What Exactly Is Cryptocurrency? What Every Investor Should Know

Cryptocurrencies allow you to purchase products and services as well as exchange them for profit. Here's additional information on cryptocurrency, including how to acquire it and how to protect yourself.

What exactly is cryptocurrency?

A cryptocurrency (or "crypto") is a digital asset that may be exchanged without the need for a central monetary authority, such as a government or bank. Cryptocurrencies, on the other hand, are produced using cryptographic procedures that let users to purchase, sell, or exchange them safely.

Bitcoin and the majority of other cryptocurrencies are underpinned by blockchain technology, which retains a tamper-resistant record of transactions and keeps track of who owns what. The development of blockchains solved a difficulty encountered by past efforts to build solely digital currencies: prohibiting users from duplicating their holdings and attempting to spend them twice.

Individual cryptocurrency units are referred to as coins or tokens depending on how they are utilized. Some are meant to be units of exchange for commodities and services, while others are value storage, and yet others are primarily intended to aid in the operation of computer networks that carry out more complicated financial operations.

The method of mining, which is employed by Bitcoin, is one typical way bitcoins are generated. Mining is an energy-intensive process in which computers solve hard riddles to validate the legitimacy of network transactions. Owners of those machines may earn freshly minted cryptocurrency as a reward. Other cryptocurrencies manufacture and distribute tokens in other ways, and several have a substantially lower environmental effect.

The most convenient option for most people to obtain bitcoin is to purchase it through an exchange or another user.

>>Are you ready to invest? Here are our recommendations for the finest bitcoin exchanges.

How to Invest in Cryptocurrency Safely

Purchasing cryptocurrency safely entails four key steps:

1. Determine where you will purchase it.

There are several secure methods to purchase bitcoin, but the most accessible one for newcomers is likely to be a centralized exchange. Customers can have faith that they are getting what they paid for because centralized exchanges operate as a third party regulating transactions. These exchanges often trade cryptocurrency at market rates and profit from fees for different parts of their services.

If you're used to traditional brokerage accounts, there are a few online brokers that provide access to both cryptocurrency and equities. Robinhood, Webull, SoFi Active Investing, and TradeStation are among the online brokers analyzed by NerdWallet. Look for pure-play cryptocurrency exchanges if you're seeking for an exchange that only deals in cryptocurrencies. These platforms, such as Coinbase, Gemini, and Kraken, do not provide access to basic assets such as equities and bonds, but they do provide a considerably larger range of cryptocurrencies and additional on-platform crypto storage choices.

Though centralized exchanges are relatively simple to use, the volume of crypto that moves through them makes them an appealing target for hackers.

For more sophisticated users, there exist decentralized exchanges with costs that are cheaper than those paid by centralized systems. These are more complex to utilize and need more technical knowledge, but they may provide some security benefits because there is no one target for a cyberattack. Peer-to-peer transactions are another way to exchange cryptocurrencies.

2. Determine how you will pay

While dozens of cryptocurrencies are traded globally, the most popular alternatives are generally available for purchase in fiat currencies such as the US dollar. If you're a first-time buyer, you'll almost certainly have to use traditional currency to purchase cryptocurrencies.

If you're a more seasoned investor, you may consider exchanging part of your existing crypto holdings for another sort of cryptocurrency, such as Bitcoin for Ethereum.

3. Increase the value of your account

You may need to fund your account before acquiring any cryptocurrency, depending on how you want to pay. Most exchanges accept debit and bank transfers if you're using fiat cash. Some even enable you to pay using your credit card, however this is a dangerous move with a volatile asset like cryptocurrencies because interest rates can compound your losses if your assets lose value.

If you already have cryptocurrency, you may use it to trade by transferring it into your account from a digital wallet or another platform. Just make sure that your crypto exchange supports trading between the assets you're interested in. Not all cryptocurrencies can be exchanged directly for each other, and some platforms offer more trading pairings than others.

Another thing to keep in mind is that exchange costs vary based on what you're purchasing and how you're buying it, so be sure to read the fine print.

4. Decide on a cryptocurrency

There are several possibilities for bitcoin investors, but none are likely to be suitable for everyone. Before you buy, consider what you want to get out of this investment. Do you expect it to appreciate in value? Do you want to conduct transactions with cryptocurrency? Do you want to use the underlying technology through decentralized apps? These may assist you in making your selection.

NerdWallet has published guidelines for various popular cryptocurrencies, such as Bitcoin, as well as some Bitcoin alternatives:

• The first and most valued cryptocurrency is Bitcoin.

• Ethereum is widely used to carry out more complicated financial transactions than those supported by Bitcoin.

• Cardano is a cryptocurrency that competes with Ethereum and is led by one of its co-founders.

• Litecoin is a Bitcoin fork designed to make payments easier.

• Solana is another Ethereum rival that focuses speed and cost-effectiveness.

  Dogecoin started as a joke but has now evolved to become one of the most expensive cryptocurrencies.

• Stablecoins are a type of cryptocurrency whose value is intended to be steady in comparison to real-world assets such as the US dollar.

› Find out more about blockchain and how it works.

According to CoinMarketCap.com, a market research website, around 19,000 distinct cryptocurrencies are publicly traded. And cryptocurrencies are still on the rise. On April 19, 2022, the total value of all cryptocurrencies was over $1.9 trillion, down significantly from an all-time high of more than $2.9 trillion late in 2021.

If that isn't confusing enough, there are millions more NFTs — or nonfungible tokens — that are built on similar technology and provide ownership of content like as photographs and movies.

>> Find out more: How to Invest in Bitcoin.

Cryptocurrency security

Once you've opted to purchase cryptocurrency and have determined which cryptocurrencies to invest in, your next option will be how to properly keep it.

This is a critical decision. A private key, which proves ownership of cryptocurrency and is required for transactions, is required for crypto assets. You will lose your cryptocurrency if you lose your private keys. If someone obtains your private keys, they can spend your cryptocurrency anyway they see fit.

Cryptocurrency owners utilize digital wallets to safely safeguard their assets. When it comes to digital wallets, there are several solutions to consider.

>> Discover more: How to Select a Crypto Wallet