What is cryptocurrency? It’s all the same thing? What’s the difference? Is it to buy or invest? You have probably heard about bitcoin, that virtual currency that made some people make a lot of money - and some lose as much. Maybe you heard about another digital currency and wondered, after all.
What is cryptocurrency?
Cryptocurrency is the generic name for decentralized digital currencies, created on a blockchain network from advanced encryption systems that protect transactions, their information and the data of those who transact.
Do not understand anything? No problem, we’ll explain it step by step.
Cryptocurrencies are digital currencies because, unlike the real, the dollar and other currencies that can be touched, they only exist on the internet. That is, you know that they are true, but you cannot catch them with your hands - or keep them in your wallet, in the safe or under the mattress.
Decentralized because there is nobody or government responsible for controlling, intermediating, and authorizing currency issues, transfers, and other operations. Users do this themselves.
Created on a blockchain network because it is this technology that is behind cryptocurrencies. Basically, blockchain is a system that allows the sending and receiving of some types of information over the internet. They are pieces of code generated online that carry connected information, like blocks of data that form a chain - hence the name “chain of blocks”.
And in cryptography systems because it is this layer of security, guaranteed by the blockchain, that enables the issuance and transaction of virtual currencies more securely - when done correctly. It is from this technology, even, that the name cryptocurrency comes - cryptocurrency.
1.2 Are cryptocurrencies safe?
One of the pillars of cryptocurrencies is encryption: an online security layer that greatly hinders any kind of fraud.
In a very simplified way, encryption is a way of shuffling information so that only those who have the code - also called the “key” - can decipher it.
What can happen - and has already happened - is that digital wallets or bitcoin brokers are stolen. In 2019, one of the world’s largest cryptocurrency brokers reported that hackers had stolen $ 40.7 million in bitcoins using techniques like phishing and viruses.
The lack of regulation of digital currencies can also be a problem - and the Central Bank of Brazil itself warns of the risks on its website. Hacker attacks, server errors, and loss of virtual signature are some of the risks that can lead to the loss of all cryptocurrencies - and, consequently, of a high financial value.
What is cryptocurrency: black and white image of a lock-in front of a purple rectangle. A hand holding key approaches it.
1.3 Why did cryptocurrencies become so famous?
In recent years, cryptocurrencies have gained news from around the world mainly because of bitcoin, the world’s first digital currency, and its high volatility.
Like any other currency, bitcoin undergoes daily variations and follows the law of supply and demand: the more people wanting, the more expensive it gets - and vice versa.
This happens for a few reasons. One is that the amount of available bitcoins is limited: a maximum of 21 million coins can be issued - by 2019, an estimated 18 million had already been issued.
Another reason is that, like the stock market, the bitcoin market also operates from speculation. If people feel that the investment is not safe (because a cryptocurrency broker was stolen, for example), many sell their coins and the price plummets. If, on the other hand, the investment seems attractive, a lot of people wanting to buy makes the price increase.
Therefore, more than a currency for everyday transactions, bitcoin - like other cryptocurrencies - has come to be seen as a form of investment.
What are the main cryptocurrencies?
In recent years, several virtual currencies have emerged - there are already more than 2 thousand available -, but the main ones, by market value, are:
1.2 How to buy cryptocurrencies?
Buying cryptocurrencies is simple: just open an account with a virtual currency broker and start trading. But, first of all, it is essential to research the companies available on the market, check customer reviews, and understand the fees charged.
After all, this is a financial investment and, like any other, needs to be treated with care.
It is also important to remember that investing in cryptocurrencies presents a high risk since the value varies a lot over time. Therefore, experts recommend placing only a small portion of investments in this type of asset.
Four tips for securely investing in cryptocurrency
Investments are always risky, but some experts say that cryptocurrency is one of the riskiest investment options out there, according to Consumer Report. However, digital currencies are also some of the most popular commodities. Earlier this year, CNBC predicted that the cryptocurrency market was expected to reach a value of $ 1 trillion by the end of 2018. If you are planning to invest in cryptocurrency, these tips may help you make more judicious choices.
1. Search the stock exchanges
Before investing a single cent, learn more about cryptocurrency stock exchanges. These platforms offer ways to buy and sell digital currencies, but there are 500 stock exchanges to choose from, according to Bitcoin.com. Do some research, read the reviews and speak with more experienced investors before proceeding.
2. Learn how to store your digital currencies
If you buy cryptocurrency, you will need to store it. You can store it in a stock exchange or in a digital “wallet”. For example, one of the cryptocurrency wallets described in the post on our blog Which cryptocurrency wallet to choose. Although there are many different types of portfolios, each has its own advantages, technical requirements and security. Like stock exchanges, you should investigate your storage options before investing.
