What You Need To Know About Cryptocurrency Before Investing
Cryptocurrency is a virtual or digital currency that uses cryptography for the screen. A defining point of cryptocurrencies is that they're decentralized, meaning they aren't subject to government or fiscal institution control.
Cryptocurrencies are becoming increasingly popular, with Bitcoin – the first and most well-known cryptocurrency – surged in value in recent years. However, cryptocurrency is still a relatively new phenomenon, and there is a lot of misinformation about it circulating.
This article will provide you with everything you need to know about cryptocurrency – what it is, how it works, and what to consider before investing. By the end, you’ll be equipped with the knowledge you need to make informed decisions about cryptocurrency investment.
Bitcoin Is Not The Only Cryptocurrency
All cryptocurrency is unique and derives value from the same underlying technology, but not all cryptocurrencies are the same. Some use cryptography to protect the transaction between users, while others use complex algorithms to verify transactions and prevent fraudulent activity.
Most popular and well-known cryptocurrencies include Bitcoin and Ethereum, but there are many more. One cryptocurrency that could be on the rise is Ripple. Not all digital currencies are based on Bitcoin, however. Some focus on specific verticals such as energy, blockchain, or other alternative currencies.
It’s also important to note that some cryptocurrencies aren’t meant to be used as currency – they’re used only to pay for certain services, such as utility payments.
What Is Blockchain?
To fully understand cryptocurrencies, it’s important to understand how blockchain technology works. Blockchain is essentially a massive database of recorded transactions. Whenever a user buys or sells a cryptocurrency, the entire transaction is in the ledger. All parties in the transaction are identified by a unique ID number. This is called a public or blockchain network, and it means all transactions are permanently preserved in a public record.
Because blockchain transactions are permanent, they can be verified and verified again if necessary. A user buying a cryptocurrency would have their transaction authenticated in the ledger. And because these transactions are in a digital format, they can also be stored on a computer for later retrieval. Because the blockchain itself is a digital asset, it can be transferred to anyone and doesn’t need an intermediary to transfer ownership.
How Can You Mine Cryptocurrency?
Cryptocurrencies are the result of complicated algorithms that are coded into the underlying software. While you might be familiar with traditional mining methods, there is a new process called “mining” that is being adopted by many cryptocurrency mining operations.
In the past, a computer needed to be dedicated to mining, but many crypto mining operations use cloud-based mining operations. For example, Coinbase, one of the largest bitcoin exchanges in the U.S., uses an Amazon cloud computing service to provide a means for customers to mine and trade cryptocurrencies.
What Is Hash Rate?
The amount of computing power a device uses to mine a cryptocurrency depends on the hashing rate – the number of calculations performed by a computer in a certain period.
A single individual with a relatively powerful laptop can’t expect to win any prizes at a crypto mining contest. However, a mining operation that uses cloud-based mining or power shared by some clients will increase the hashing rate of its computers. This type of cryptocurrency mining isn’t just for large operations. It also allows individual users to effectively make money by paying for the electricity they use to mine a cryptocurrency.
It’s a similar concept to selling or leasing physical land. While it’s difficult to know the exact amount of power consumed for cryptocurrency mining, there’s no question that a significant amount of electricity is consumed for mining cryptocurrencies. This can cost around a hundred dollars per month, and that amount will increase as the cryptocurrency market continues to increase in value.
How Does Blockchain Work?
While digital currency mining has been around since the mid-2000s, a different type of cryptocurrency was created in 2009. Called Bitcoin, it’s a relatively anonymous currency with a finite supply of 21 million coins. This makes it particularly attractive to those that want to hide their identities.
Although digital currency mining has existed for some years, only recently have high-powered computers become capable of generating a large number of digital coins. With this new technology comes a new method of mining – “ Proof of Work.”
The cryptocurrency that is being worked on is launched into an “un-launching” process, which simply means that it is moved from one section of the blockchain to another. This activity is called a “proof of work.” The more transactions in a particular block, or sector, that the miner creates, the more points they will get for the work they do.
So, while there is a small amount of computing power being used to mine cryptocurrencies, the amount is not an all-out competition. Instead, the processing power of the mining operation is used to validate and verify transactions in the digital ledger.
Today, some cryptocurrency mining operations use a so-called “Proof of Stake.”
Is it Safe to Buy or Mine Cryptocurrency?
While buying and selling cryptocurrencies is relatively easy, buying and selling are not at all easy. This is because there are some different currencies available, some of which are more volatile than others. When a cryptocurrency is in a steep decline, the price often plummets in a short period.
Because of this, some reputable financial institutions including large money exchanges, have advised users to use a virtual currency exchange for buying and selling cryptocurrencies, which are equipped to make sure that users’ accounts are protected.
Hackers have also been known to target online cryptocurrency exchanges, resulting in the loss of millions of dollars in cryptocurrencies. To safeguard its customers, Binance, one of the largest cryptocurrency exchanges, chose to open a new exchange in Singapore.
Buying a cryptocurrency is also a risky venture. Bitcoin recently reached an all-time high, and prices can change quickly. The company Coinbase says that a single transaction may take up to ten minutes to complete. Also, no central authority is in charge of managing the digital currency. That means that the authorities can change their mind and discontinue a given cryptocurrency without warning.
When to Buy Cryptocurrency
While buying cryptocurrency is more complicated than buying some physical real estate, there are still a few key factors that need to be taken into account. For one, buying virtual currency isn’t a guaranteed investment. The currency can be worth more one day, and less the next, and for investors, it can be difficult to know which ones are legitimate.
Another issue is that although the value of a cryptocurrency may increase or decrease at a quick rate, investors don’t always get a good read on what they should be investing in. The more unique and profitable an investment is, the more volatile its value is likely to be. This is one reason why it’s important to do your research before investing in a particular cryptocurrency.
Certainly, investing in a cryptocurrency is risky. But that doesn’t mean that it’s not a sound option for some investors.
