What Is Cryptocurrency And How Can I Invest In It?
What Is Cryptocurrency?
Cryptocurrency is a form of digital currency which is built on blockchain technology, doesn’t have a physical form and uses cryptography to secure its transactions. And while cryptocurrencies have some similar features to PayPal or digital fiat money, for example, you can transfer money to your friends or pay for products and services, it has some key differences which make it unique.
Cryptocurrency is decentralized which means it is spread out across the network of nodes. So even if one node goes offline, you’ll still be able to get information from other nodes. That’s why crypto is available 24/7. And that’s why it’s often called permissionless, anyone with Internet connection can make transactions at any time.
When using cryptocurrencies, you won’t need to provide any unnecessary personal information which means your information can’t be accessed by a bank, government, advertisers or payment services. And because your information remains confidential there are fewer risks of falling victim to fraud or identity theft.
Cryptocurrency is not controlled by any government or central bank. Cryptocurrency transactions are recorded on a public ledger called the blockchain where each transaction is timestamped, allowing users to verify the chronological order of transactions. Though there are many different types of cryptocurrencies available today, all use blockchain technology as their underlying structure for recording information about transactions on their network.
There are 2 main types of cryptocurrencies: coins and tokens. Coins are cryptocurrencies that exist on the basis of their own blockchain. For example, Ether is a native coin of the Ethereum blockchain and Bitcoin is a native coin of the Bitcoin Blockchain. All other coins that are not Bitcoin, are known as altcoins.
Another type of cryptocurrency, which is commonly used, is called a stablecoin. Stablecoin is a cryptocurrency which is tied to a certain external reference, such as national currencies, precious metals or commodities. Stablecoins are aimed to provide stability in the highly volatile crypto trading space. Most stablecoins are tied to US dollar.
Bitcoin is the first-ever and the most well-known cryptocurrency, which has been around since 2009 and has been trading at more than $60,000 per coin in November 2021. As of October 17, Bitcoin is trading at $19,531. Since 2009 thousands of cryptocurrencies have been created and as of 2021 there are over 18000 of them in the market and a new one pops up every day.
How Can I Invest In Cryptocurrencies?
There are multiple platforms which allow you to invest and trade in cryptocurrencies. Which one will work for you will depend on whether you want to buy crypto with fiat money such as dollars, pounds, rubles, Indian rupees or dirhams or if you’re already holding some crypto and want to exchange it for other crypto assets.
If you want to purchase crypto with fiat money you can either use traditional finance apps like PayPal, a centralized exchange or a centralized wallet.
Traditional Finance Apps: There are a few traditional financial apps that allow you to buy certain coins. PayPal for example allows its users to purchase 4 cryptocurrencies: Bitcoin, Ether, Bitcoin Cash and Litecoin. Popular stock brokerage Robinhood has also introduced 7 cryptocurrencies to its platform. Using traditional finance apps can be beneficial for those who already have an existing account and are not yet ready to trust crypto platforms.
Centralized exchanges: Another option to buy cryptocurrencies with fiat money is through a centralized crypto exchange. Centralized means there’s a private company that holds your funds. This company acts as a custodian and is responsible for conducting all trades and transactions. These exchanges have multiple advantages: they usually have easy UI, customer support available and in case you lose your account access, they can help you restore your account. Additionally, they offer a much wider range of crypto assets as compared to traditional financial apps. However, Centralized Exchanges require you to follow KYC (Know Your Customer) process which means you no longer remain anonymous.
Centralized Wallets: 3rd option to buy crypto with fiat money is through a centralized wallet provider. A wallet is a software or a mobile app that allows you to store, transfer and receive different types of coins and tokens. Through a centralized wallet you can also buy cryptocurrencies using your debit or credit card. However, you can only buy it at a market price and you won’t be able to set your own price as you can do on an exchange. Some examples of centralized crypto wallets are – Coinomi, Xapo, Coinbase Wallet, Bitgo and Luno.
If you already hold cryptocurrencies, you can exchange them for other crypto assets through decentralized exchanges or decentralized wallets. Additionally, on centralized exchanges which we already covered, you can make crypto-to-crypto transactions as well.
One of the options to exchange the crypto you hold for other crypto assets is through a decentralized exchange. Decentralized means there’s no 3rd party custodian that holds your funds. All of the transactions and trades are processed automatically through smart contracts. This makes such exchanges more secure and protected from hackers and infrastructure downtimes. There’s also usually no requirement for you to share your personal information, which is great for those who’d like to remain anonymous. Yet if an attack happens or you lose your wallet access, then you won’t be able to recover your funds as there’s no way to prove your identity. Additionally, these exchanges usually have lower liquidity and limited functionality.