What is cryptocurrency

What is cryptocurrency?

Cryptocurrency is a decentralized digital currency based on blockchain technology. You may be familiar with the most popular versions, Bitcoin and Etherium, but there are over 5,000 different cryptocurrencies in circulation.

How does cryptocurrency work?

Cryptocurrency is a digital, encrypted and decentralized medium of exchange. Unlike the US dollar or the euro, there is no central authority that manages and maintains the value of a cryptocurrency. Instead, these functions are widely distributed among cryptocurrency users via the Internet.

You can use crypto to buy regular products and services, although most people invest in cryptocurrencies because they invest in other assets such as stocks or precious metals. Although cryptocurrency is a sophisticated and exciting asset class, buying it can be risky because you need to do enough research to understand how each system works.

Bitcoin was the first cryptocurrency, first described in principle by Satoshi Nakamoto in a 2008 research paper entitled “Bitcoin: a Peer-to-Peer Electronic Cash System”. Nakamoto described the project as “an electronic payment system based on cryptographic evidence rather than trust”.

This cryptographic evidence comes in the form of transactions that are verified and recorded in a blockchain.

What is a blockchain?

A blockchain is an open, distributed ledger that records transactions in code. In practice, it is like a checkbook that is distributed to countless computers around the world. Transactions are recorded in “blocks” that are connected to a “chain” of past cryptocurrency transactions.

Buchi Okoro, CEO and co-founder of the African cryptocurrency exchange Quadax, says, “Imagine a book where you write what you spend every day. Each page is like a block, and the whole book, a set of pages, a blockchain. “

Through a blockchain, everyone has their own copy of the ledger to create a unified transaction record using cryptocurrency. As each new transaction occurs, the software records it and each copy of the blockchain is updated simultaneously with the new information, keeping all records consistent and accurate.

To prevent fraud, each transaction is verified using one of two primary verification techniques: proof of work or proof of partnership.

Proof of work versus proof of participation

Proof of work and proof of partnership are two different verification techniques used to verify a transaction before it is incorporated into a blockchain that rewards verifiers with more cryptocurrency. Cryptocurrencies typically use proof of work or conjecture to verify transactions.

Proof of work

Simon Oxenheim, social media manager at Xcoins.com, said: “Proof of work is a way to verify transactions in blockchain where an algorithm provides a mathematical problem that drives computers to solve.”

Each participating computer, often referred to as a “nickname”, solves a mathematical puzzle that verifies a set of transactions – called blocks – and then adds them to the blockchain ledger. The first computer to succeed was rewarded with a small amount of cryptocurrency for their efforts.

This race to solve blockchain puzzles may require a lot of computing power and electricity. In fact, this means that miners, after factoring in the cost of electricity and computing resources, can rarely break with the cryptocurrencies obtained to legitimize the transaction.

Proof of betting

To reduce the amount of energy required to test transactions, some cryptocurrencies use a proof-of-stack verification method. Each person can verify that the amount of the transaction is limited to the amount of cryptocurrency they want to “stack” or temporarily lock in communal security in order to have the opportunity to participate in the process. “It’s almost like a bank deposit,” Okoro said. Anyone participating in Crypto is eligible to verify the transaction, but you will be selected to do so with the amount of money in front of you.

“Because stack proof removes energy-intensive equation solutions, this verification /

The role of consensus in cryptography

Proof of partnership and proof of work both depend on the consensus process to verify the transaction. This means that even though each transaction uses individual users to verify, each verified transaction must be verified and approved by the majority of account holders.

For example, a hacker cannot modify a blockchain laser until he has managed to obtain at least 51% of his fake version of the laser. The amount of resources needed to do this makes fraud impossible.

How can you mine cryptocurrency?

Mining is how new units of cryptocurrency are introduced into the world, usually in exchange for legalizing transactions. Although it is theoretically possible for the average person to mine cryptocurrency, it is becoming increasingly difficult to prove that a method like Bitcoin works.

“As the Bitcoin network grows, it becomes more complex, requiring more processing power,” said Spencer Montgomery, founder of Vinta Crypto Consulting. “The average consumer will be able to do it, but now it’s very expensive. There are a lot of people who have adapted their equipment and their technology to be competitive.”

And remember: a proof-of-work cryptocurrency requires a lot of energy. It is estimated that 0.21% of all electricity in the world goes to bitcoin farms. Switzerland consumes roughly the same amount of energy per year. It is estimated that most bitcoin miners use 60% to 80% of their mining revenue to cover their electricity costs.

Although it is unrealistic for an average person to earn crypto. by digging up proofs of the working system, less capable computational methods are required to prove the stack model, as the partnership amount is chosen at random. However, you must already have a cryptocurrency to participate. (If you don’t have crypto, you have nothing to defend.)

