Digital currencies, which are referred to as “cryptocurrencies” or “cryptographic currencies” have become more popular over the past several years, and today there are over 10,000 currencies. The significant value of cryptocurrencies is that they are designed to be decentralized and not controlled by a central body or country, but by a network of peers that are spread across the globe.
Thus, they are not controlled by regulation but by supply and demand. We are here to give you an explanation about crypto – the complete guide to digital currencies as well as to help you understand this complicated and interesting world in a better way.
What are cryptocurrencies?
Digital currencies (cryptocurrencies) are actually a kind of digital payment system that does not rely on banks or central bodies that are controlled by regulation to verify transactions. This is a Peer 2 Peer system, which can allow anyone, anywhere, to send and receive payments.
Unlike cash or checks, which are transferred and exchanged in the real world, cryptocurrency payments exist solely within the digital world that contains an online database that lists specific transactions.
When digital currency is transferred, the transactions are recorded in a public ledger that everyone can access and see what transactions were made with that currency. It should be noted that the cryptocurrencies are stored in digital wallets (of trading platforms or private individuals).
Cryptocurrencies got their name because they use encryption to verify transactions, with the purpose of encryption being to provide security and safety. The first digital currency was the famous Bitcoin, which was founded in 2009 by an unknown entity and, to this day, remains as the most sold currency with the highest market value.
The process of creating cryptocurrencies
Cryptocurrencies, as mentioned, are registered in a decentralized public ledger called the blockchain – the blockchain contains a record of all the updated and stored transactions by the owners of the currency.
Units of various cryptocurrencies are created through a process called mining, which involves the use of significant computer power to solve complicated mathematical problems that create currency units. Users may also buy the currencies from brokers, then store them using wallets.
It should be noted that ownership of a cryptocurrency does not provide a tangible asset and ownership actually lies in a key, which allows the amorphous asset to be transferred from one person to another without the need for an intermediary such as a bank.
Examples of cryptocurrencies
There is a large number of cryptocurrencies, and as part of the complete guide to digital currencies, we will list the most well-known currencies:
Bitcoin, as mentioned, is the first cryptocurrency that was founded in 2009 – to this day, it is the most widely traded cryptocurrency. This currency was developed by Satoshi Nakamoto – and it is widely believed that it is a pseudonym for a person or a group of people whose exact identity remains unknown to this day (although it is a person or people who are very rich in light of the amount of bitcoins in their possession).
Ethereum is actually a platform developed on top of the blockchain in 2015. The platform has its own cryptocurrency, called Ether (ETH) or Ethereum. This is the second most popular currency. The implementation of Ethereum is based on smart contracts.
Those smart contracts are tools that can execute transactions automatically if certain conditions are met, without requiring the help of an intermediary company or entity.
This currency is very similar to Bitcoin and is based on its characteristics. However, it added new developments, most of which delve into faster processes that are carried out with maximum efficiency, and Litecoin has no limit on the amount of coins compared to Bitcoin (Bitcoin is limited to only about 21 million coins).
Ripple is a decentralized ledger system founded in 2012. Ripple can be used to track various types of transactions, not just cryptocurrencies. The company responsible for the creation of this currency worked with various banks and financial institutions, which assimilated the currency as a legitimate currency for payment, similar to regular money.
The famous and funny Dogecoin cryptocurrency was originally created as a joke that pokes fun at the growth of the digital currency era. However, in light of Elon Musk’s tweet, the currency soared and its value reached over 50 billion dollars and is now considered one of the five most common currencies.
How to purchase cryptocurrencies?
If you are interested in purchasing cryptocurrencies, the complete guide to digital currencies that we have prepared is here specifically to answer this question for you:
Step one – choosing a platform
If you are interested in getting started, the initial decision should be in which platform you wish to invest. In general, you may choose between a traditional broker and a dedicated cryptocurrency exchange:
- Traditional brokers – these are actual brokers, which can be accessed online and they offer several options for buying and selling digital currencies. This is done similarly to the purchase of other financial assets such as stocks, bonds and ETFs and sometimes you may buy both stocks and crypto from the same broker. The main advantage is the commission rate, but the disadvantage is that they sometimes lack specific experience in the crypto market, which sometimes requires a deep understanding and is different from the traditional financial markets.
- Cryptocurrency exchanges – there is a large number of crypto exchanges. Each of these exchanges has advantages and a different range of value propositions. Thus, they offer various digital currencies, wallet storage, interest bearing account options and more. Many exchanges charge asset-based fees.
When you come to choose between brokers and exchanges, we recommend considering which cryptocurrencies are offered in each of the places, what the fees are, what security and identification measures they require and other parameters that will help you understand if this is the most suitable investment platform for you.