3. Diversify your investments
Diversification is the secret to any good investment strategy, and this is also true when investing in cryptocurrency. Don’t put all your money in bitcoins, for example, just because that’s the name you know. There are thousands of options, and it is best to spread your investments across multiple currencies.
4. Prepare for volatility
The cryptocurrency market is volatile; therefore, be prepared for ups and downs. You will see dramatic price changes. If your investment portfolio or mental well-being is not compatible with that, cryptocurrencies may not be a good choice for you.
Cryptocurrencies are the trend of the moment, but remember that they are still in the beginning. Investing in something new brings many challenges; so be prepared. If you intend to participate, do your research and, to start, invest conservatively.
How do cryptocurrencies impact your life?
Currently, unless you are an investor or enthusiast of cryptocurrencies, the truth is that they have little impact on the lives of the general population.
For many years, the market looked at bitcoin as a new transaction currency. In Brazil, real estate companies announced that they would accept digital currency as a form of payment.
Anyway, many people discuss the role of cryptocurrencies in the future. Some say that this will be the main form of transaction in a few years, but it is too early to say.
1.2 What is the security level of cryptocurrencies?
Generally, cryptocurrencies are created using blockchain technology. The blockchain describes how transactions are recorded in “blocks” and identified with a timestamp. It is a very technical and complex process, but the result is a digital ledger of cryptocurrency transactions difficult to be tampered with by hackers.
In addition, transactions require a two-factor authentication process. For example, you may be asked to enter a username and password to initiate a transaction. Then, you may need to enter an authentication code sent by text message to your personal cell phone.
Although protections are in place, this does not mean that cryptocurrencies cannot be hacked. In fact, several high-value hacks have caused significant damage to cryptocurrency startups.
However, cryptocurrencies have come to be increasingly seen as a financial asset - so much so that, today, little is said about using bitcoin to pay for a product, for example.
What are the advantages of cryptocurrency?
Here are the main benefits of using cryptocurrency.
Confidentiality: The names of users with cryptocurrencies are not public, unlike with credit cards and bank accounts.
Transparency: all transactions are recorded in a shared digital book (blockchain) accessible to all.
Decentralization: France is the first country in the European Union to legally regulate the use of digital currency. But in the absence of a centralized official market, cryptocurrency can be mined any time of the day, 7 days a week.
Globality: Cryptocurrency users are much less sensitive to the political-economic situation of countries. The currency is globally accessible and can be instantly transferred anywhere in the world.
Of course, depending on everyone’s interests, cryptocurrency will be viewed differently, in its best light or with its worst drawbacks.
What are the disadvantages of cryptocurrency?
Here are what can be considered to be the most common drawbacks of digital currency or cryptocurrency.
Reduced Acceptance: Although their popularity is increasing, cryptocurrencies are not accepted by everyone and their future can be seen as uncertain.
Volatility: Since the price is set by the law of supply and demand, prices may fluctuate considerably. This can lead to large losses, but also makes them very interesting for speculation.
The use of cryptocurrencies has been associated with illegal transactions in the past and therefore its use in some countries is prohibited.
Frequently Asked Questions(FAQs)
1. What is a cryptocurrency?
The term cryptocurrency refers to both a virtual currency and the peer-to-peer payment system that goes with it. These are virtual currencies without physical media, not regulated by a central body and whose value is not indexed to a legal currency or a commodity.
2. How to invest in a cryptocurrency?
You can invest in cryptocurrency by purchasing tokens through a specialized platform. You can also trade cryptocurrency through an online broker like eToro, investing in a derivative that has virtual currency as its underlying. Be careful in any case to only devote a very small part of your assets to this type of investment.
3. What makes the value of a virtual currency?
The price of a cryptocurrency is linked to the confidence it inspires among investors, to its technical characteristics, to the ease with which we can or not buy things in real life with it, but also to the possible more -value that the virtual currency will allow achieving.
4. What is the cryptocurrency used for?
There are several reasons to use a cryptocurrency: to buy goods and services, to realize short-term capital gain for the purpose of speculation or to invest for the long term.
Cryptocurrencies are no longer a matter of science fiction, they are real and they are not owned by any state. They are used for non-cash settlements and for those investors with a vision of the future who want to get rich.
Investing in cryptocurrencies implies generating large profits through a relatively young market, where the most optimistic and visionary investors look to the future to buy the cryptocurrencies with the greatest potential.
However, do not forget that before investing you need to do your own research. That way your investments will be safe and unlikely to lose.