A Beginners Guide To Cryptocurrency- What Is Cryptocurrency?
Cryptocurrency is fascinating and enigmatic at the same time. Fascinating because it has taken the world by storm. Bitcoin alone, the world’s most popular cryptocurrency, has a current market capitalization of a staggering $455 billion. If you include all cryptos in circulation, the total market capitalization reaches a mind-blowing $1.17 trillion.
It is said that cryptocurrencies can make you wealthy (crypto millionaires are a real thing, you know) – but how do cryptocurrencies work? We explain everything in a simple way, but we can’t guarantee that you will become rich.
But that’s only the fascinating part; the world of virtual currency is enigmatic too. The technicalities of cryptocurrencies still baffle many, who find it confusing, to say the least. Many are still confounded by the erratic developments in the crypto world and struggle to grasp even the basics of cryptocurrencies.
You will learn here;
- Basics of cryptocurrencies
- Blockchain technology – the soul of cryptocurrencies.
- Potential of cryptocurrencies.
- Can it really make you rich?
- How can you buy cryptocurrencies?
- Where to buy cryptocurrencies?
- Risks involved with cryptocurrencies
Contents
Basic Guide To Cryptocurrencies
If you are a crypto novice struggling to grasp the concept, it’s time to have a clear understanding of how the crypto world operates, what forces drive its movement and what actually powers and nourishes the crypto ecosystem. To help you with the process, we have pulled together a beginner’s guide to cryptocurrencies. Read it whole to wrap your head around the concept and understand the intricacies of cryptocurrencies.
Why Is Learning About Cryptocurrencies Must These Days?
When you dig into the details of cryptocurrencies, you will learn it to be an unbelievable tale of technology creating money and revolutionizing the financial sector. That’s why, despite a timid start, cryptocurrencies have risen exponentially to the point that they have become an essential assets class in several sectors of activity.
Many consider them the way ahead for financial independence and the future of how we deal with money. Nonetheless, there are people at the other end of the spectrum who consider the whole crypto environment an elaborate hoax, a house of cards bound to topple and disrupt global financial stability. But no matter where you stand in this discussion, you cannot deny that the impact of cryptocurrencies on the financial sector will only be more profound with each passing day.
That’s why it’s essential to learn the basics of cryptocurrencies and use the knowledge to extract significant gains whenever an opportunity presents itself.
What Really Is Cryptocurrency?
The word ‘cryptocurrency’ gives a glimpse of some of its fundamental characteristics. It’s a combination of two words: crypto, the cryptographic technology used to encrypt data, and currency, which denotes money. But there are no bank notes, coins, or bills here – cryptocurrency only exists in the digital world. That’s why it’s also called virtual money or digital currency.
That said, virtual currency, in all its sense and purpose, is similar to real money; that is, it allows all possible financial actions to be carried out: purchase, sale, or transfer.
But, the question arises, when we already have physical money, with crisp notes in our wallets, why do we need digital money?
Here, the peculiarities of cryptocurrencies come into play – unlike fiat money, no bank, government, or central authority controls digital currencies. That is its real strength, the real reason for the exploding rise of cryptocurrencies.
Proponents of cryptocurrencies see them as an answer to traditional finance. There are no longer banks or central authorities that dictate our money; instead, the owners themselves become the financial institutions. It entirely eradicates the need for a central body to control the flow of money and currency.
The users are in control and responsible for the functioning of the ecosystem and the security of the assets. Anyone with appropriate computing power and required software can participate in the network. Consequently, instead of a central body, the control is distributed to a group of users in the network, regulating and maintaining the whole cryptocurrency infrastructure; that’s why cryptocurrencies are also called decentralized currency.
What Powers Cryptocurrencies?
The currency part is understandable as it’s somewhat synonymous with the fiat currency. But what actually runs virtual currency in the first place. What technology made it possible for cryptocurrencies to rise? The answer is Blockchain and Cryptography. Blockchain is to validate all the transactions and ensure proof of ownership and cryptography to prevent data alteration, duplication, and deletion. Blockchain deserves a whole section for itself which we indeed have added in this guide, but first, let’s understand why blockchain is indispensable to the crypto world.
Why Is Blockchain Needed For Cryptocurrencies?
In the real world, there are banks or centralized authorities that see through all the transactions between different parties. In short, they act as intermediaries to check and ensure the due processes. Besides, banking institutions also control the total currency in flow – you cannot simply print a note or mint a coin. Also, in digital space, copy, paste, manipulation, and forgery are so prevalent that we need trustworthy authorities to ensure seamless exchange of funds and government regulation to ensure that these institutions work ethically and partially.
However, there’s no central authority in the crypto world – so how to prevent alteration or manipulation of digital data (say transactions or transfers of funds)? That’s where blockchain comes in. It replaces banks but in a decentralized way.
Blockchain stores the record of every exchange and transaction in thousands or millions of computers connected via peer-to-peer networks. Each participant of the network has an identical record of all transactions. Anyone can track and verify the transactions, so no individual or institution can tamper or falsify the information. In addition, the transactions are encrypted using cutting-edge cryptographic methods to ensure added security.
Types Of Cryptocurrencies
You must know that not all cryptocurrencies are the same. In fact, you must be clear about an important difference concerning cryptocurrencies. At their most basic, cryptocurrencies are of two types;
· Bitcoin ( the Primary cryptocurrency)
· Altcoins ( rest of the crypto coins)
We have already discussed Bitcoin, so let’s focus on altcoins now. The term altcoins menas alternative coins. That is, they present themselves as the alternative to Bitcoin. Today, thousands of altcoins are circulating in the market, and new ones are released every now and then.
Altcoin takes inspiration from Bitcoin; they run on the same Blockchain technology, but each altcoin’s approach is different from one other.
For example, Bitcoin is intended to be a payment system, while Ethereum, the second-largest cryptocurrency, aims to provide a platform for developing applications. Did you get the difference – the former has more economic characteristics while the latter is infused with technological character.
