Cryptocurrency – meaning and definition
Cryptocurrency, also called cryptocurrencies or cryptocurrencies, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies have no central issuing or regulating authority and instead use a decentralized system to record transactions and mint new units.
What is cryptocurrency?
Cryptocurrency is a digital payment system that does not rely on banks to confirm transactions. It is a P2P system that allows anyone, anywhere, to send and receive payments. Rather than actual money being carried and exchanged in the real world, cryptocurrency payments exist only as digital entries into online databases that describe specific transactions. When you transfer cryptocurrency funds, the transaction is recorded in a public ledger. Cryptocurrencies are stored in digital wallets.
Cryptocurrency is so named because it uses encryption to verify transactions. This means that advanced coding is involved in storing and transferring cryptocurrency data between wallets and public ledgers. The purpose of encryption is to provide security and safety.
The first cryptocurrency was founded in 2009 and is still the best known today, Bitcoin. Most of the interest in cryptocurrencies is trading them for profit, with speculators sometimes driving prices up.
How does cryptocurrency work?
Cryptocurrencies run on a distributed public ledger called a blockchain, which is a record of all transactions updated and held by holders of the currency.
Cryptocurrency units are created through a process called mining. This involves using computer power to solve complex mathematical problems to generate coins. Users can also purchase currency from a broker and then store and spend it using a crypto wallet.
If you own cryptocurrency, you don't own anything tangible. What you have is a key that allows you to move records or units of measurement from one person to another without a trusted third party.
Bitcoin has been around since 2009, but in the financial aspect, applications of cryptocurrency and blockchain technology are still emerging, and more uses are expected in the future. Trades involving bonds, stocks, and other financial assets could eventually be transacted using this technology.
Cryptocurrency example
There are thousands of cryptocurrencies. Some of the best known are:
Bitcoin:
Founded in 2009, Bitcoin was the first cryptocurrency and remains the most traded. This currency was developed by Satoshi Nakamoto. This is widely known as a pseudonym for a person or group of people whose exact identity is not yet known.
Ethereum:
Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency called Ether (ETH) or Ethereum. It is the second most popular cryptocurrency after Bitcoin.
Litecoin:
This currency is most similar to Bitcoin, but has moved faster to develop new innovations, including faster payments and processes that allow for more transactions.
ripple:
Ripple is a distributed ledger system founded in 2012. Ripple can be used to track many different types of transactions, not just cryptocurrencies. The company behind it has been working with various banks and financial institutions.
Cryptocurrencies other than Bitcoin are collectively known as “altcoins” to distinguish them from the original.
How to Buy Cryptocurrency
You may be wondering how to safely purchase cryptocurrency. Typically three steps are involved: these are:
Step 1: Choose a platform
The first step is to decide which platform to use. You can usually choose between a traditional broker or a dedicated cryptocurrency exchange.
Traditional broker.
These are online brokers that offer ways to buy and sell cryptocurrencies as well as other financial assets such as stocks, bonds, and ETFs. These platforms tend to have lower transaction costs but fewer cryptocurrency features.
Cryptocurrency exchange.
There are a variety of cryptocurrency exchanges to choose from, each offering different cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge asset-based fees.When comparing different platforms, consider the cryptocurrencies offered, fees charged, security features, storage and withdrawal options, and educational resources.
Step 2: Fund your account
After choosing a platform, the next step is to fund your account so you can start trading. Most cryptocurrency exchanges allow users to purchase cryptocurrency using fiat (i.e. government-issued) currencies such as US dollars, British pounds, or euros using a debit or credit card. However, this varies depending on the platform.
Buying cryptocurrency using a credit card is considered risky and not all exchanges support it. Some credit card companies do not even allow cryptocurrency transactions. This is because cryptocurrencies are very volatile and it is not advisable to go into debt for any particular asset or risk paying high credit card transaction fees.
Some platforms also allow ACH transfers and wire transfers. Accepted payment methods and turnaround times for deposits or withdrawals vary from platform to platform. Likewise, the time it takes for your deposit to clear depends on your payment method.
An important factor to consider is fees. This includes potential deposit and withdrawal transaction fees and transaction fees. Fees vary depending on the payment method and platform, so this is something you should research from the beginning.
