crypto basics

Crypto Basics: The What, Why, and How of Digital Currencies

As we continue to live in a new technological era, we find ourselves changing the way we do our daily tasks, such as how we work, shop, communicate, and even pay for services and goods. We’re now in a new decade when people don’t always prefer cash anyway, and with that in mind, it gave way to the behaviour of preferring contactless payments over the other.

With a simple wave of a smartphone, consumers can now pay for any item at digital registers. But there’s a new payment system that’s slowly emerging: cryptocurrencies.

By now, almost everyone has probably heard about crypto, especially the first-ever digital currency that came into the market, Bitcoin. It was the first crypto to go mainstream, but in 2021, there are already thousands of different other cryptos circulating the market, and they are even more being developed every day.

Various cryptocurrencies are traded on renowned platforms like Binance, Kucoin, Bitcoin Buyer, and many others every day.  But despite crypto’s popularity, many others don’t fully understand what the technology is, and to help, we’ll take on the what, why, and hows of cryptocurrencies.

What Is A Digital Currency?

Digital currency, at its core, is a public system of value, and when investors buy crypto, it’s with the hope that the market value of the asset increases in the future. Similar to how investors put their money on stocks and securities, it’s because they believe that the company they have invested in will eventually grow, thus having their share prices increase significantly.

Furthermore, the key difference between stocks and digital currencies is their valuations. The valuation of stocks will depend on the estimations of a company’s cash flows. Digital currencies, on the other hand, don’t have any ovulation metric to compare because there’s no underlying company, thus having the market value of cryptos tied to how the investors feel about the technology.

With that in mind, the valuation of digital currencies would boil down to two different factors. One is the likelihood of other investors buying the digital currency asset, and the other is the overall utility of a crypto’s blockchain technology.

How Does The Crypto Market Work?

The market for digital currencies is, in general, decentralised as they are typically not issued by a central authority such as banks and government entities. Instead, the crypto market is run across an extensive network of computers; however, digital currencies can be sold, bought, and traded through exchange platforms and generally stored in digital wallets for safekeeping.

But unlike traditional currencies, crypto exists only in the digital space, which only shares a digital record of ownership and it’s stored in the blockchain network.

When it comes to how the market for crypto works, it’s pretty complex but can become relatively easy once you get the general gist of the system. When users want to send their digital currency funds to a different user, they typically send them to the recipient’s digital wallet.

However, the transaction is never considered final unless the process has already been verified and added to the blockchain. It’s through a process, crypto mining, which is also how new crypto tokens are usually created.

Why Are Cryptos Popular?

There are many reasons why digital currencies are popular, and one of the most common ones is the publicity, social posts, and news about an investor making millions from it in a short time frame.

Moreover, there are other factors to consider as to why digital currency appeals to its supporters. One of them is the possibility of crypto becoming more than just an asset that stores value. People who believe in crypto see the asset as the new currency of the future; thus, people are racing to buy the assets now before they become even more valuable in the future.

Another reason digital currencies are popular is that the supporters appeal to the idea of digital currencies possibly removing central banks in managing the supply of money. The rest of its supporters acknowledge the technology behind digital currency, not to mention that the decentralised blockchain can process and record transactions considered more secure than traditional payment systems.

Where To Buy Digital Currencies?

While some digital currencies, especially Bitcoin, are available for users to purchase with real currencies like the U.S. dollar, others require you to purchase them with another digital currency. However, to buy digital currencies, you will first need a digital wallet to store the digital coins that you’re going to buy.

Generally, you simply create an account in a crypto exchange platform, verify it. You can fully utilise it to transfer your real money to buy crypto such as Litecoin, Ethereum, Bitcoin, and so much more.

Are They Legal?

Ever since the development of the first-ever digital currency that came into the market, Bitcoin has never received any regulation whatsoever regarding its legality.

Regardless, in 2021, there’s no question that digital currencies, in general, are legal in the United States; however, there have been reports that China is essentially banning any interaction with cryptocurrencies. Ultimately, the legality of digital currencies will entirely depend on each country if their governments allow them to do so. An attorney specializing in crypto can advise buying and using Bitcoin and other blockchain-based currencies.

How Secure Are They?

To determine how secure cryptos are, we’ll first discuss the digital technology currencies are typically built on, blockchain technology. In general, blockchain describes how crypto-related transactions are verified, recorded, and time-stamped into “blocks” of information. Understanding how it fully works can be fairly complex and technical.

However, the results are still the same, and that’s a digital ledger exclusive only for cryptocurrency transactions, which can be challenging for hackers to tamper with. Regardless, as there are security measures in place, it doesn’t mean that digital currencies are entirely safe or the platform you’re doing business on is unhackable.

Final Thoughts

The question that remains is, should you invest in cryptocurrency? Owning digital currencies and adding them to your portfolio can diversify it since it’s historically proven that there is no price correlation between the U.S. stock market and digital currencies. If you believe that digital currencies will have an increase in global usage over time, then it would probably make sense for you to buy crypto and let it be part of your diversified portfolio. 

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