Moving further, you will find all types of altcoin offering unique functionality. Altcoins are primarily classified into;
- Digital money
- Stablecoins
- Tokens
✔ Digital money
All those cryptocurrencies that offer an alternative to physical money are termed digital money. Bitcoin is the prime example, but altcoins too can be digital money. All seek to replace Bitcoin by offering faster transfers, greater privacy, etc., but so far, they still fall behind Bitcoin. Litecoin, Bitcoin Cash, Monero, Ripple, Zcash, and Dash are the most famous.
✔ Stablecoins
These coins are created to tackle the volatility of the crypto market. These coins are backed by fiat currencies like dollars or euros or materials like gold or oil.
Notable examples of stable coins backed by fiat currency are Tether, TrueUSD, or USD coins – the value of these coins remains equal to one dollar. Consequently, stable coins provide the same stability as fiat currency but within the crypto environment.
✔ Tokens
Tokens, also termed cryptographic tokens represent monetary value, but they do not aim to be a replacement for physical money. Mostly they intend to represent some value within the platform they are created.
Let’s understand them with the example of casino chips.
To play in a casino, you exchange money for casino chips. These chips represent a monetary value but within that casino only. Outside the casino, they do not have any value.
Similarly, crypto tokens only have value on their respective platforms. They serve specific purposes on their platform: as a utility, exchangeable currencies, loyalty points in games, etc. Ether, the Ethereum cryptocurrency, and the Binance coin are examples of crypto tokens.
History Of Cryptocurrency
The foundation of cryptocurrencies goes back to the seventies when cryptographic data entries in a decentralized database were first discussed; however, concrete development only happened in the 1990s.
In the early 1990s, a group of programmers and cryptographers began discussing ways to protect privacy online via email. The group called themselves Cypherpunk based on the popular term “Cyberpunk.” Most notable among them was Brit Adam Back. He is credited with being the developer of the first proof-of-work method on which most cryptocurrencies are based. The proof-of-work method was originally intended to avoid spam.
Evolution Of Cryptocurrency
Bitcoin is often touted to be the first cryptocurrency. Indeed, Bitcoin opened the door to the fascinating world of cryptocurrencies and blockchain; however, several attempts were made to introduce a Bitcoin-like crypto coin back in the 1990s.
- David Chaum, a well-known cryptographer, introduced the DigiCash principle – a kind of cryptocurrency based on a cryptographic key. However, it wasn’t an entirely decentralized coin, unlike today’s cryptocurrencies.
- Then in 1997, Adam Back came up with HashCash, a cryptocurrency that employed a hashing algorithm. It was a proof of work-like concept where computers have to perform complex calculations to generate HashCash.
- In 1998, two cryptographers came up with their own digital currency. Nick Szabo introduced BitGold, while Wei Dai came up with B-Money. Nick Sabzo made several improvements to the Proof-Of-Work concept, which finally paved the way for the development of Bitcoin.
- Then on November 1, 2008, a mysterious person(identity unknown), Satoshi Nakamoto, proposed the idea of Bitcoin in The Cryptography Mailing List. After two months, that is, on January 12, 2009, the first Bitcoin transaction was made, kickstarting the era of cryptocurrencies that would take the world by storm.
Bitcoin Price Evolution
2010
2010 marked the first real transaction of Bitcoin. It was in 2010 that Bitcoin was used in the real sense of money when two Pizzas at Papa Johns were exchanged for 10,000 Bitcoins.
2013
Until 2012 there was no real hype for the Bitcoin phenomenon, and the price stagnated at around a few dollars. But 2013 changes the fate of Bitcoin. The price soared to an all-time high of $220, attracting immense interest in the digital currency and the crypto world.
Although the price retreated to the $70 mark, again in November that year, the value soared to $195. By the end of 2013, Bitcoin was trading at its all-time high of $1,079.
2014
Bitcoin couldn’t sustain its bull run in 2014, and the price gradually dropped to $600 in mid-July 2014.
2015
The fall of Bitcoin price continued in 2015 too, and the digital currency took a dip to below $315. Many were skeptical that the run for Bitcoin was over and that the digital currency would soon bite the dust. But against all odds, the price soared to $460 by November that year.
2016
2016 saw the prices consolidate gradually, as Bitcoin slowly trodden uphill. Brexit offered a boost to the price, and they surged to $1,000 levels.
2017
It’s the year that witnessed meteoric rises and a dramatic decline in Bitcoin prices. In May that year, Bitcoin crossed the $1500 mark for the first time. But the bull run wasn’t over yet; the price soon touched $5000 and then $10,000. By November of 2017, Bitcoin was trading at a whopping $19,000. And yet again, investors witnessed how volatile the crypto game is when the price suddenly dipped to $13,000 at the end of 2013.
2018
The year begins with a value fluctuating between $12,500 and $16,500. But giving investors a real jerk, the price fell below $3,500 in November 2018.
2019
2019 again saw a meteoric rise in Bitcoin price. It first rose to $10,000 in June; however, it couldn’t sustain the growth and fell again to $7,500 by the end of the year.
The rally will continue for the following years, and Bitcoin will reach the all-time high value of an astounding $68,000 in November of the year 2021.
Several cryptocurrencies have hit the exchange in the meantime, yet the price fluctuation of Bitcoin is the most critical indicator of how the market is doing. Bitcoin has become the benchmark for evaluating the state of the cryptocurrency market, and that’s why we consider it essential to showcase the price history of the father of all cryptocurrencies.
Evolvement
Since the introduction of Bitcoin, cryptocurrencies have come a long way – there are now over 18000 cryptocurrencies in circulation. But only around 100 achieve a daily trading turnover of more than 1000 US dollars.
Bitcoin is still the reigning king of the crypto world; however, Ether, Ripple, and Litecoin are also fighting for their place.
Additionally, thousands of new cryptocurrencies are launched every month based on all sorts of concepts. Unconventional currencies like Cryptokitties are also gaining popularity. It’s about breeding the most extraordinary virtual cats possible and then selling them for a profit – hard to believe, but true.
