Cryptocurrency is everywhere. You’ve seen it advertised on TV and heard about it on your favorite podcasts. Now is the time to break down the basics.
WASHINGTON – Does it feel like cryptocurrency is everywhere you look? Super Bowl ads, social media ads, and all that bitcoin talk. If it wasn’t obvious before, cryptocurrency has officially hit the mainstream.
If you have questions about cryptocurrency and don’t know where to start, you’ve come to the right place.
Welcome to Cryptocurrency 101: Cryptocurrency Basics. In this article, we will break down cryptocurrency into four parts:
- What is Cryptocurrency?
- What makes it valuable?
- The process of investing and buying cryptocurrency?
- What are the risks of cryptocurrency?
What is Cryptocurrency?
Encryption, Bitcoin, digital wallets and private keys. These are all cryptocurrency terms you may have heard before, but what do they mean?
Cryptocurrency is a currency or medium of exchange based on code resolution. The word itself is made up of two words. Cryptography, the study and practice of sending secure messages or data between two or more parties and currency, a monetary system.
Bidisha Chakrabarty, Ph.D., of Saint Louis University, broke down cryptocurrency into three parts.
“To narrow it down to the definition of cryptocurrency, it’s those currencies that are crypto, which means they have to be digitized, encrypted, and decentralized,” Chakrabarty said.
Unlike silver or gold, cryptocurrency does not exist physically but exists on computers in a series of numbers, which makes it digitized. Cryptocurrency is not measured in quantities like the dollar, for example, but is expressed in numbers of zero and one. Because cryptocurrency is expressed in numbers, it means that it is encrypted and stored on a network of computers.
“What this process does is very simply it takes this original representation of the currency, the cryptocurrency that you’re trying to hold, and then it encrypts it, you know, call it plain text. And then, when you send it to someone, just like you would make a transaction with any currency that you authorize someone to use, you are going to give them a way to decode it on their end,” Chakrabarty said.
With centralized currencies like the US dollar, transactions are verified through your bank, but with cryptocurrency, the process is different. This is where blockchain comes in.
According to Coinbase, a blockchain is a list of transactions that anyone can see and verify. Blockchain technology makes it possible to transfer money online without an intermediary.
“Cryptocurrencies use blockchains to hold those transactions, and because those cryptocurrency transactions are held in that blockchain, there’s no need for a central party like a bank,” Chakrabarty said.
According to Investopedia, a blockchain records each transaction as a “block” of data, and this data cannot be deleted or modified. Blockchains are described as a form of public ledger where your transaction details are recorded and verified by people in your network.
What makes cryptocurrency valuable?
In recent years, cryptocurrencies have popped up like weeds.
The cryptocurrency is so popular that after 22 years of operation, the Lakers and Clippers arena was renamed Crypto.com Arena in December 2021.
Bitcoin, the first and most well-known cryptocurrency, has a current value of tens of thousands of dollars and at one point exceeded $70,000.
Okay, so cryptocurrency is popular, but what determines its monetary value?
Professor Andrew Wu of the University of Michigan teaches cryptocurrency to over 120,000 students, and he says the reasoning behind the value of cryptocurrency is very simple.
“The real value that these units have in people’s minds, like Bitcoin, for example, is what people think it is,” Wu explained.
Because a group of people put a monetary value on Bitcoin and other cryptocurrencies, people are now willing to pay for it, even if it costs $40,000.
You’re probably wondering why people attribute value to crypto, and it’s because Bitcoin and other cryptocurrencies have certain characteristics that make them attractive as a mode of exchange.
For example, the nature of cryptocurrency imposes a strict limit on the number of units that can exist. This means that the supply is limited. This makes it different from cash, which governments can always print more of, driving down the value of money. Crypto can be a hedge against this kind of inflation.
Not everyone is obligated to accept Bitcoin’s value if enough people accept it, and the more people who accept Bitcoin’s value, the more its value can increase.
“People believe it has some value, for example, either as an inflation hedge or as a means of a speculative vehicle. So it’s very similar to a digital version of gold, and that’s basically the case for almost all of these cryptocurrencies out there,” Professor Wu said.
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How do you invest/buy cryptocurrency?
So now that we know what cryptocurrency is and what makes it valuable, let’s talk about how you can invest and buy cryptocurrency.
First, you need to choose a cryptocurrency exchange. A cryptocurrency exchange is a platform where you can buy, sell and trade cryptocurrency. There are many exchanges out there, so it is important to spend some time researching all the exchanges before making your decision. Some exchanges have fees, others have a higher level of security, and some are for beginners. So choose the one that best suits your investment needs.
“Don’t go to strangers, you know. It doesn’t matter what they tell you. They might give you bonuses to redeem, they might, you know, have a bunch of promotional campaigns. Don’t do this because they could easily take your money,” Wu said.
After choosing a crypto exchange, the process is very similar to the stock market. Create an account with this exchange and fund your account with fiat money. Fiat, i.e. a currency issued by the government, such as the US dollar.
After funding your account, decide which crypto you want to buy. Coinmarket.com displays a plethora of cryptocurrencies to choose from, including Bitcoin, Ethereum, and Dogecoin.
Once you have done this, place a buy order for your crypto and store your crypto in a digital wallet, which protects your private keys and cryptocurrency.
Your private key is like a password. According to Coinbaseit is a string of letters and numbers that allows you to access and manage your cryptocurrency.
Traditional stock investing apps like Robinhood, PayPal, and Cashapp have also added crypto trading for its users. Same Costar allows you to buy bitcoin.
Bidisha Chakrabarty, Ph.D., said if you’ve ever used Apple Pay or Venmo, you know how this process works.
“Then you could just use this digital wallet. From this wallet, you can use the cryptocurrency you have purchased to make payments to other entities that will accept that cryptocurrency. Now, not everyone accepts all cryptocurrencies unlike, say, dollars. Everyone accepts dollars as payment in this country, but cryptocurrencies are not that way,” Chakrabarty said.
What are the risks of buying and investing in cryptocurrency?
Of course, with the excitement of any new financial venture comes potential risk for investors.
The Federal Trade Commission shared last year that 7,000 people had reported losses related to fake cryptocurrency investments. Losses totaled more than $80 million. The report also noted that people between the ages of 20 and 30 lost more money on investment scams than any other type of fraud.
The FTC warned cryptocurrency investors to be sure to research before investing, to be wary of grand promises or promotions, and said anyone who asks you to pay by cryptocurrency, wire banking or gift card could be a scammer.
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