking of secure transactions has become possible, thanks to innovative DeFi apps that do not even require slow intermediaries that are costly too. Auditors can also get a record of previous transactions as blockchain records the same. There are DeFi apps for other purposes as well such as international remittances, borrowing, investing, and many more. This is how cryptocurrency is changing the financial world.
Do’s and Don’t’s while Investing in cryptocurrency
- Be aware of the risks before investing
- Keep a check on your emotions while investing
- Research thoroughly and make a trading plan while readjusting it to suit the dynamic marketing conditions.
- Follow already-established and time-tested trading strategies.
- Go for a trustworthy cryptocurrency trading platform
- Don’t get carried away and make impulsive investment decisions.
- Don’t be obsessed over price movements.
- Don’t invest based on your fear of missing out (FOMO)
Cryptocurrency’s impact on the global economy cannot be ignored. It is continuing to evolve and in the future, we may see a wider acceptance of the concept. You need to continue your research on cryptocurrencies so that you can make well-informed decisions while investing in the crypto market. We hope this blog has offered valuable crypto insights and has been able to unravel cryptocurrency mysteries.
Frequently Asked Questions
How many cryptocurrencies exist exactly?
If we go by number, there exist more than 1000 cryptocurrencies as of now and the most common is Bitcoin followed by Ethereum and others.
Can I trace cryptocurrency?
Since transactions on public blockchains are transparent, it is easy to see transactions that are linked to any particular address.
As far as crypto insights are concerned, what are hot and cold crypto wallets?
Hot wallets are those that are connected to the internet whereas cold wallets are those that are essentially “offline”.
What are NFTs?
NFTs are Non-fungible tokens i.e. they are those blockchain tokens that are not mutually interchangeable.
Why are bitcoins called fungible tokens?
Bitcoins are called fungible tokens because they can be exchanged for another bitcoin.