Technology Behind Cryptocurrency
The technology that is the soul of cryptocurrencies is Blockchain. In fact, cryptocurrencies are only possible because of blockchain technology. In the simplest form, it’s a computer architecture that ensures the functioning of cryptocurrencies securely and autonomously.
What Is It?
Think of Blockchain as a large digital database that stores information. It’s kind of a transaction register. Each page of the register is a block. When one block is full, it is sealed, and operation starts on the new block. However, the previous block is still connected to the new block via a cryptographic chain. A long series of interconnected blocks then make a blockchain.
How Blockchain Works?
Blockchain is not a single entity but rather a combination of three concepts working together to make blockchain operations possible.
✔ Blockchain Is Accessible To All, Which Means It’s An Open Cashbook
Blockchain is visible to all, which means each transaction is accessible to everyone who is part of the network. The main advantage of such a setup is that there’s no possibility of invalid transactions happening. There are thousands or millions of eyes validating each transaction. Because there is a record of every transaction, if someone tries to send more cryptocurrencies than they own, the transaction won’t happen.
✔ Blockchain Is Decentralized
The second concept that allows Blockchain to function properly is decentralization. Decentralization means that databases or the records of transactions are not on a single server but distributed on several computers. Each participant in the network has the same access right and opportunities. Besides, each participant also has a complete copy of the entire Blockchain. Such a copy of a blockchain is also called a full node. Being decentralized, blockchain technology is also called “distributed ledger technology.”
✔ Blockchain Has Miners To Validate Every Transaction
Every new transaction is traceable and secure because it reflects in all copies of the ledger and, therefore, must match in each ledger. But, what is the surety that every participant has the same copy of the ledger? That’s the work of miners – they are kind of accountants of the Blockchain. Every transaction has to be verified to ensure that it’s valid. Miners have to perform complex calculations to obtain a key code that will enable them to register the transaction in the Blockchain.
This code is also referred to as a hash value and is not easy to obtain. Certain computing power is necessary to extract the code. Once a miner has the code, it can enter the transaction details in the distributed ledger. The hash value is then sent to the entire node, which keeps the records identical throughout the Blockchain.
Why Is It So Popular?
The popularity of Blockchain lies in its inherent working;
✔ Blockchain Makes Middlemen Superfluous
The biggest motivator for Blockchain is its ability to transfer control from a centralized authority to individuals. In the real world, banks are the custodians of your money, and you depend on them for the safety and security of transactions you are making. The peer-to-peer principle of Blockchain allows you to eliminate the middleman. Consequently, you can transfer funds from person A to B without any middleman, central authority, or banks.
✔ Blockchain Allows Counterfeit-Proof Transactions
One of the biggest advantages of blockchain technology is that it’s tamper-proof. It’s a distributed ledger with each participant having a copy of the ledger. The hash value of a block is transferred to subsequent blocks. Any manipulation attempt will be immediately recognizable because the hash value won’t match.
Common Crypto Terms And Meanings
To have a better understanding of cryptocurrencies and to make an informed decision while investing in the crypto space, there are some common crypto terms that you must be aware of;
👉 Cryptocurrency
A virtual currency based on blockchain technology that only exists in digital space.
👉 Fiat money
It’s the actual money or the physical money, like dollars, euros, etc.
👉 Bitcoin
The first cryptocurrency launched in 2008.
👉 Altcoin
Every cryptocurrency other than Bitcoin is called an altcoin.
👉 Stable Coin
A type of crypto coin tied to a stable fiat currency like the dollar. It combines the stability of fiat currency with the flexibility of cryptocurrency.
👉 Blockchain
The technology that runs cryptocurrencies. It’s a distributed ledger that contains an immutable record of every cryptocurrency transaction.
👉 Node
A server or computer that is equipped with the software needed to store Blockchain.
👉 Mining
Mining is a way of validating cryptocurrency transactions. Miners solve a complex mathematical problem imposed by Blockchain to generate key code or hash value. One who solves the code is allowed to enter transaction details and seal the block. For the work, the miner is awarded a few crypto coins.
👉 Airdrop
Airdrop is a way of promoting and popularising new cryptocurrencies. In an airdrop, a certain number of crypto coins are awarded for free to attract investors.
👉 Fork
A fork happens when a blockchain is split into two entirely new blockchains.
👉 FUD
Fear, Uncertainty, and Doubts – are used to describe negative sentiments in the market.
👉 HODL
A type of investing strategy where investors hold cryptocurrencies for an extended period.
👉 Wallet
A software application or a hardware device that is used to store private keys associated with your digital assets safely.
👉 Public Key
An encrypted key consisting of a string of alphanumeric characters can be used to transfer cryptocurrencies.
👉 Private Key
Also, an encrypted string of alphanumeric characters allows the user to claim ownership of the digital assets. You must never share your private key with anyone.
👉 ROI
Acronym for Return On Investment. It denotes the profit or loss of your investment.
Trading Crypto
In the previous segment, you have learned about cryptocurrencies and Blockchain. Now, the real adventure begins – it’s time you learn how to get some cryptocurrencies for yourself.
Where To Buy And Trade Cryptocurrency?
Crypto trading begins from an exchange, but before getting into the matters, it’s imperative to learn what an exchange actually is.
What Is An Exchange?
In the crypto world, exchanges are specialized online platforms that allow you to exchange money for cryptocurrencies or trade one cryptocurrency for another. Crypto exchanges are synonymous with stock exchanges, where buyers and sellers meet to buy, sell and trade cryptocurrencies.
‘The number of crypto exchanges that allow you to trade cryptocurrencies is enormous. The essential thing is that you know how to differentiate the best from the rest.’
There are hundreds of different crypto exchanges, some old and well known like Binance, others still relatively new like etoro. Depending upon the type of crypto exchange, it will allow different features and functionalities.
