Cryptocurrency isn’t just an alternative mode of payment or digital currencies hosted on cryptography. It’s decentralization.
For almost one decade, cryptocurrency has disrupted traditional approaches to financial transactions, diverging from the layman's methods of exchanging money.
This article presents a concise summary of what you need to know before getting started with investing in cryptocurrency.
Cryptocurrencies run on blockchain technology. They are independent of any traditional regulation.
What Is Cryptocurrency?
Cryptocurrency is a digital or virtual currency that uses cryptography to secure and verify transactions and to control the creation of new units.
Most cryptocurrencies run on blockchain technology, a network system that encourages a transparent exchange of information, keeping transactions secure and attack-proof.
Since they aren’t issued by the government or central banks, cryptocurrency operates independently of any traditional regulation. They are immune to regulated attacks, manipulations, or disruptions.
Some other features of cryptocurrency include:
- Limited supply: Commodity-collateralized coins are backed by actual commodities like gold or oil. Bitcoin, unarguably the most mined crypto, has a finite supply of 21 million coins, after which no new coins would be mined. This boosts the value of many coins.
- Pseudonymity: Cryptocurrency transactions are typically pseudonymous, meaning that users are identified by a public key, rather than by their real name.
- Transparency: Blockchain offers a high degree of transparency; users can trace the financial history of any cryptocurrency, at any time, and make investment decisions based on their findings about different coins.
- Security: ‘Crypto’ in cryptocurrency denotes the advanced cryptographic techniques used to secure and verify transactions, lessening the existence of counterfeit coins. Though the prices can be extremely volatile, the tokens purchased are relatively safe.
- Volatility: The value of any coin can fluctuate in response to market demand, news events, or any other factors. The collapse in the value of the
FTX coin illustrates this.
Any given cryptocurrency possesses most of these features. Though the market evolves, if you find a coin that isn’t defined by several of these features, you have possibly found a
How Cryptocurrency Works: Explaining Blockchain
A blockchain is a decentralized digital ledger that records all transactions on a network securely and transparently. Blockchain technology allows users with minimal trust to interact and communicate with one another.
The blockchain consists of several blocks, each block holding a record of multiple transactions. Once a block is added to the chain, it cannot be altered or deleted.
Blockchain transactions are verified using complex cryptographic algorithms, ensuring each transaction is valid. When a user exchanges cryptocurrency with another user, the transaction is broadcast to the network of users on the blockchain.
Upon verification, the transaction is merged with other verified transactions, forming a new block, which is added to an existing blockchain. With each addition, blockchain security improves, as it becomes increasingly strenuous to alter with the previous blocks in the chain.
The blockchain consists of several blocks, each block holding a record of multiple transactions. Once a block is added to the chain, it cannot be altered or deleted.
Cryptocurrencies transacted on a blockchain network are either run through a PoS (proof-of-stake) or PoW (proof-of-work) system. PoW coins such as Bitcoin and DOGE use a process called mining.
Miners solve complex mathematical equations to validate each generated transaction and then add them to the existing blockchain. This earns them new crypto tokens for their efforts.
Usually, the first computer - or user - to solve a specific problem earns the reward. Miners can also purchase tokens from other PoW users.
In PoS, users receive new coins by participating in
Blockchain technology ensures secure and transparent transactions without the need for a regulatory body.
Types of Cryptocurrencies
Cryptocurrencies are routinely typified by their different names. Any crypto enthusiast will name-drop Bitcoin, Ethereum, Tether, and Binance as some of the known types of cryptocurrencies.
However, these digital currencies can also be typified based on their mode of utility. Known ones include:
- Currency Cryptocurrencies: These cryptocurrencies, such as Bitcoin and Litecoin, were created primarily to function as digital currencies for purchasing goods and services. These coins are likewise suitable for peer-to-peer transactions. The total number of created coins is often limited, with the values of coins rising as availability drops.
- Platform Cryptocurrencies: Some other coins are used as a platform for the creation of smart contracts, ledgers, and decentralized applications (dApps). Their functionality is platform-based.
- Stablecoins: Stablecoins are ideal for conservative investors concerned about the volatility of cryptocurrencies. These coins, though built on blockchain, maintain a stable value, as they are pegged against physical currencies, mostly US Dollars. Tether and USDT, which trades at $1 per coin, are used for investments and other financial market transactions.
- Utility Tokens: Utility tokens include finance tokens, government tokens, service tokens, and non-fungible tokens. With these coins, crypto enthusiasts can access specific products within a particular ecosystem. For example, Binance Coin is used to pay for trading fees and access discounts on Binance.
Check the regulatory and trading status of your desired coin, and ensure you are comfortable with your findings.
How to Buy Cryptocurrencies
Before you purchase any coin, do some digging. Research the coin’s selling history, the recent market trends, and the pros and cons of purchasing the coins. One way to do this is to be active in the crypto community, and follow conversations around different cryptos.
Check the regulatory and trading status of your desired coin, and ensure you are comfortable with your findings.
Then:
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Choose a Crypto Exchange: A crypto exchange is a platform where users trade cryptocurrencies. Many platforms offer user-friendly interfaces and processes for new users; however, you may consider the services of a crypto broker if purchasing on advanced platforms. You can also purchase coins from a crypto ATM or a P2P platform.
