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What is a cryptocurrency and how is it used?

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Cryptocurrency is any kind of currency in digital or virtual form; To protect transactions in cryptocurrency, encryption (cryptography) is used. There is no central authority to issue or regulate cryptocurrencies. A decentralized system is used to record transactions and issue new units.

What is a cryptocurrency?

Cryptocurrency is a digital payment system that does not involve banks in verifying transactions. It is a peer-to-peer system that allows anyone, anywhere, to send and receive payments . Cryptocurrency payments exist exclusively digitally in an online database describing specific transactions. They do not imply transactions with physical money that have circulation and the possibility of exchange exchange in the real world. When transferring funds in cryptocurrency, transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.

The term Cryptocurrency came into use due to the fact that encryption (cryptography) is used to verify transactions: advanced coding is used to store and transfer cryptocurrency data between wallets and to public registries. The purpose of encryption is to provide reliability and security.

The first cryptocurrency was bitcoin , created in 2009 and the most famous to date. Cryptocurrency trading is interesting in terms of making a profit; as a result of speculative activities, price jumps for cryptocurrencies are periodically observed.

How is cryptocurrency applied?

Cryptocurrencies are processed in a distributed public ledger – blockchain, where records of all transactions are stored, updated by currency holders.

Cryptocurrency units (coins) are created during the mining process. This is a process in which the processing power of a computer is used to solve complex mathematical problems, resulting in the generation of coins. Users can also buy currency from brokers and then store and spend it using cryptographic wallets.

Cryptocurrency is not a material object, it is a key that allows you to move a record or unit of measure from one person to another without a trusted third party.

Bitcoin has been around since 2009, but financially, cryptocurrencies and the application of blockchain technology are still in their infancy; their rapid development is expected in the future. In the future, cryptocurrencies can be used in trading transactions with stocks, bonds and other financial assets.

Examples of cryptocurrencies

There are thousands of cryptocurrencies. The most famous of them are listed below:

bitcoin

Bitcoin, created in 2009, became the first cryptocurrency and still retains the highest popularity. The currency was designed by Satoshi Nakamoto and is believed to be a pseudonym for a person or group of people, while the exact identity of the developer remains unknown.

Ethereum (Ethereum)

The Ethereum blockchain platform was developed in 2015. It has its own cryptocurrency Ether (ETH) or Ethereum. It is the most popular cryptocurrency after bitcoin.

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Litecoin

This currency is most similar to bitcoin, but innovations such as faster payments and processes that allow more transactions are more quickly developed in it.

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 Ripple platform developer has worked with various banks and financial institutions.

Cryptocurrencies other than bitcoin are collectively referred to as “altcoins” to distinguish them from the original.

How to buy cryptocurrency?

The question may arise how to safely buy cryptocurrency. This usually happens in three stages.

Step 1. Platform selection

The first step is to choose a platform to use. As a rule, one can choose between a traditional broker or a specialized cryptocurrency exchange.

  • traditional brokers. These are online brokers offering the purchase and sale of cryptocurrencies, as well as other financial assets: stocks, bonds, ETFs. These platforms tend to offer lower trading fees but fewer crypto features.
  • Cryptocurrency exchanges. There are many cryptocurrency exchanges, each offering different cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge fees based on the assets traded.

When comparing platforms, it is a good idea to look at the cryptocurrencies traded, fees, security features, storage and withdrawal options, and educational resources.

Step 2. Depositing funds to the account

The next step after choosing a platform is to fund your account so that you can start trading. Most cryptocurrency exchanges, depending on the platform, allow users to buy cryptocurrencies with fiduciary (government-issued) currencies such as the US dollar, British pound, euro, and when paying with debit or credit cards.

Cryptocurrency purchases with credit card payments are considered risky and are therefore not supported by all exchanges. Some credit card companies also do not allow cryptocurrency transactions. This is due to the extremely high volatility of cryptocurrencies – when trading certain assets, it is not recommended to take risks by making transactions on credit or potentially paying high commissions for credit card transactions.