How can you use cryptocurrency?

You can use cryptocurrency to make purchases, but it’s still not a popular payment method. Bitcoin is accepted by a handful of online retailers like Overstock.com, but it’s far from ideal.

Until crypto becomes widely accepted, you can deal with current limitations by exchanging cryptocurrency for gift cards. In gifted, for example, you can use Bitcoin to purchase gift cards for Dunkin’ Donuts, Target, Apple, and select other retailers and restaurants. You may be able to load cryptocurrency onto a debit card for purchases. In the United States, you can sign up for a Bit Pay card, a debit card that converts crypto assets into dollars for purchases. but the card can be used to pass money orders and withdraw cash from ATMs, for example. example. There are user fees.

You can use crypto as an alternative investment option apart from stocks and bonds. “The most well-known crypto, Bitcoin, is a secure, decentralized currency that has turned into a treasure trove of gold,” said David Zeller, cryptocurrency expert and co-editor of the financial news site Money Morning. “Some even call it ‘digital gold’.”

How to use cryptocurrency for secure purchases

Using crypto to make secure purchases depends on what you want to buy. If you want to spend cryptocurrency at a retailer that doesn’t accept it directly, you can use a cryptocurrency debit card like BitPay in the US.

If you’re trying to pay someone or a retailer that accepts cryptocurrency, you’ll need a cryptocurrency wallet, software that interacts with the blockchain and allows users to send and receive cryptocurrency. cash. Permission.

To transfer money from your wallet, you can scan your recipient’s QR code or manually enter their wallet address. Some services make it easier for you by allowing you to enter a phone number or select a contact on your phone. Keep in mind that transactions are not instantaneous as they must be verified using proof of work or proof of partnership. Depending on the cryptocurrency, this can take anywhere from 10 minutes to two hours.

However, this lag is the only part of it that secures crypto transactions. “A bad actor trying to modify a transaction will not have the “cl

How to invest in cryptocurrency

Cryptocurrencies can be purchased on peer-to-peer networks, and cryptocurrency exchanges, such as Coin base and Biaffine. Be aware of fees, as some of the fees on this exchange can be prohibitively expensive for small crypto purchases. For example, Coin base charges a 0.5% fee on your purchase and a flat fee of 990.99 to 992.99 depending on the size of your transaction.

Some brokerage platforms – such as Robinhood, Weibull, and iTero – allow you to invest in crypto. They offer the ability to trade some popular cryptocurrencies, including Bitcoin, Ethereum, and Dogecoin, but they may also have limitations, including the inability to remove crypto purchases from their platform.

“It used to be quite difficult, but now it’s relatively easy, even for beginners in crypto,” says Zeller. “Exchanges like Coin base are for non-technical people. It’s very easy to open an account there and link it to a bank account.”

It is good to remember that buying individual cryptocurrencies is like buying individual stocks. It is better to spread the word about your purchases than to simply buy security.

If you want to invest in the crypto market, you can invest in different stocks of crypto companies. “There are also bitcoin mining stocks, such as the HIVE blockchain,” Zeller said. “If you want low-risk crypto exposure, you can invest in big companies that are embracing blockchain technology, such as IBM, Bank of America, and Microsoft.”

Should you invest in cryptocurrency?

Experts have mixed opinions on investing in cryptocurrencies. Since crypto is a highly speculative investment, with the possibility of rapid price changes, some financial advisors advise people not to invest.

For example, the value of Bitcoin has almost quadrupled by 2020, rising to 28,900 by the end of the year. In April 2021, the price of BTC had more than doubled since the start of the year, but all those profits had been lost in July. BTC then more than doubled, reaching $68,990 on November 10, 2021, and then fell to around $46,000 at the end of 2021. As you can see, cryptocurrencies can be very volatile

That’s why Peter Palin, a Certified Financial Planner (CFP) in East Norwich, NY, thinks it’s prudent to stick with government-backed currencies such as the US dollar.

“If you have US dollars in your cash reserves, you know you can pay your mortgage, you can pay your electric bill,” Palion said. “When you look at the past 12 months, Bitcoin basically looks like my previous ECG, and the US Dollar Index is almost a flat line.

That said, for clients particularly interested in cryptocurrency, CFP Ian Harvey helps them put some money into it. “If the investment drops to zero, the weight of the client’s wallet should be enough to make their long-term plans a success without derailing them,” Harvey said.

How much to invest, Harvey spoke to investors about the percentage of their portfolio they are willing to lose if the investment goes south. “It could be 1% to 5%, it could be 10%,” he said. “It depends on how much they have now and how much risk they take from a loss standpoint.”

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