In this lesson you will learn:
- What is cryptocurrency in simple terms
- The gold standard
- How to use cryptocurrency
Cryptocurrency has already become a full-fledged part of the new financial world, attracting not only numerous private investors but also big business with its prospects. The rules of the game in this rapidly growing market are becoming clearer every year, and processes more transparent. However, the volatility and specific risks associated with digital currencies haven't gone anywhere, and to make money in this market, you need to study all its features. Let's try to understand what cryptocurrency is and how to work with it.
What is cryptocurrency in simple terms
Cryptocurrency is program code; it has no offline version. All digital money exists only in the network space. At the same time, it's not backed by gold. Anyone who has enough money to buy special equipment can mine cryptocurrency, but there are limits on coin mining, so the price of digital money should rise.
As everyone knows, in the world of fiat (ordinary) currencies, everything is different. World central banks periodically turn on the printing press at full capacity, which inevitably leads to inflation. Exchange rates of world currencies are regulated by the states issuing this money. In the crypto world, everything is decentralized, and there's no single control center. The speed of payments and the size of commissions for cryptocurrency transfers are generally lower than in the regular currency market.
A plus of the crypto world that attracts more and more new users is anonymity — it's impossible to find out who participated in a transaction. At the same time, the minuses are the same — extremely high volatility and the impossibility of wide circulation of digital money in public life due to scarce infrastructure.
The gold standard
When answering for the first time the question of what cryptocurrency is and how to use it, it's best to look at Bitcoin. Bitcoin is the gold standard and the first coin of the cryptocurrency market. Bitcoin's exchange symbol is BTC. In English, this word roughly translates as a coin the size of one bit or the smallest coin.
The coin is completely decentralized, and its issuance is not controlled by any state or central bank. Answering the question of what cryptocurrency is, we can say that Bitcoin is a full-fledged means of payment that can be used for buying and selling goods and services or as a means of preserving capital. Bitcoin can be exchanged through an internet exchange or exchange office for any world currency at rates established according to the market situation.
After Bitcoin's success, miners began mining other digital currencies. In the crypto world, they're called altcoins. This is quite a broad concept that includes alternative coins—"coin"—and so-called "tokens." However, digital coins are mined and used as a full-fledged means of payment. Tokens are shares in projects that might "take off"—a venture investment with quite high risks.
Bitcoin and its friends
Without mentioning altcoins, the conversation about what cryptocurrency is would be incomplete. Popular altcoins include Ethereum, Ripple, Litecoin, and Monero. All these digital currencies are based on blockchain and are not affected by the initial algorithm like Bitcoin. Transactions of Bitcoin's competitors go through faster due to differences in encryption codes.
However, Bitcoin's friends have a simple problem—they're very dependent on the "gold standard's" rate. If Bitcoin shoots up, competitors join in; if the main crypto world currency's rate falls, neighboring rates fall too.
Tokens are a more aggressive and risky mechanism. They're the stocks of the cryptocurrency market. You can buy tokens at an ICO and then wait for this mechanism to detonate, trying to exit by locking in losses.
Buying coins is a conservative investment, if you can say that about a volatile market. In a rising market, your capital increases, and in a falling market, it decreases.
Acquiring tokens indicates a high risk appetite in an investor. It's a venture investment. Tokens shouldn't be bought with your last money because rapid project growth will bring super profits, but a crash will completely zero out capital with no possibility of recovery.
How to use cryptocurrency
Before you start using cryptocurrency, you need to think about where to store it. Wallets are used to store currencies. A cryptocurrency wallet is a mobile application, special program, or separate standalone device created for conducting all operations with electronic money.
In the digital world, there are five types of wallets: software, online wallets, hardware, mobile, and paper. Let's briefly describe each of these types.
Software wallets store money on the hard drive of a computer or laptop. Their advantage is a fairly high level of security.
The downside is that storage requires quite a lot of space: from 150 gigabytes for just one currency.
Online wallets store your digital capital on third-party servers (in the cloud). You can access the money from any device. The price for mobility is a low level of security. If hacked, all money is lost.
Mobile wallet applications installed on phones and tablets have the same advantages and disadvantages. If the phone falls into the hands of scammers, you have to say goodbye to the money. Thus, there's no simple answer to the question of how to use cryptocurrency through a wallet.
A much more reliable hardware wallet is a separate standalone device. It's quite difficult to hack. An obvious minus—the device needs to be constantly with you, and you need to remember all PIN codes.
A paper wallet is just a private and public key generated using a special website. It can be written in a paper notebook or printed, and it's even better to write it down in several notebooks at once, because losing the key leads to losing money.
Buying digital
To work with digital money, you first need to buy it. Let's remind once again what cryptocurrency is and where you can buy it. One of the most common ways to buy Bitcoin and other cryptocurrencies is through an exchange service. There are many exchange services, and they differ from each other in commission size and ease of use.
Another important aspect is reputation. Scandals happen, and it's desirable not to fall into the same traps as unlucky investors. There are aggregators of exchange offices online that take on this part of the task by collecting reliable resources. But risks still remain, and this fact must be taken into account. As for the technology of exchanging fiat money for cryptocurrency resources, it's practically the same as offline. We choose the rate, enter the details, and confirm the transaction.
An equally popular way of obtaining cryptocurrency is registering on an exchange. There are two types of exchanges: some specialize exclusively in cryptocurrency operations, others work with both digital money and fiat currencies.
The selection criteria are the same as when looking for an exchange office: reliability, reputation, transaction speed, and convenience when working with services. To work with large sums of money, you'll need to verify your account.
As an option—finding a cryptocurrency seller through platforms working with p2p (peer to peer) technology. This is a site with frequent ads where sellers and buyers meet. Before making a transaction, you need to check the seller. Such platforms have a rating system similar to the one actively used by foreign online stores. But you need to understand that the risks in such transactions are higher than when working with exchanges and exchange offices.
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