Types Of Crypto Exchanges
According to their way of working, we can classify crypto exchanges as;
✔ Broker
A crypto broker is an online platform that acts as an intermediary and allows the exchange of cryptocurrencies for fiat money. Crypto brokers like Bitpanda are the most preferred platform for crypto novices because of the ease of operation. However, it’s usually the most expensive way to buy cryptocurrencies because crypto brokers charge hefty commissions.
✔ Trading Platforms
Trading Exchange offers a platform for direct dealing between buyers and sellers who wish to trade cryptocurrencies. You can immediately buy and sell crypto currencies based on the market price. However, similar to crypto brokers, trading platforms also act as intermediaries, and for lending their platforms, they charge commissions. Fees vary with each transaction, mode of payment as well as the type of trade. Coinbase, Binance, and etoro are all well-known crypto trading platforms.
✔ Direct P2P exchange
The working of direct P2P exchange is like setting up two people for business. They decide the terms, and if everything aligns with their goal, they proceed with the business. P2P exchanges bring people interested in buying and selling cryptocurrencies in contact so that they can trade directly without a middle man. Understand that users are not buying cryptocurrencies from the exchange; rather, they set their own exchange rate. This way, if two people agree on the proposed price, they can proceed with the exchange. Bybit is a well-known direct P2P crypto exchange.
But these are not the only classification of crypto exchanges. They can also be centralized or decentralized – let’s understand the difference;
Centralized Crypto Exchanges (CCE)
Centralized crypto exchanges act like a central entity or a company that controls all the operations and transactions going-on on their website. These platforms act as intermediaries and facilitate the buying, selling, and trading of cryptocurrencies. However, centralized exchanges do not offer anonymity and ask their users to complete the KYC process.
Likewise, people who opt to use these platforms do not have control over their private keys – these platforms act as a custodian of their digital assets. In other words, people have to put their trust in these exchanges just like they do with banks.
If you wish to make a comparison between a centralized crypto exchange and a real-world entity, they are closest to a cryptocurrency bank, where you can buy and store cryptocurrencies, but you do not have any control over them.
Despite this, centralized exchanges are the most used crypto exchange because of their ease of use, advanced trading features, and higher liquidity. Coinbase, Binance, Kraken, etc., are some well-known centralized crypto exchanges.
Decentralized Crypto Exchanges (DEX)
Decentralized exchanges (DEX) are the crypto trading platform that upholds the true principles of blockchain technology – decentralization. No central entity controls what’s happening inside the platform – all transactions happen directly between users.
On decentralized exchanges, no one holds your funds or controls your private keys. Each user has complete anonymity and sovereignty over his data and his cryptocurrencies. These platforms only serve as a layer where transactions happen.
Also, being decentralized, there’s no central server or a single point of attack; therefore, they offer a higher level of security. Also, the exchange fees are relatively lower than the centralized exchange. In contrast to a centralized exchange, DEXs are not widespread in use, primarily because of the complexity of their operations. Kyber Network and EtherDelta are two of the most used decentralized platforms.
How To Trade?
How easily you can buy or sell cryptocurrencies depends on the country you reside and the payment method you want to use
After you have discovered the essentials of cryptocurrencies, made up your mind to invest in cryptos, and are clear where you are going to carry out the said operation, you are ready to know how to trade cryptocurrencies.
As we have said earlier, you need an exchange to buy, sell or trade cryptocurrencies. We have made Coinbase our point of reference, however, the process of trading cryptocurrencies is somewhat similar to every crypto exchange.
So, if Coinbase does not operate in your country, you can choose the best crypto exchange based on your place of residence.
To invest in cryptocurrencies, there are mainly five steps;
- Account Registration
2. Email Verification
3. Identity Verification
4. Funding the Account
5. Purchasing Cryptocurrencies
✅ Step 1: Account Registration
In order to operate on an exchange, you need to register an account. The registration process is simple – you have to proceed with the sign-in option on the main page of the exchange.
The Coinbase signup page is – https://www.coinbase.com/signup.
You have to fill in some details on the registration page. Your name and last name, your email address, and a password – the one you will need to access the platform.
After filling up all the details, click on the register now button to complete the registration process.
✅ Step 2: Email Verification
Once you complete the account registration process, you will receive an email confirmation link.
Simply open the email and click on the link. Doing so will complete the verification process and will take you to the main account dashboard.
✅ Step 3: Identity verification
Coinbase is a centralized exchange and needs identity verification before you can enjoy its trading features.
As soon as you login into your account, the setup will prompt you to complete the KYC process. In order to complete the verification process, you have to provide; Identity card, Passport, or Driving license. You have to upload the photos of these documents on the platform to complete identity verification.
✅ Step 4: Finding the Account
You need money in your account that you can exchange for cryptocurrencies. For this, you have to fund your account. Now, every crypto exchange offers several modes of payment to deposit money.
In most cases, they accept the following deposit methods;
– Wire transfer
– Credit card
– PayPal
– Other cryptocurrencies
Some payment modes offer instant fund transfers like credit cards, while others require a few days to complete the transaction, like a bank transfer. Also, credit card transactions will incur charges depending upon the platform you are using.
Whichever method you choose, complete all the steps required by the exchange until you receive the message, ‘your payment method has been validated,’ and the funds reflect in your account.
✅ Step 5: Buy cryptocurrencies
This is the last step, and for this step to go smoothly, you have to be clear about two things;
· The cryptocurrency you want to purchase.
· The amount you want to invest.
Most of the popular crypto exchanges like Coinbase offer hundreds of cryptocurrencies to trade. In addition, they keep on adding new crypto coins to the list to offer you more comprehensive options and better investment opportunities.
You can purchase cryptos in two ways;
- You can specify the number of coins you want to purchase. For example, you want to purchase 0.5 BTC. In that case, the exchange will calculate and display the amount you have to pay to buy 0.5 BTC based on the current exchange rate.
