Facebook caused a bit of a stir in late 2019 by saying it was going to enter the cryptocurrency market. You might know cryptocurrencies had a moment in the stock market run in 2018. At other times, they’re considered particularly suspicious.
All this probably has you asking what on Earth a cryptocurrency actually is and how it works. Before you decide to bet the house on it, take a look at our cryptocurrency 101 guide.
Cryptocurrency 101: What Is It?
The first thing any cryptocurrency beginner should understand is what a cryptocurrency is. You’ve probably heard of Bitcoin. You may have heard of a few more currencies, or you’re keeping an eye on chatter about what Facebook and other players are up to.
A cryptocurrency is effectually a digital currency. Some people think this is the way of the future, while others are deeply suspicious of it. Both sides have some valid points.
A digital currency doesn’t exist in a physical form, unlike paper money or even a credit card. In many ways, much of the world’s currency is already digital.
Take your credit card limit for example. You could walk into the bank and ask them to hand you the cash, but you wouldn’t. Instead, whenever you use your card, funds are recorded as moving from one account to another.
The same is true of payment apps like Paypal and Venmo. Your account will be credited when someone pays you and debited when you pay someone else. No physical cash moves.
Cryptocurrencies capitalize on this trend. They’re not backed against national banks, instead they are being offered by companies. They can be used to buy goods and services online.
Whether a company accepts a certain coin as a form of payment depends on the company. Some currencies are specific to a company, meaning you can only use it to buy from that company. Others, like Bitcoin, are meant to be widely accepted and used.
The idea is that a single, unified currency can be used online, eliminating the need for currency conversions. They can also provide extra security for online transactions.
How Do Cryptocurrencies Work?
Cryptocurrencies take advantage of a technology called blockchain. Blockchain has been around for a while, but it’s only been in the last few years that the public has realized its massive potential for security.
That’s one reason cryptocurrencies use it. Using blockchain technology, currency providers create better records of where, when, and how much was moved. Blockchain makes it difficult to change the records and easier to compare versions.
That makes it much easier to spot discrepancies in the transactional record. That means it’s much more difficult for hackers to intercept and change amounts or steal information.
How does blockchain achieve this? Essentially, it decentralizes record-keeping across several different machines. By employing several devices in the record-keeping chain, it can keep better, simultaneous records.
Blockchain is also what enables cryptocurrency “mining” operations. These operations harness the miner’s computing power to update the public ledge of a cryptocurrency.
The transactional record is available to any user, which allows every record to be verified and “sealed off.” Miners help to verify transactions by adding to the ledger. That keeps spent funds from being re-spent before the transaction is recorded and confirmed.
Miners earn cryptocurrency for their efforts. Most people have extra computing power, so they can run cryptocurrency mining operations. Some miners add extra capability.
Investing in Cryptocurrencies
Mining isn’t the only way to earn money with cryptocurrencies. Many of them are publicly traded on the major stock markets. There was even a bubble in late 2018, where currency values inflated enormously.
Many people took that as a sign cryptocurrencies had arrived, but the bubble popped. It did put cryptocurrencies front and center in the public imagination.
Investing in cryptocurrencies can be a smart move, although you need to be prepared. The cryptocurrency market is like the stock market, as currencies value and devalue. The old “buy low, sell high” is incredibly applicable for the cryptocurrency market.
If people are complaining about their coins losing value, it’s a great time to buy. Similarly, if people are talking about their gains, you’ll probably want to hang tight.
Aside from that, though, the cryptocurrency market is quite a bit different. It experiences huge fluctuations quite often. Investors need to be able to weather the storm.
It’s also wise to do research on which currencies have performed well in the past, as well as current trends. Places like Reddit can be a good starting point for learning more from the community.
You should also do research into the team behind each currency you want to invest in. Think about who else is investing as well. Read more here about the ins and outs of cryptocurrency investments before you start trading.
Are They Legal?
One of the reasons cryptocurrencies have yet to catch on is because people are confused about whether they’re legal.
In the US, cryptocurrencies are most definitely legal. In countries like China, though, the situation is less clear. The Chinese government has effectually banned the use of cryptocurrencies.
One of the reasons people are concerned about legality is that cryptocurrencies have been connected to crime. Fraudsters have been known to use cryptocurrencies to defraud investors of their money.
Some claim to be investment firms, only to disappear with the money. Others get investors to put their money into fictional currencies.
That’s why it’s so important to do your research before you begin investing.
Do Your Homework
That concludes Cryptocurrency 101. There’s still plenty more to know about how cryptocurrencies work and how to stay safe while investing in them. Doing careful research will serve you well. Want to learn more about which cryptocurrencies are trending up and which are facing a dip? We’ll help you keep tabs on your favorite coins with all the latest investment news.