A 101 guide on what is cryptocurrency: start investing now!
The cryptomarket is an innovative market surrounded by expectations and uncertainties. This article will clarify it and explain what a cryptocurrency is.
Cryptocurrency: what is it and how can you start investing
If you don’t know what is cryptocurrency, it’s almost like you’re not living on this planet. If crypto coins looked like a video-game thing a decade ago, now we have governments funding their own cryptocurrency. It is here to stay and keeps getting more and more real.
But it is a disruptive concept. Outs society tends to rely on government entities and “touchable” things. Now, we’ll have to trust in blockchains, cryptography, software, and something that exists only as a number on the screen.
The cryptocurrency is a whole new mindset that has to be comprehended. The truth is that our trust is also what keeps the government’s currency valid because it doesn’t have a solid currency backing either.
Can we trust cryptocurrencies? Let’s find out while we learn more about this important topic.
What is cryptocurrency?
In simple words, cryptocurrency is digital money, also called digital assets.
The term “cryptocurrency” comes from the fact that the transactions have elaborated cryptography and encrypted algorithms to generate it, which keeps it safe from counterfeit. It is almost impossible to double-spend or corrupt the chain.
Cryptocurrencies are decentralized, which means there is no authority in control, like a government or a bank. The blockchain and cryptography guarantee the ownership and the secure trading of each coin.
The inventor of Bitcoin, the first cryptocurrency, believed that this currency system could use cryptographic proof instead of trust to guarantee the currency is legitimate and valuable. What does it mean?
Our society has a pact of trust in money. If I give you a five dólar bill, we all agree on its value, and we can check that the Central Bank has issued it by a series of security proofs in that bill.
That said, we 1) agree that the bill values 5 dollars and 2) we have ways to guarantee its authenticity. It is the same with cryptocurrency. Each cryptocurrency has a value based on stocks and other factors, and you can check its authenticity with cryptography.
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How does it work?
Now that we know what cryptocurrency is, let’s see how it works.
It is based on a blockchain technology system. It doesn’t have one central authority that manages it. Instead, it has an extensive net of computers that process all this data.
After the software generates a certain amount of data, it turns it into a block. Then, it attaches the block to the other blocks, forming this chain with encrypted information. Every transaction made is registered in those blocks, and it is almost impossible to corrupt the system.
As it is decentralized, the members and developers of each coin have the autonomy to decide upon the contracts and rules. This concept is also a mindset change. We should have more voice in every economic decision made by the government upon the traditional currencies. But they are already so established in a certain way that it looks almost impossible to change them.
The sustainable problem
Unfortunately, a relevant problem about cryptocurrencies has raised a red flag. Although it may seem that the things we see on the internet are “invisible,” they require a server, an existing real computer, to store the data
Some of them, like bitcoin, have a mining process in which the computers have to solve a massive amount of algorithms as fast as possible. This processing costs a lot of energy and an enormous amount of hardware and software. Some of the mining processes demand more power than entire countries.
Generating electricity has a significant Ambiental impact, primarily upon poorer communities. The ones that suffer from this impact are not the ones making profits on this market.
Fortunately, a lot of software developers in the crypto market are working to minimize this impact. This is the currency of the future, so it can’t accelerate the Ambiental problems we are facing. They have to be innovative and sustainable at the same time and are working toward this statement.
How can I use cryptocurrency?
It is easier to buy a crypto coin than to spend it.
Just like you can put money on your wallet, you can also have a digital wallet for your digital money. It can be a hardware wallet, which looks like a USB device and stores your keys. Or it can be an online wallet, which allows you to make transactions from your phone.
You can spend some cryptocurrencies with a debit card. Credit card companies with reliability in the market, like Visa and Mastercard, issue these cards. The majority of them work only with Bitcoin. But other cryptocurrencies are getting there.
This kind of transaction will involve fees, just like when you change one currency for another at an exchange office. These transactions consist in turning your crypto coins into US dollars. If you’d like to avoid these fees, you can search for online retailers that accept your cryptocurrency as payment.
Is it safe to start investing in cryptocurrency?
Yes, it is safe to invest in cryptocurrency, and it is a rising market where you can generate profit. However, it tends to fluctuate a lot.
Every investment needs a lot of study and information. People are talking a lot about the crypto market now, but don’t make rash decisions and don’t follow any trend just because it seems nice.
Cryptocurrency is not officially considered a real currency. That’s because its decentralized system is not backed by any entities. They are considered as financial property or assets. However, the debate about this topic in financial jurisdictions worldwide is effervescent and promising.
And if you want to learn more about finances, check out our article below!
About the author / Julia Bermudez
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