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A Beginner's Guide To Cryptocurrency

What is Cryptocurrency, and How Does it Work?


What Is Cryptocurrency?

Cryptocurrency is a decentralized digital currency based on blockchain technology, which is secure as it can establish distributed consensus among untrustworthy parties. Despite the popularity of Bitcoin and Ethereum, there are over 5,000 different cryptocurrencies in circulation.

 

How Does Cryptocurrency Work?

The term cryptocurrency refers to a digital, encrypted, and decentralized medium of exchange. In contrast to the U.S. Dollar or the Euro, cryptocurrencies are not managed and maintained by a central authority. Instead, these tasks are for the users of a cryptocurrency via the internet.

You can use cryptocurrencies to purchase goods and services, but most people tend to invest in cryptocurrencies as they would for other assets such as stocks or precious metals. Cryptocurrencies are a novel and exciting asset class, but purchasing them can be risky — you need to research and fully understand how the crypto-system operates.

Satoshi Nakamoto (the anonymous name used by the creators of the Bitcoin cryptocurrency) described the first crypto, known as bitcoin, as a “decentralized, peer-to-peer electronic payment system based on cryptographic proofs instead of trust.”.

The cryptographic proof appears as transactions verified and recorded on a blockchain. To prevent fraud, one of the two primary methods validates each transaction — Proof of Work and Proof of Stake.

 

Proof of Work vs. Proof of Stake

Proof of work and proof of stake are two different validation techniques used to verify transactions before being added to a blockchain, for which they reward the verifiers. Cryptocurrencies typically rely on either proof of work or proof of stake to verify transactions.

Proof of Work:

Simon Oxenham, social media manager at Xcoins.com, described a proof of work as a method of verifying transactions on a blockchain — an algorithm provides a mathematical problem for computers to solve.

Each computer participating in the blockchain network, called a “miner,” solves a mathematical puzzle used to verify a group of transactions, called a block and adds them to the blockchain ledger. The first computer to accomplish this will receive a small amount of cryptocurrency.

In this race to solve blockchain puzzles, enormous amounts of computer power and electricity are required. Thus, after considering the costs of power and computing resources, the miners may barely break even with the crypto they receive for validating transactions.

Proof of Stake:

Some people use the proof of stake method to reduce the computing power and electricity needed to verify transactions. When people use this method, the amount of cryptocurrency they are willing to stake limits the number of transactions they can verify or temporarily store in a communal safe for the opportunity to participate. Okoro described it as being similar to bank collateral. It is possible for each person who stakes crypto to verify transactions. However, the likelihood of being chosen increases with the amount you stake.

In addition to removing the need for energy-intensive equation solving, proof of stake offers much faster verification and confirmation times when compared to proof of work, says Anton Altement, CEO of Asom Finance.

If a stake owner (sometimes referred to as a validator) is selected to validate a new block of transactions, they will get rewarded with cryptocurrency. However, if you are chosen but verify invalid transactions, a portion of your stake is forfeited to discourage fraud.

 

How to Invest in Cryptocurrency to Make Money?

The first thing that comes to mind when considering investing in cryptocurrency is to buy crypto coins. It is probably the most common way to add cryptocurrency exposure to your portfolio. But for investing in cryptocurrencies, there are a few different options:

✅ You may choose to buy and store cryptocurrency. You have the options of the oldest cryptocurrencies, such as Ethereum and Bitcoin, or the virtually unknown coins included in an initial coin offering (ICO).

✅ You can invest in crypto companies that focus on cryptocurrencies, such as mining companies, mining hardware manufacturers, companies like Robinhood Markets, Inc. (HOOD) and PayPal Holdings, Inc. that support cryptocurrency, and many others with various degrees of exposure to cryptocurrency are also possible investments. In addition, you may wish to consider companies like MicroStrategy Incorporated (MSTR), which hold significant amounts of cryptocurrency on their balance sheets.

✅ If you are reluctant to invest in cryptocurrency companies, you may consider investing in crypto-related funds. A good option includes Exchange-traded funds (ETFs) — index funds and futures funds. Cryptocurrency investment trusts are another option. While some crypto-focused funds invest directly in cryptocurrency, others invest in crypto-focused companies or derivative securities, such as futures contracts.

✅ If you want to invest in crypto and benefit from the tax advantages, you should consider investing in a cryptocurrency IRA (Individual Retirement Account). It is also possible to store your cryptocurrency holdings more securely if you utilize the services of a crypto IRA provider.

✅ Becoming a crypto miner or validator is perhaps the most direct way to invest in cryptocurrency. Crypto miners and validators earn rewards in cryptocurrency, which can be held as investments or exchanged for another currency.

 

Conclusion:

Cryptocurrencies are constantly evolving and accompanied by both opportunities and disadvantages. If you are interested in dealing with them, get ready to face all possible outcomes.

 

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