What is Cryptocurrency - How To Invest

Learn more about what is cryptocurrency, how to buy cryptocurrencies, advantages of buying crypto coins, how does the cryptocurrency market works.

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What Is Cryptocurrency?

A cryptocurrency (or “crypto”) is a digital currency that can be used to buy goods and services, but uses an online ledger with strong cryptography to secure online transactions. Much of the interest in these unregulated currencies is to trade for profit, with speculators at times driving prices skyward.

Cryptocurrency is a currency and hence it is an asset. Therefore, cryptocurrency transactions are subject to tax like any other asset or currency. Cryptocurrency transaction may attract capital gain tax, income tax, transaction tax, and wealth tax. Even if cryptocurrency transaction is void and illegal, the tax law is empowered to charge taxes on such transactions.

Cryptocurrency may be considered as medium of exchange, negotiable instrument, property, and subject of the contract. Depending upon the transaction and power of legislation to tax such transaction, tax incidences are pertinent for cryptocurrency.

How do cryptocurrencies work?

Cryptocurrency works a lot like PayPal or a credit card, except you exchange digital assets for goods and services instead of US dollars. To make a transaction with cryptocurrency, you must exchange currency with a peer using a digital wallet known as a cryptocurrency wallet.

The main difference between cryptocurrency and bank credit is that instead of banks and governments issuing the currency and keeping ledgers, an algorithm does.

Cryptocurrency transactions are recorded in perpetuity on the underlying blockchain. Groups of transactions are added to the ‘chain’ in the form of ‘blocks,’ which validate the authenticity of the transactions and keep the network up and running.

Transactions made between peers are encrypted and then broadcast to the cryptocurrency’s network and queued up to be added to the public ledger. Transactions are then recorded on the public ledger via a process called “mining” (explained below). All users of a given cryptocurrency have access to the ledger if they choose to access it, for example by downloading and running a copy of the software called a “full node” wallet (as opposed to holding their coins in a third party wallet like Coinbase).

A feature of most cryptocurrencies is that they have been designed to slowly reduce production and some have an absolute limit on supply. Consequently, in some cases only a limited number of units of the currency will ever be in circulation. For example, the number of bitcoins is not expected to exceed 21 million. Cryptocurrencies such as ethereum, on the other hand, work slightly differently. Issuance is capped at 18 million ethereum tokens per year, which equals 25% of the initial supply. Limiting the number gives it higher value.

What is blockchain technology?

The blockchain is like a decentralized bank ledger, in both cases, the ledger is a record of transactions and balances. When a cryptocurrency transaction is made, that transaction is sent out to all users hosting a copy of the blockchain. Specific types of users called miners then try to solve a cryptographic puzzle (using software) which lets them add a “block” of transactions to the ledger.

Whoever solves the puzzle first gets a few “newly mined” coins as a reward (they also get transaction fees paid by those who created the transactions).

A blockchain is the decentralised, public ledger or list of a cryptocurrency’s transactions. Completed blocks, comprised of the latest transactions, are recorded and added to the blockchain. They are stored in chronological order as an open, permanent and verifiable record. An ever evolving network of market participants manage blockchains, and they follow a set protocol for validating new blocks.

Each ‘node’ or computer connected to the network automatically downloads a copy of the blockchain. This allows everyone to track transactions without the need for central record keeping.

How to invest in cryptocurrency?

Cryptocurrencies have emerged as an asset class that provides you with a chance to invest and earn substantial returns. Despite the lack of government backing, this asset class, has garnered massive popularity in recent years. The probability of handsome returns over a short period has propelled investors to jump onto the crypto bandwagon.

Steps needed when it comes to invest in cryptocurrency:

Can cryptocurrencies be used to make online purchases?

A limited number of retailers take Bitcoin in exchange for goods and services, but unlike its reputation, they are often regular, run-of-the-mill companies, not black market operations. Currently, some Shopify store owners (under a variety of brands) will take Bitcoin, as do Overstock.com and Newegg.

There are several advantages to using Bitcoin for transactions. However, the two main advantages of using the cryptocurrency are its peer-to-peer focus that removes intermediaries and its pseudonymous design that eliminates the need for identification information for both parties.

Why should you invest in cryptocurrency?

Cryptocurrency is a good investment if you want to gain direct exposure to the demand for digital currency, while a safer but potentially less lucrative alternative is to buy the stocks of companies with exposure to cryptocurrency.

Many cryptocurrencies like Bitcoin and Ethereum are launched with lofty objectives, which may be achieved over long time horizons. While the success of any cryptocurrency project is not assured, if a cryptocurrency project achieves it goals, then early investors could be richly rewarded over the long term.

Like any investment, making money depends on what price you buy and sell an asset for. If you sell when its price is higher than you bought it for, you will make money.

If you sell for a lower price than you bought it for, you will lose money.

SHORT TAKEAWAYS

  • Cryptocurrencies, like bitcoin, are a form of payment that uses blockchain technology to send data in cyberspace.
  • Cryptocurrencies are “decentralised” meaning they are not regulated by a financial authority, like a government or central banks.
  • The potential for making payments with Bitcoin has improved following technological advancements such as the Lightning Network.
  • Bitcoin transactions are especially useful for international transfers.
  • There are several complex security protocols that should be followed carefully before buying cryptocurrency.
  • Investment: If you haven’t got much money left at the end of each month, it’s best to steer clear of crypto and focus on saving your money instead.

The 5 most common cryptocurrencies

Bitcoin

Bitcoin was the first cryptocurrency to be created in 2009 by a person (or possibly a group) that goes by the pseudonym Satoshi Nakamoto. As noted above, there are more than 18.8 million Bitcoin tokens in circulation as of September 2021, against a capped limit of 21 million.

Etherum

Like Bitcoin, Ethereum is a blockchain network, but Ethereum was designed as a programmable blockchain, meaning it wasn’t created to support a currency — but to enable the network’s users to create, publish, monetize, and use applications (called “dApps”). Ether (ETH), the native Ethereum currency, was developed as a form of payment on the Ethereum platform.

Cardano (ADA)

Cardano bills itself as a third-generation blockchain platform, to cast itself as a next-level player. Cardano relies on proof-of-stake (PoS), meaning that the complicated PoW calculations and high electricity usage required for mining coins like Bitcoin aren’t necessary, potentially making its network more efficient and sustainable. Its cryptocurrency is called ada, after Ada Lovelace, a 19th-century mathematician.

Binance Coin (BNB)

Binance is one of the world’s biggest cryptocurrency exchanges, and Binance Coin (BNB) is a cryptocurrency token that was created to be used as a medium of exchange on Binance. It was initially built on the Ethereum blockchain, but now lives on Binance’s own blockchain platform. BNB was created as a utility token in 2017 that allowed traders to get discounts on trading fees on Binance, but now it can also be used for payments, to book travel, for entertainment, online services, and even financial services.

Tether

Tether was the first cryptocurrency marketed as a “stablecoin” — a breed of crypto known as fiat-collateralized stablecoins. The value of the tether is pegged to a fiat currency — in this case, the U.S. dollar. Like other stablecoins, the tether is designed to offer stability, transparency, and lower transaction charges to users. Tether is not a speculative investment like some cryptocurrencies; rather it can be used by investors who want to avoid the extreme volatility of the crypto market.