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Create and Fund Your Account: Next, you must set up your crypto account. As with most online business platforms, you must verify your identity before trading. This could mean providing your personal information and submitting a valid identity document.
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Purchase Your Coins: You need funds before you can purchase crypto. This could be through a transfer or deposit of fiat currencies like USD, EUR, or your local currencies from your bank account. Once the funds reflect on your balance, you are cleared for transactions. Some crypto exchanges take up to one day to reflect your funds; however, funding your crypto account with your credit cards may incur a higher interest rate than expected.
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Store Your Coins: Cryptocurrencies are stored in
wallets - hot or cold - though you may leave it on the crypto exchange if you consider the platform secure and trustworthy.
Five Best Cryptocurrencies
Investing in crypto requires an understanding of the current market evaluation. Given the volatility that comes with the territory, here are five risk-tolerant coins worth purchasing in 2023:
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Binance (BTC ): Being the first created coin, Binance is arguably the choicest coin in the market. With a market cap of $383 billion, Binance has grown in value by over 4000% since its inception. -
Ethereum (ETH) : ETH is a decentralized platform enabled for smart contracts, and accessible by individuals everywhere. It has a market capitalization of over $400 billion as of December 2021 and is the second-largest cryptocurrency after Bitcoin. Ether trades at around $1500 per unit. -
Tether (USDT) : Tether is backed by the US Dollar. Its value is commensurate with the present-day value of the fiat currency. It’s a worthy option for low-risk investors troubled by the unpredictability of other top coins like Binance. -
USD Coin (USDC) : The USD coin is a stablecoin pegged to the US Dollar at 1 USDC to $1. Powered by Ethereum, it is trusted for global transactions and trades up to $10 billion monthly. -
Cardano (ADA): Cardano is a decentralized platform that aims to provide a more secure and sustainable ecosystem for building dApps and smart contracts. It has a market capitalization of over $60 billion as of December 2021.
Other cryptocurrencies with great market caps include Binance Coin (BNB), Binance USD (BUSD), Solana (SOL), and Dogecoin (DOGE).
Recent Market Trends
The crypto market, being freight with uncertainties, is affected by a motley of
The COVID-19 pandemic marked the start of a significant fluctuation season, with bullish and bearish patterns observable over the next two years.
The market entered 2023 by
Forecasts suggest that the market could hit unprecedented figures by the end of the decade. Presently, the market is affected by:
- Increased Institutional Adoption: In recent years, there has been a notable increase in institutional adoption of cryptocurrencies, with companies such as Tesla, MicroStrategy, and Square adding Bitcoin to their balance sheets. Additionally, traditional financial institutions such as JPMorgan and Fidelity have started offering cryptocurrency services to their clients.
- Growth of Decentralized Finance (DeFi): Decentralized finance, or DeFi, has emerged as a major trend in the cryptocurrency space, offering a range of financial services such as lending, borrowing, and trading, all without the need for intermediaries.
- The emergence of Non-Fungible Tokens (NFTs): Non-fungible tokens (NFTs) emerged and spread like a hurricane in 2021 and well into 2022. Though the intensity of transactions has subsided to a manageable tempo, NFTs allow for the creation and trading of unique digital assets such as artwork, music, and collectibles, all of which affect the value of the crypto market.
- Increased Regulatory Scrutiny: The Security Exchange Commission (SEC) alleged in 2020 that Ripple was guilty of raising funds through the sale of its token, XRP.
Though the case is still open in court , the SEC isn’t slowing in investigating other crypto players. As the cryptocurrency market grows, regulators globally would increase their scrutiny of the industry. The emphasis remains on increasing transparency and accountability from all stakeholders in the industry.
- Continued Volatility: Cryptocurrencies remain highly volatile, with their values fluctuating widely over short periods. While Bitcoin and other cryptocurrencies saw significant gains in 2020 and 2021, they also experienced periods of sharp declines.
It is necessary to conduct thorough research before becoming an active member of any crypto exchange. This will prevent you from incurring losses in a market governed by flaky values.
AI can also enhance the security and transparency of blockchain technology that underlies cryptocurrencies.\
Will AI Affect Cryptocurrencies?
Artificial Intelligence (AI) in crypto may be the next big thing. Already, bots like ChatGPT and image generators like Dall E have redefined what AI is capable of.
A partnership between AI’s predictable model and crypto’s decentralized nature may usher us into a vastly productive era of digital transactions.
For instance, AI can analyze large amounts of data and provide insights into market trends and trading strategies.
This can be particularly useful in a highly volatile market like cryptocurrency, where the ability to quickly and accurately analyze data poses challenges to several crypto exchanges. Leaning on AI can be a significant advantage for stakeholders.
AI can also enhance the security and transparency of blockchain technology that underlies cryptocurrencies. For example, AI can detect fraudulent transactions and identify potential security threats, helping to protect users and prevent fraud.
AI could also research valuable coins, best buys, etc., saving you several hours of manual research.
Though a flawless merger between AI and crypto would require tons of training and hundreds of terabytes of data, the potentials are encouraging.
Trailblazers of this unparalleled relationship must also be careful of bias in AI-managed crypto, as this could expose the market to manipulations.
There are still gray areas to explore in the crypto market. It remains to see what the future holds for the market and how an expanding AI industry will affect this.
Nevertheless, before making your first $10 crypto investment, research the market, gather updates, and decide on a secure crypto exchange for your portfolio.