Some platforms also accept ACH transfers (automated clearing house transfers) and wire transfers. Accepted payment methods and deposit and withdrawal times vary by platform, while deposit clearing times vary by payment method.

An important factor to look out for is the size of the fees, which includes potential fees for depositing and withdrawing funds, as well as trading fees. Fees vary by payment method and platform. This question is recommended to be studied at the platform selection stage.

Step 3: Placing an order

Orders can be placed through the website or mobile app of the selected broker or exchange. To buy cryptocurrency, you need to select the “Buy” option, the type of order, specify the amount of the purchased cryptocurrency and confirm the order. A sell order is placed in the same way.

There are other ways to invest in cryptocurrencies. These include payment services such as PayPal, Cash App, and Venmo that allow you to buy, sell, and store cryptocurrencies. In addition, there are the following investment instruments:

  • Bitcoin Trusts . Bitcoin trust shares can be purchased with a regular brokerage account. Such instruments provide individual investors with access to cryptocurrencies through the stock market.
  • Bitcoin Mutual Funds . There are Bitcoin-pegged ETFs as well as Bitcoin mutual funds.
  • Blockchain stocks and ETFs . You can indirectly invest in cryptocurrencies through blockchain companies that specialize in the technologies underlying cryptocurrency mining and cryptocurrency transactions. Alternatively, you can buy shares or ETFs of companies using blockchain technology.

The best option depends on investment goals and risk appetite.

How to store cryptocurrency?

After the acquisition, it is necessary to ensure reliable storage of the cryptocurrency, which guarantees protection against hacking and theft. Cryptocurrency is usually stored in crypto wallets. These are physical devices or online programs used to securely store private keys to cryptocurrencies. Some exchanges provide wallet services, thanks to which the storage of cryptocurrency funds is carried out directly by the platform itself, however, not all exchanges and brokers automatically provide such services.

There are also different wallet providers. There are two types of funds storage: “hot wallet” and “cold wallet”.

  • A hot wallet is a cryptographic storage that uses online programs to protect private keys to assets.
  • A cold wallet (also called a hardware wallet), unlike a hot wallet, uses offline electronic devices to securely store private keys.

As a rule, there is a fee for using cold wallets, while there is no fee for using hot wallets.

How to buy cryptocurrency.

What can be bought with cryptocurrency?

Initially, bitcoin was conceived as a means of daily transactions, allowing you to buy anything from a cup of coffee to a computer or even high-value items such as real estate. These plans have not yet been fully realized. Despite the growth in the number of institutions accepting cryptocurrencies, large transactions using cryptocurrencies are quite rare. However, cryptocurrencies can be used to buy various goods on e-commerce sites. Let’s give some examples.

Technology company and e-commerce websites

On the websites of individual companies selling technology products, you can pay in cryptocurrency. Examples are newegg.com, AT&T and Microsoft. E-commerce platform Overstock was one of the first sites to accept bitcoin. You can also use Bitcoin to pay for purchases on Shopify, Rakuten, and Home Depot.

Luxury items

Some luxury retailers accept cryptocurrency as a form of payment. For example, online luxury retailer Bitdials offers Rolex, Patek Philippe and other exclusive watches for Bitcoin.

Cars

Some auto dealers, from mass brand sellers to luxury dealers, also accept cryptocurrencies as payment.

Insurance

In April 2021, the Swiss insurance company AXA announced that it would begin accepting bitcoin as a payment method for all insurance programs except for life insurance (due to regulatory issues). Premier Shield Insurance, which sells real estate and auto insurance policies in the US, also accepts bitcoin to pay insurance premiums.

To pay with crypto in a store that does not accept it directly, you can use a crypto debit card, such as BitPay in the US.

Cryptocurrency scam

Unfortunately, there has been an increase in the number of crimes related to cryptocurrency. Cryptocurrency-related fraud can take one of the following forms.