- You can commit a specific amount. For example, you want to purchase a $100 amount of a specific cryptocurrency. In this case, the exchange will calculate and display the number of crypto coins you can have for that amount.
It is essential to mention that with each purchase operation you make, the crypto exchange will charge a commission based on the amount you have invested.
When you are sure of the amount or the number of crypto coins you want to purchase, simply click the buy button. If additional steps are required, the screen will prompt you; to follow the prompts and complete the process. Once the purchase process is complete, you will have your cryptocurrencies in your account.
Congratulations, you now own cryptocurrencies and could be on the path to profitability and economic prosperity.
How To Safely Store Cryptocurrencies?
After purchasing cryptocurrencies, you have to ensure their safety too. Crypto theft is real; there are many incidents where people have lost all of their crypto investments. So, how to safely store cryptocurrencies? Simple – in a wallet.
Yes, you read it right – cryptocurrencies are kept in wallets, but they are unlike the wallet you keep in your pockets. These are specially designed software applications or hardware devices to store cryptocurrencies. Before we learn more about crypto wallets, let’s understand what public and private keys are.
👉 Public key
Each crypto wallet has two keys, one is a public key, and the other is a private key. The public key is like the address of your wallet – it’s a string of Alphanumeric characters. You can share it with others to receive cryptocurrencies from them. Also, your public key does not allow anyone to withdraw from your wallet, only to send it.
👉 Private Key
The second key is the private key. It is generated when you first set up a crypto wallet. It’s proof that you are the owner of the funds in the wallet. Never, in any circumstances, should you share your private key with anyone. If someone else has access to your private key, nothing can prevent him from stealing all your money.
👉 Seed Phrase
A seed recovery phase is also generated when you set up a wallet, apart from the private key. It’s like a safety net to reclaim your money in case you lose your device or password to your wallet. If your device is lost, stolen, or destroyed, you can download a wallet application on another device and use the seed recovery phase to instantly access your funds again. Therefore, it’s imperative to take utmost care of the seed recovery phrase and keep it somewhere safe.
Now we can move on to the wallet part. Understand that crypto wallets are broadly divided into two groups – Hot Storage and Cold Storage.
👉 Hot Storage
Hot Storages are software wallets or online wallets for which internet connectivity is essential. They are the simplest wallets and offer relative ease of use. However, constant connectivity to the internet makes them vulnerable to attack.
👉 Cold Storage
Cold storage is a hardware device that stores digital assets offline. This provides additional security and better control over your assets. Because cold storage wallets provide enhanced security, they are more recommended to save large amounts.
Types Of Crypto Wallets
✔ Wallets in Exchange (Hot Storage)
Exchange wallets are hot storage wallets provided by the exchange itself that you use to purchase cryptocurrencies. Normally, no additional steps are required to set up exchange wallets – registering on the exchange also creates a wallet for you.
These are probably the easiest to operate, but they do not provide you with private keys, which puts them at a disadvantage. Consequently, they are not recommended to store a large part of your investment. Coinbase, Binance, Kraken provide exchange wallets.
✔ Wallets Apps on the smartphone (Hot Storage)
You can also operate a wallet on your smartphone. Just like other apps, you can easily install wallet apps on your phone and store your digital assets in them. These wallets allow greater ease of use; however, they are only recommended when you make frequent crypto transactions. Security-wise they are not that great; therefore, we recommend only committing 2% to 3% of your crypto funds to them. Electrum and Bither are well-known mobile wallets.
✔ Wallets Online (Hot Storage)
Online wallets are web services that offer you crypto storage facilities. Some online wallets offer full control of your private keys, while others work on a shared custody wallet. In terms of security, they are quite vulnerable because you never know if the network, device, or browser is compromised. Bitgo and Coinspace are popular web wallets.
✔ Desktop Wallets (Hot Storage)
Web wallets are desktop applications. You can easily install them on your PC to manage your cryptos and keep them safe. Software wallets also offer relative ease of use and are usually easy to set up. But, internet connectivity makes them vulnerable; therefore, caution is required while using them. Wasabi and Bitcoin Core are good examples of Desktop wallets.
✔ Wallets in Browser Extension (Hot Storage)
Browser extensions or plugins allow you to customize a browser to include a crypto wallet. You can store cryptocurrencies in them, make payments or do transactions. Although they may bring convenience and ease of use, they are the least preferred method of protecting your investment. Metamask is the only worthwhile option.
✔ Hardware Wallets (Cold Storage)
Now we have come to the cold storage option. There’s actually a physical device that allows you to store your digital assets. If you really wish to stay invested in cryptocurrencies for a long time while being able to sleep peacefully, cold storage is the best option you have. These small devices are specially designed to store cryptocurrencies in the most secure way possible. Because they remain disconnected from the internet most of the time, they limit the possibility of unauthorized access. Trezor and Ledger are the two most used hardware wallets.
Most Popular Cryptocurrencies To Buy In 2022
The cryptocurrency market right now is in red following two super big crashes. But price swings are nothing new, and most of the time, the market recovers with new vigor. Therefore, if you intend to a position, here are some cryptocurrencies that can be a good investment;
Bitcoin: The King Of Crypto!
Yes, we know we have pushed an open door, but when we talk about the portfolio of cryptocurrencies, we can’t just ignore Bitcoin. And this ultimately is regardless of the price. Bitcoin is the powerhouse of digital value, and its value will most certainly increase. Given the recent crash, Bitcoin is available at an attractive price.
If you are concerned about the recent price crash, it’s probably because of the Luna disaster and the stock market slowdown. But its adoption is increasing and with it the demand; therefore, sooner or later, Bitcoin is bound to pick the speed again. Consequently, Bitcoin must cover a significant portion of investment, 30% at least.
ETH: Before ETH 2.0
ETH 2.0 is in the pipeline, and if you can buy ETH before the release, do not hesitate. The ETH 2.0 is the most awaited evolution of the Ethereum blockchain. The team behind Ether has been working for years to improve its blockchain. With the release of ETH 2.0, the team intends to revolutionize the Ethereum ecosystem: 90% fewer costs, ten times faster, and 90% less energy-consuming. Many anticipate the big release sometime in the spring of 2022. Therefore, investing in ETH at the moment could be hugely profitable following the ETH 2.0 release.