Step two – transferring funds to the user
Step two includes the transferring of funds to the platform you have chosen, so that you can start making purchases. Most crypto exchanges allow users to purchase crypto using currencies such as euros, dollars and even shekels.
However, crypto purchases with credit cards are considered risky and some credit companies do not allow them due to fear of volatility and getting into debt. The main factor that should be taken into account is the commission rate. These include possible deposit and withdrawal fees plus trading fees.
The fees will vary according to the payment method and the platform, and this is something that you should pay attention to during the first step of choosing a platform. We recommend reading the terms and conditions of the platforms and even consulting with platform experts in case you are not sure what commission rate is relevant for you.
Third and final step – purchase and sale
Most of the platforms and the brokers have accessible apps, through which it is very easy to make transactions. In addition, there are many tutorials on the Internet.
Thus, if you plan to purchase cryptocurrency, you may do so by selecting “Purchase”, selecting the order type, entering the amount of cryptocurrency units you wish to purchase and confirming the order. The same process applies to “sell” orders.
Storing the digital currencies
Once you have purchased cryptocurrencies, you should store them in a safe and accessible place. Typically, digital currencies will be stored in crypto wallets, which can be physical or online. Some exchanges provide wallet services, which makes direct storage through the platform easier. However, not all exchanges or brokers provide wallet services automatically for you.
There are two types of wallets between which you have to choose – a hot wallet or a cold wallet:
- Hot wallet – refers to crypto storage, which uses online software to protect the private keys (in fact, it is a private code that gives access to the cryptocurrencies) to your assets.
- Cold Wallet – Unlike hot wallets, cold wallets (also known as hardware wallets) rely on offline electronic devices to store your private keys in a secure way. Generally, cold wallets are characterized as more secure but tend to charge fees unlike hot wallets.
Are digital currencies safe?
Cryptocurrencies are built upon the blockchain technology. The blockchain describes the way in which transactions are stored in blocks that are signed and entered into a complicated system, which verifies them in an unambiguous and almost immutable way. This is a fairly complex and technical process, but the result is a digital ledger of cryptocurrency transactions that is difficult for hackers to tamper with.
Additionally, transactions require a two-factor authentication process, similar to other protections that companies such as Google have. As part of this, users are asked to enter a username and password and in the second step, they are required to enter a verification code sent via text to their personal mobile phone.
It should be noted that although the use of cryptocurrencies is quite safe, several cryptocurrency hacks have occurred in the past. Hackers hit the Coincheck platform for $534 million and BitGrail for $195 million.
Almost done – advantages and disadvantages of digital currencies
Blockchain technology and cryptocurrencies in particular, began with the goal of revolutionizing the financial infrastructure. However, as with any revolution, there are trade-offs. At the current stage of the development of digital currencies, there are many differences between the theoretical ideal of a decentralized system with cryptocurrencies and its practical implementation.
Therefore, in crypto – the complete guide to digital currencies, we will be happy to present a number of advantages and a number of disadvantages so that you can make informed decisions regarding the choice of whether or not to invest in this type of currencies:
Advantages of cryptocurrencies
Cryptocurrencies create money decentralization. Through decentralization, there is no need for centralized intermediaries, such as banks, in order to enforce transactions between two parties. Thus, a cryptocurrency system eliminates the possibility of a single point of failure, such as a large bank, that could lead to major crises around the world, such as the crisis of 2008.
Moreover, the element of speed is evident, since there is no need for third-party intermediaries, cryptocurrency transfers between two parties are faster compared to regular money transfers. As we know, cryptocurrency investments can generate profits. Cryptocurrency markets have skyrocketed in value over the past decade and at one point reached nearly $3 trillion.
Disadvantages of cryptocurrencies
Ostensibly, the transactions of digital currencies are supposed to be anonymous; however, they leave a digital trail that the authorities can decipher. This opens up possibilities for governments or federal authorities to monitor the financial transactions of ordinary citizens. On the other hand, another significant failure stems from cryptocurrencies becoming a popular tool among criminals.
As of today, the cryptocurrency market is not very decentralized – an MIT study found that only 11,000 investors owned about 45% of Bitcoin’s value. Another significant disadvantage is related to energy consumption – mining cryptocurrency requires considerable energy, sometimes as much energy as entire countries consume.
Finally, there are disadvantages such as volatility and hacks (which, as we have shown, still exist in some cases).
In this article – crypto – the complete guide to digital currencies, we reviewed the development of the digital currency market, we have explained how they can be traded and through which platforms, and even presented the existing advantages and disadvantages.
We recommend that you continue to follow the world of digital currencies because it changes rapidly, and every day there are new happenings and you can learn new and fascinating things about it. Good luck!