What Are Bitcoins and Cryptocurrency?

Make sure you grasp the possible benefits and risks of Bitcoin and cryptocurrencies before diving in.

Cryptocurrencies have risen from relative obscurity to constantly dominating the headlines of our most well-known trade and finance media publications as a result of the spasmodic oscillations in Bitcoin's exchange rate over the last two years.

Here is some background information for anyone unfamiliar with Bitcoin and other cryptocurrencies (such as Litecoin, Ripple, or Ethereum). A single Bitcoin was worth around $1,000 at the beginning of 2017. The value of one Bitcoin has reached an all-time high of almost $20,000 at the end of 2017. This means that if you had put $100 into a Bitcoin in January 2017, you could have cashed out around $2,000 in December 2017, a 20x return on investment. Following its peak in 2017, Bitcoin (and other cryptocurrencies) saw a precipitous drop, with prices as low as $3,179 per coin in December 2018.

What is Cryptocurrency?

So, what exactly does the phrase "cryptocurrency" imply? In a nutshell, cryptocurrency is a decentralized, worldwide computer network that uses virtual/electronic currency. Its infrastructure is based on blockchain technology, a recently established electronic ledger that records virtual currency transactions instantly, automatically, and publicly. In general, each blockchain's ledger is an evolving record of all the transactions that every computer in that blockchain's network keeps track of at the same time and in the same place. Every time a computer adds a line to its own copy of the shared ledger, the addition is replicated by every other computer in the blockchain. Once a transaction has been confirmed, it will (theoretically) remain in the ledger indefinitely, unalterable, and inerasable.

Users can transfer and receive cash via the Internet on a peer-to-peer basis thanks to the blockchain, which eliminates the need for a middleman such as PayPal, Mastercard, or a traditional financial institution. It's also worth noting that, despite all of the media attention paid to Bitcoin, it's only one of over 1,000 different types of cryptocurrencies available to users.

You can buy cryptocurrencies with money that has been put in a standard bank account. You can then use your cryptocurrency to conduct business with other users who accept this payment method. Naturally, the method also works in reverse, allowing you to change your crypto into ordinary paper money that can be placed in your bank account.

Potential Benefits of Using Cryptocurrency

Using cryptocurrencies as a payment method has advantages both theoretically and practically. Instead of being bound by their bank's hours of operation, users can conduct bitcoin transfers 24 hours a day, seven days a week.

A blockchain is intended to ensure complete transparency. While financial records have traditionally been held in a single location (such as a server, a courthouse, or a temple) or managed by a central authority, blockchain ledgers (under some type of cryptographic seal) are distributed to everyone and belong to no one. No one can edit the ledger because it is shared and monitored by every computer on the blockchain; in fact, if you try, the underlying software would reject it. Each new block in the chain is effectively an amalgamation of all previous transactions, including all the information included in the previous one, all the way back to the first—the so-called genesis block—which is a real embodiment of full transparency.

Because each participating node in the global computer network shares the currency ledgers, cryptocurrency transfers have minimal (or no) transaction fees and are less prone to identity theft and fraud. Furthermore, users can easily send funds globally due to the decentralized structure of the currency exchange, and it is currently difficult for any business or government to arbitrarily take or freeze any of these funds.

As bitcoin continues to pervade the financial landscape, the number of people and businesses willing to accept it as payment for goods and services is rapidly increasing. Because customers cannot reverse payments, businesses may find cryptocurrency to be an appealing choice. Clients must rely on the business owner to reverse a payment via a direct refund in the event of a disagreement. Furthermore, bitcoin transfers do not need the exposure of personal information, which helps to protect computer databases and sensitive data from hackers. Finally, Bitcoin supporters such as David Johnson, the founder and CEO of Latium, have stated that the value of Bitcoins can only rise because the system is designed to cap the number of Bitcoins in circulation at 21 million (due to limited supply).

Potential Risks of Using Cryptocurrency

While many people see cryptocurrencies as a safer and more efficient means to do business, some financial experts have highlighted and emphasized its concerns. Cryptocurrency's value fluctuates depending on global economic performance, current events, user optimism and demand, and other intangible market factors, just like any other investment. Some economists interpreted Bitcoin's sudden spike in value in 2017 as a bubble fueled by existing media hype and growing vendor ardour. These experts were completely correct in their financial foresight; cryptocurrencies have always been unpredictable, particularly during the Bitcoin meltdown of 2018. Their valuations can vary dramatically from day to day—or even hour to hour—making it difficult for even the most seasoned, skilled, and risk-loving investors to stay calm and retain their investments. Financial gurus remind us every day that any boom in the exchange rate of Bitcoin and other cryptocurrencies could cease on any given day, just like any other investment.

While it is theoretically true that a blockchain's ledger cannot be erased or manipulated, this does not rule out the possibility of one's online bitcoin wallet being hacked or stolen—this happens all the time. Furthermore, the blockchain has earned a reputation for being completely private as a result of cryptocurrency's frequent use in malicious dark web transactions. This, however, would be a naive assessment. Every transaction is recorded in the ledger and is visible to all. Each blockchain transaction is inherently anonymous or pseudonymous, but there are a variety of techniques to damage that anonymity.

Other common risks associated with cryptocurrency investing include the following:

• Cryptocurrencies (with Tether being one possible, yet highly controversial, exception) are entirely virtual and not backed by any real-world assets, like gold bars, for example. As such, Bitcoins are completely unsecured, and you cannot carry them around in your pocket.
  
• Credit cards can offer more substantial buyer protections than Bitcoins because cardholders can file claims and chargebacks.
  
• If you lose some or all of your cryptocurrency due to hacking or some online malfunction, you'll likely have no recourse which leaves your funds somewhat vulnerable at all times.
  
• Scammers and hackers are notorious for using phishing tactics to lure Bitcoin holders into visiting malicious websites. Any cryptocurrency investor should be exceedingly conscientious about not interacting with, or disclosing any personal or confidential information to, any persons or websites that set off red flags.
  
• The future costs and benefits of using cryptocurrency might be subject to unpredictable government regulations. This will require investors to pay close attention to the legal and political landscapes of their respective jurisdictions.
  

How to Buy and Sell Cryptocurrency

If you've evaluated the benefits and drawbacks of bitcoin and decided to take the plunge, the simplest method to get started is to sign up with a third-party wallet service provider. In general, you can purchase whatever amount that fits your budget, even if it's only a fraction of a coin. Some of the most popular bitcoin exchange websites include Coinbase and Gemini.

Signing up for these services is similar to registering for any other website. Simply enter your email address and establish a password to get started. You'll need to connect your standard bank account, credit card, or debit card to buy cryptocurrency. To secure your account, these sites should require you to utilize two-factor authentication, but avoid utilizing SMS or your phone number throughout this process. Criminals may steal from your cryptocurrency wallet using only your name and phone number, according to cybersecurity experts. To verify your account, use Google Authenticator or a security key (such as a YubiKey).

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