ADA, DOT, SOL: The Alternative Trio
At its root, cryptocurrency represents a revolutionary breakthrough technology. Any innovation to this technology always creates a stir and attracts investment. Ether was the first innovation after Bitcoin, but now there are new players who want to grab a significant share of the technological revolution that is internet 3.0.
There are many options, but three of them are worth considering;
– Cardano, with its ADA cryptocurrency
– Polkadot, with its crypto DOT
– Solana: SOL
If you could, we will really urge you to focus on these three digital assets. The year 2021 witnessed the vertical takeoff of Salona, which rose from $1.44 to $189.34. Cardona and Polkadots are also following suit mainly because of the new innovation they are introducing to the crypto ecosystem. Their Proof-of-Stake (PoS) consensus less energy consumption is the driving factor for their growth, and it’s expected to continue in 2022 and beyond.
Solana (SOL)
Solana is sometimes considered an Ethereum killer. Its price surged by almost 10,000 percent in 2021. Investors love its speed and cost-effective savings. Solana can execute 710,000 transactions per second, making it one of the fastest programmable blockchains on the market. It’s probably a compelling reason to onboard Solana, and 2022 is the right time because, with increasing interest, the token is gearing up for a big jump again.
Trading vs. Long Term Investment – Which Is Best And Why?
If you have come this far, congratulations because it means;
- You have a clear understanding of cryptocurrencies and how they work.
- Know where to buy and how to trade cryptocurrencies.
- You know about exchanges, where you can carry out your first investment in cryptocurrencies.
Let’s discuss the strategies you must adopt to make it big in the crypto world. Because crypto is a highly volatile game, without a clear vision and a perfect strategy, you are in for significant losses.
Basically, there are two widely applied strategies in an investment scenario, be it stock or cryptocurrencies: Long Term Investment and Short Term Trading. Both strategies have their potential and shortcomings. Both require a different approach, temperament, knowledge set, and risk appetite. But among the two, which one is better? According to us, its long term investment, or Hodl, as they say in cryptocurrency jargon. Let’s understand why!
Hodl
Hodl is the most straightforward and most used investment strategy in the crypto space because it is considered safe and offers better returns. The term Hodl refers to ‘Hold’ or ‘Maintain,’ and that is what investors do: buy the cryptocurrency and simply hold it for a long time. The premise is to hold the cryptocurrencies until the time being when they become a good bargain to make a considerable profit.
But Why ‘Hodl’ Or Long-Term Investment?
Unlike trading, where you have to keep a constant tab on the price movements to act accordingly, Hodling is pretty straightforward. You buy a cryptocurrency, hold it for long, and then sell it for big profits. It’s an investment philosophy, one that doesn’t require constant pouring over charts and graphs to predict the price movements. Apparently, Hodl strategy is easy, low risk, affordable for anyone, and stress-free. It’s the most recommended method for crypto beginners to test the water. But, to actually go with this strategy, you have to be clear that cryptocurrencies hold potential, and in the long run, they are a worthy investment.
Why Not Trade Cryptocurrencies?
Trading is another strategy involving buying and selling cryptocurrencies to make a profit. The idea is to buy low and sell high in the short term. One cannot utterly outcast trading because it can be hugely profitable in many scenarios. But it only happens when you are adept with the market terminologies and have a firm understanding of price movements and the factors that influence them.
In general, trading is not ideal, particularly for crypto novices. Traders make money exploiting the market volatility, but it can be as dangerous as it is profitable. Trading can be very tempting to beginners because most are in for quick profits. But they fail to apprehend that volatility is an indicator of risk, and just as your chances of profits increase, so does the possibility of loss.
Trading is pretty complex and risky, apart from the fact that loss incurred could be more considerable if there’s no precision in decision making. Mastering trading required patience, years of grueling, and practice. In fact, among the crypto community, it’s considered the fastest way to lose money. It’s because most of the majority do not have the necessary experience, the required patience, and the right knowledge to apply it correctly.
For this very reason, we do not recommend trading cryptocurrencies unless you have several years of experience and practice under your belt in the crypto world.
Safety
When investing in cryptocurrencies, people often wonder whether they are safe or not, because no one wants their money to disappear. But whenever the question arises of the safety of cryptocurrencies, it’s often referring to two concerns;
· Are cryptos safe as an investment?
· Being a digital currency, what is the risk that someone might turn my crypto balance to zero using unscrupulous means?
Since these are genuine concerns, therefore we will attempt each one separately to have a clear understanding.
How Safe Are Cryptocurrencies As An Investment?
In recent years cryptocurrencies have come up as lucrative investment opportunities. People have poured their money in hopes of multiplying it manifolds. But the question remains, how safe are cryptocurrency investments?
When you compare cryptos with other investment options, like stocks or government bonds, these undoubtedly appear riskier. Besides, the huge fluctuations are another huge concern and certainly can’t be ignored. In a recent blood bath after the LUNA incident, crypto space was stripped off half of its value – that’s above one trillion dollars. Bitcoin itself tanked half its price to what it initially traded in May 2022.
Besides, cryptocurrencies are still a fairly new avenue and are largely unregulated. Both these facts combined are partly responsible for the instability in the crypto market. Also, investors still have little understanding of how things work in the crypto world; this further exacerbates the volatility issue.
So, cryptocurrencies are more prone to market manipulations, volatility, and fluctuations. Therefore, it’s prudent to invest cautiously in cryptocurrencies and view them from a larger perspective, not for short-term profits.
How Secure Are Cryptocurrencies?