Step 3: Place your order
You can place your order through the broker's or exchange's web or mobile platform. If you want to buy cryptocurrency, simply select “Buy”, select the order type, enter the quantity of cryptocurrency you want to purchase and confirm your order. The same process applies to “Sell” orders.
What can you buy with cryptocurrency?
When Bitcoin first launched, it was intended as a medium for everyday transactions, allowing users to purchase everything from a cup of coffee to high-value items like computers and real estate. This has not yet materialized, and although the number of institutions accepting cryptocurrencies is increasing, large-scale transactions involving them are rare. Nonetheless, you can use cryptocurrency to purchase various products on e-commerce websites. Here are some examples.
Technology and e-commerce sites:
Several companies that sell technology products, including newegg.com, AT&T, and Microsoft, accept cryptocurrency on their websites. E-commerce platform Overstock was one of the first sites to accept Bitcoin. Shopify, Rakuten, and Home Depot are also accepted.
Luxury:
Some luxury retailers accept cryptocurrency as a payment method. For example, online luxury retailer Bitdials offers Rolex, Patek Philippe, and other luxury watches in exchange for Bitcoin.
automobile:
Some car dealers, from mass-market brands to high-end luxury dealers, are already accepting cryptocurrency as a form of payment.
insurance:
In April 2021, Swiss insurer AXA announced that it had begun accepting Bitcoin as a form of payment for all insurance lines except life insurance (due to regulatory concerns). Premier Shield Insurance, which sells home and auto insurance in the US, also accepts Bitcoin for premium payments.
If you want to spend cryptocurrencies at retailers that don't accept cryptocurrencies directly, you can use a cryptocurrency debit card like BitPay in the US.
Cryptocurrency Scams and Cryptocurrency Scams
Unfortunately, cryptocurrency crime is on the rise. Cryptocurrency scams include:
Fake websites: These are fake sites that use cryptocurrency jargon and fake valuations that promise huge returns if you keep investing.
Virtual Ponzi Schemes: Cryptocurrency criminals promote non-existent opportunities to invest in digital currencies and create the illusion that existing investors can make huge profits by paying out new investors' money. One of the scam organizations, BitClub Network, raised more than $700 million before its perpetrators were indicted in December 2019.
“Celebrity” endorsements: Scammers pose as billionaires or celebrities online, promising to increase your investment in virtual currency, but instead steal what you send them. They may also use messaging apps or chat rooms to spread rumors that a famous businessman is backing a particular cryptocurrency. When investors encourage buying and drive up prices, scammers sell their shares and the currency falls.
Romance Scams: The FBI warns of a trend of online dating scams, in which scammers persuade people they meet on dating apps or social media to invest in or trade virtual currency. The FBI's Internet Crime Complaint Center received more than 1,800 reports of cryptocurrency-focused romance scams in the first seven months of 2021, with losses reaching $133 million.
Otherwise, scammers could pose as legitimate cryptocurrency traders or set up fake exchanges to trick people into giving them their money. Another cryptocurrency scam involves fraudulent sales pitches for individual retirement accounts denominated in cryptocurrency. Then there are simple cryptocurrency hacks, where criminals break into the digital wallets where people store their virtual currency and steal it.
Are cryptocurrencies safe?
Cryptocurrencies are typically built using blockchain technology. Blockchain describes how transactions are recorded and timestamped in “blocks.” 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.
Transactions also require a two-factor authentication process. For example, you may be asked to enter your username and password to initiate a transaction. You may then be asked to enter a verification code sent as a text message to your personal mobile phone.
The existence of securities does not mean that cryptocurrencies cannot be hacked. Several high-value hacks have cost cryptocurrency startups dearly. Hackers attacked Coincheck for $534 million and BitGrail for $195 million, making them two of the biggest cryptocurrency hacks of 2018.
Unlike government-backed money, the value of cryptocurrency is determined entirely by supply and demand. This can result in rapid fluctuations that can result in significant profits for investors or large losses. And cryptocurrency investments have far less regulatory protection than traditional financial products such as stocks, bonds, and mutual funds.