Fake websites . Scam sites with fake reviews and crypto jargon that promise huge guaranteed returns if you keep investing.

Virtual financial pyramids . Cryptocurrency scammers advertise non-existent opportunities for investing in digital currencies, creating the illusion of huge profits, while paying off earlier investors with new investors’ money. The BitClub Network scam raised over $700 million before the participants were charged in December 2019 .

Pseudo-Billionaires Supporting Cryptocurrency . Posing as billionaires and famous personalities on the Internet, scammers promise to increase investments in virtual currency, but in reality they appropriate the funds sent by users. Fraudsters can also use messaging apps or chat rooms to spread the word that a well-known businessman supports a particular cryptocurrency. As a result, investors start buying cryptocurrency, the price rises, and then the scammers sell their share, and the price of the currency falls.

Online Dating Fraud . The FBI reports an emerging trend of online dating scams , where users of dating apps or social media are persuaded to start investing or trading virtual currencies. In the first seven months of 2021, the FBI Internet Fraud Complaint Center received more than 1,800 reports of online dating scams related to cryptocurrency; while losses reached $133 million.

Fraudsters can also impersonate real virtual currency traders or set up fake exchanges to trick users into giving them money. Another type of cryptocurrency scam is fraudulent offers to sell individual retirement accounts in cryptocurrencies. Then there is a hacking of cryptocurrency wallets and theft of virtual currency.

Is Cryptocurrency Safe?

Cryptocurrencies are usually based on the use of blockchain technology, which describes the way transactions are recorded in blocks with time stamps. This is a rather complex technical process, which results in a digital ledger of cryptocurrency transactions that is sufficiently resistant to hacking.

In addition, two-factor authentication is required to complete transactions. For example, you may need to enter a username and password to start a transaction. You may then have to enter an authentication code sent as a text message to your mobile phone.

However, all these security measures do not exclude the possibility of cryptocurrencies being hacked. Several major hacks have cost crypto startups dearly. The two largest cryptocurrency hacks in 2018 are the $534 million Coincheck crypto wallet hack and the $195 million BitGrail crypto exchange hack.

Unlike government-backed money, the value of virtual currencies is entirely determined by supply and demand. This can cause sharp fluctuations that can bring investors both significant profits and significant losses. In addition, investments in cryptocurrencies are much less subject to regulatory protection than traditional financial products such as stocks, bonds, and mutual funds.

Tips for Safe Investing in Cryptocurrency

According to consumer reports, all investments involve risk, but a number of experts consider cryptocurrency to be one of the riskiest investment options. If you are considering investing in cryptocurrencies, the following tips will help you make an informed choice.

Analyze existing exchanges

Before you start investing, learn as much as you can about cryptocurrency exchanges. It is estimated that there are more than 500 exchanges. To get started, conduct an analysis, read reviews and consult with more experienced investors.

Learn how to store digital currency

The purchased cryptocurrency can be stored either on the exchange or in a digital wallet. There are different types of wallets, each with its own benefits, technical requirements, and security level. As with exchanges, it is a good idea to explore the different options for storing cryptocurrencies before you start investing.

Diversify your investments

Diversification is the key to a successful investment strategy. This is also true for investing in cryptocurrencies. For example, you should not invest all your money in bitcoin just because it is a well-known name. There are thousands of investment options and it is better to spread funds across multiple currencies.

Get ready for high volatility

The cryptocurrency market is very volatile, so be prepared for drastic currency price fluctuations. If your investment portfolio or mental well-being cannot withstand such fluctuations, cryptocurrencies may not be the best choice.

Cryptocurrency is now in vogue, however, the cryptocurrency market is still in its infancy, and the currency itself is considered highly speculative. Investing in something new often comes with challenges, so be prepared, do your research, and invest conservatively in the early stages.

One of the best ways to stay safe online is to use a comprehensive antivirus solution. Kaspersky Internet Security helps protect against malware, spyware, data theft, and secures online payments with strong encryption.

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