Cryptocurrencies exist in the digital world – a world is ridden with dubious characters ready to strike and dupe you of your money. So, security risks to cryptocurrencies are real. Here are some of the security risks associated with dealing with cryptocurrencies;
Cryptocurrency theft is possible and not an unheard phenomenon. In Fact, several incidents have happened where people lost their crypto assets. Even the safest crypto exchanges have been hacked. In 2019, hackers broke through the security of the Binance exchange and stole 40 million worth of cryptocurrencies. Therefore, going with a highly secure wallet to safely store your cryptocurrencies and applying additional security layers such as two-factor authentication is a must to properly safeguard your digital assets.
While dealing in cryptocurrencies, you have limited legal protection. Remember that cryptos often operate beyond government regulations. Financial authorities protect bank or card transactions. But if you lose your cryptocurrencies, there’s often a very slim chance that you can get them back. Also, there’s nothing much you can do legally because no central authority is responsible for the dealings or transactions.
Once a crypto transaction is complete, there’s no way you can revoke it. Cryptocurrency transactions are stored in blockchain, which is immutable and unalterable. Once the transaction is sealed in the blockchain, there’s nothing you can do to revert it. In case of an erroneous transaction, there’s no way to get a refund.
Legal
Virtual currency is no longer a discussion in nerd circles but a growing trend amongst investors. Initially, cryptocurrencies were only considered an experimental means of payment outside the established banking system. But today, virtual currencies are poised to revolutionize the financial sector.
The spectrum has even become more colorful, and cryptocurrencies are being used to fund ambitious projects or even companies. The rapid growth can blind investors from the regulatory aspects or overlook the legality issues. But knowing whether cryptocurrencies are legal in your country is imperative to avoid pitfalls in your crypto investment journey.
Are Cryptocurrencies Legal?
If you wish to enter the crypto world, you should know the legal compliance you must adhere to based on your location or country. The legal status of cryptocurrencies varies from country to country. In some countries, you can buy, sell or spend cryptocurrencies freely without attracting any government crackdown. However, in some places dealing in cryptocurrencies can land you in big trouble or even jail.
Additionally, there are certain legal technicalities regarding cryptocurrencies. Firstly, cryptocurrencies are not a thing but transferable and encrypted data stored in a forgery-proof ledger. Its value is assigned by the network involved – civil laws struggle to categorize such entities. Furthermore, the legal ruling about how to regulate transactions, prevent faulty or erroneous exchanges, or reverse them in case of theft or software mishandling is unclear. Therefore tying legal compliances to the crypto space is a challenge to governments.
In Which Countries Are Cryptocurrencies Not Legal?
In many parts of the world, cryptocurrencies are generally well accepted; however, there are still countries where trading in cryptocurrencies can land you in trouble. Reasons vary: some consider it to be a threat to their financial system, while others have not yet enacted regulations to control the trading of cryptocurrencies. Pakistan, Afghanistan, Algeria, Bangladesh, and Saudi Arabia still restrict the use of cryptocurrencies.
Countries Where Cryptocurrencies Are Partially Restricted
Some countries have not entirely banned cryptocurrencies but heavily regulated them. These countries restrict their financial institutions from trading with cryptocurrency exchanges and have put heavy taxes on income earned through digital assets. India is the most notable example where digital assets are heavily taxed. Besides, Qatar, Egypt, Morocco, and Indonesia restrict the use of cryptocurrencies to some extent.
Countries Where You Can Legally Deal In Cryptocurrencies
Despite all the doubts and concerns about cryptocurrencies, there are at least a hundred countries where cryptocurrencies are legal. These countries have a much more friendly approach to the crypto ecosystem and have enacted regulations to easily assimilate them into their financial system. The United States and Canada are prime examples, however, these countries have strict anti-money laundering laws in place to prevent cryptocurrency fraud. Similarly, most countries in the European Union have a thriving environment for cryptocurrencies.
Crypto Taxes
Many unaware users think that cryptocurrencies aren’t taxed. The pseudo-anonymity part of the crypto dealings has probably led to the popularisation of such belief; however, it’s far from the truth.
Although initially, the crypto ecosystem developed far from the grasp of government regulations, as it slowly began to gain traction, crypto taxation became a major point of consideration while discussing measures to regulate the crypto space.
Therefore, cryptocurrencies are not free money – whatever profit you make, you have to give a part of it to the government. And don’t think there’s no way the government can track your crypto transactions. In fact, there are several ways a crypto transaction can be traced back to you.
How Are Cryptocurrencies Taxed In The US?
If you reside in the US, you have to pay taxes on the profits made via cryptocurrencies. The IRS considers crypto as property and attributes similar tax laws to any other property.
How Are Cryptos Taxes In The UK?
The UK treats crypto as capital assets, and you will have to pay taxes while disposing of your crypto assets. It means that if you sell cryptocurrencies, exchange them or use them to make purchases; you have to pay taxes.
How Are Cryptocurrencies Taxed In France?
France also levies taxes on cryptocurrency transactions. All capital gains attract a single 30% flat tax. 12.8% of it goes to tax and 17.2% to social security contributions.
How Are Cryptocurrencies Taxed In Italy?
Authorities in Italy consider cryptocurrencies as foreign currency. Accordingly, any profit made via investment in cryptocurrencies, trading of cryptocurrencies, or exchanging cryptocurrencies with fiat money attracts a flat 26% tax.
How Are Cryptocurrencies Taxed In Australia?
Similar to the US, cryptocurrencies in Australia are considered to be property and therefore subject to capital gain tax. As an individual investor, the tax you pay for investing in cryptocurrencies is the same as the income tax.
Crypto Crash 2022 – Latest Events
The year 2022 is still halfway, yet the cryptocurrency market has already suffered two of the biggest crashes in history. Both events shook the very foundation of the crypto ecosystem and wiped away the wealth of trillions of dollars within days. Let’s check out how the events unfold and the reason behind the disaster of such a massive proportion.
May 2022 Crash – Terra Luna Plummet To Zero
May of 2022 witnessed a disaster in crypto space when Luna, a stable coin of the terra ecosystem, fell to the ground. It was a real shocker because just a month ago, the coin was flying high with an all-time high market valuation of $50bn. But then came May and the coin began its downward journey. Many couldn’t anticipate the upcoming disaster, but when the dust settled, Luna was gone – $50bn was turned to dust.
The market lost 50% of its value, and the situation only worsened because Luna stripped away Bitcoin value, too, which plummeted to half the price it was trading. Bitcoin found itself at $28,000 while Ethereum, the second-largest crypto coin, fell to the $1,625 mark.
June 2022 Crash – Bitcoin Spiralled Down To $24,137
If May 2022 was a bloodbath for cryptocurrencies, June 2022 brought no relief. It appears that the black days of cryptocurrencies are not over yet. The situation exacerbated by the Luna fall still haunts the market and has shooked investors’ confidence. The downward spiral of Bitcoin continued, and it fell below $25,100, the lowest in the last 18 months, falling 12% to $24,137. The fall of Bitcoin alone is sending panic waves across the market. Ethereum has also suffered a huge dip, and the cryptocurrency fell 17% to $ 1,222. When two of the giants of the crypto world are in blue, the entire crypto sector is bound to suffer. Consequently, the market tanked, witnessing a market cap contraction of 11.6% which means below one trillion dollars.
Reason
If you pick up any cryptocurrencies, there’s a high probability that you will find them in red. The cryptocurrency market is in a mess, and people are calling it to be a long winter. There is a general sense of panic in the market, and not only new investors but long-term veteran investors are feeling the heat of the crash. The global crypto capitalization has dipped more than two trillion after touching the all-time high of three trillion last November. But what led to this bloodbath of cryptocurrencies? Let’s take a look at why cryptocurrencies are crashing face down.
Crash Of Stable Coins
Last month, two of the most sought-after stable coins, Terra and Luna, tanked to the ground. Prior to the crash, LUNA had a market capitalization of around 50bn. There’s a common belief that stable coins are stable because they are priced equal to the US dollar. Their existence ensures that investors can easily move in and out of fiat without the need for third parties for approval.
When LUNA crashed, Terraform lab( parent company of Terra) tried to pump Bitcoin into the market to keep the price of Terra at 1 USD. But they failed, wiping around $50 billion from the market. The plight of the dollar-pegged cryptocurrency sent a panic wave in the market, creating a chain reaction that pulled down the entire market and turned trillion dollars into a whiff.
Recent Slowdown In Stock Markets
Although stock investing and crypto investing are two different turfs, the crypto market is influenced by the happenings of the stock market. If there is a downward trend or a slowdown in the stock market, it is immediately reflected in the crypto market. Unfortunately, stock markets have been faltering for some time, and tech stocks have plunged to a quarter of their original value – it was only a matter of time before the crypto market experienced the same fate.
Bonds Are Becoming More Interesting Again With The Turnaround In Interest Rates
Inflation is rampant, and the economy is in a slump. Governments are compelled to change interest rates in order to revive the economy. In these conditions, savings are already dwindling, and people are skeptical about investing in volatile assets like cryptos. Due to the increase in interest rates, government bonds appear to be a more lucrative investment opportunity. Consequently, private and large investors are withdrawing in bulk from the crypto market to invest in more risk-free options.
Future
Bitcoin is down by 56% in six months, and other cryptocurrencies are in the red too. What will be the future of cryptocurrencies and the relevance of investing in digital assets and their long-term value?
The cryptocurrency market is peaking in instability, facing turmoil following the current political and economic events. It’s been over two years since Bitcoin lost so much of its value. It has bifurcated investors into two groups – one is too skeptical, particularly shaken by the current situation, and thinks the market may not recover anytime soon. Others are a more optimistic bunch who see an opportunity to take profitable positions – a good bargain before the prices begin to rally again.
No matter which lot you belong to, the impact of cryptocurrencies on the financial sector will only increase. There’s a wider acceptance of cryptocurrencies among the masses, which won’t let the investment dry out. Those who are fully aware of the market’s volatility and invest with a sound strategy will still be able to make a profit.
Time events
A series of events led to the current turmoil in the crypto world. Let’s check them out;
November 2021
The golden month for BTC and cryptocurrencies as a whole. Bitcoin price hit an all-time high of $68,789. The rest of the market swiftly followed the growth, and Ethereum, another large cryptocurrency, breached its previous high and reached the peak price of $4,891.
January 2022
Central banks in the US were finally forced to intervene following the rising inflation. The US Federal Reserve moved to a 50-basis-point rate from a 25-basis-point rate hike.
May 2022
The tightening grip of central banks sucked away liquidity from the market, which responded with a steep price decline of risk assets. BTC lost 37% of its value and fell to $29,900.
LUNA, a stable coin, followed a dramatic decline, and the mounting pressure to keep the price stable at one dollar led to the biggest fall in crypto history – LUNA lost all its value.
June 2022
Bitcoin couldn’t recover from the previous month’s bloodbath and fell to $24,137, the lowest in 18 months. Ethereum followed suit and fell to 1,222, losing 17% of its value.
Final Verdict On A Beginners Guide To Cryptocurrency
As with many other things in life, cryptocurrencies are not all roses and sunshine. Cryptocurrencies are purely virtual – no bills, no coins, or loss insurance. Therefore it’s essential to have a certain level of crypto know-how to tread the crypto space safely. We hope this beginner’s guide to cryptocurrency must have helped you understand the world of virtual currencies.
Since the launch of Bitcoin, thousands of cryptocurrencies have emerged with different functionalities, market caps, and prices. A multitude of them will likely meet a disastrous fate ( Luna is a prime example), but some will undoubtedly continue to prosper.
Despite all the crashes and volatility, cryptos, in one way or the other, are going to take a stronghold on the financial landscape in the coming years. Therefore, it’s not aberrant for investors to take an interest in them. Given the possibilities, cryptos can be a worthwhile investment, provided you know the ecosystem well and understand what drives these financial instruments.