Cryptocurrency is seen by some as a type of currency that will be used in the future, while others believe it is too dangerous to invest in.
So which is it? Should you put your money into this?
This article will provide an overview of cryptocurrency basics to assist those new to the topic in gaining better comprehension of the intricate aspects.
You need to comprehend the core principles of cryptocurrency before you can figure out if it is an appropriate option for your investment and retirement plans.
Cryptocurrency Basics: How Cryptocurrency Works
In order to understand cryptocurrency, you should also understand the following technologies and principles:
Cryptography
Cryptocurrency employs cryptography — the practice of concealing and disclosing data — to make sure that user data and dealings are completed securely.
Blockchain
A blockchain is a type of Distributed Ledger Technology (DLT), which is basically a database maintained across several participants (nodes, computers, etc.).
This is the technology that powers an entire cryptocurrency. This is basically an electronic record-keeping system that confirms accounts, balances, and transactions.
Blockchain can be applied for much more than financial services – for example it may be used for supply chain control, tracking down the origin of fine art, and even keeping hold of digital collectibles.
A concept linked to blockchain that will also come up frequently in this article is a node. A node is a single element that is part of the entirety of the blockchain data structure. Without nodes, the entire system would fall apart.
Cryptography and blockchain are utilized to aid in the generation of fresh coins, validate valid trades, and construct a protected system by cryptocurrencies.
De-Centralized
Distributing the authority among all peers on a network, as Bitcoin does, means that there is no single point of failure that could bring down the whole system.
For example, attempting to “hack” Bitcoin would involve someone breaking into at least 51% of the extensive network of computers powering Bitcoin, an achievement that is deemed too complicated to pull off.
Peer-to-Peer
Cryptocurrency can be transmitted straight from one person to another without using an intermediary. These transfers have a very small charge to pay the network, making it feasible for people to get around costly fees charged by more standard payment services.
That eliminates the need for using PayPal, Zelle, or any kind of banking system.
Cryptocurrency Regulation And Rules
As of 2022, Cryptocurrency has few regulations.
The US government has been concentrating on keeping track of those who use cryptocurrency to launder money, buy unlawful products and services, spot fake ICOs, and gather taxes.
The IRS’s Notice 2014-21 could be the most meaningful and applicable guidance for regular cryptocurrency users.
In Notice 2014-21, it has been established that digital currency is to be classified as property in terms of federal tax regulations and will follow the same set of general taxation guidelines.
In other words, if a person exchanges a specific cryptocurrency for goods, services, or another type of cryptocurrency, a profit or loss would be realized in the transaction. For example, if someone uses Bitcoin to buy Ethereum, it would create a gain or loss.
Also keep in mind:
- You must be 18 years or older to purchase cryptocurrency
- Crypto exchanges must be licensed and registered with the government
- Crypto assets are not legal tender
As a beginner to cryptocurrency, it is essential to be aware that the laws regulating it are subject to rapid change, with major rulings looming in the near future.
Cryptocurrency Best Practices
When using cryptocurrency, individuals can have control over their own financial resources, though there are certain drawbacks that come with this.
No central bank means there will be no assistance for cryptocurrency users, their assets will not be protected, and there will be no one to turn to for help if something goes wrong.
This leaves your cryptocurrency at serious risk of:
- Getting hacked by malicious third parties.
- Being lost through personal negligence, such as sending your bitcoin to the wrong address or losing your private key.
Nevertheless, these two potential risks can be avoided by adhering to cryptocurrency procedures.
The fundamentals and safety of cryptocurrency center around making sure your private key stays secure.
Keep in mind that your private key grants you complete control of your cryptocurrency. If you wrote your 64-character personal key on a piece of paper and someone else got hold of it, they can easily move your digital money to wherever they would like.
Pros of cryptocurrencies
The blockchain is where the details of Bitcoin and other digital currencies are logged and made visible to the public. Blockchain technology can be seen as a log of transfers that can be accessed by anybody, and once details are registered into the blockchain, they cannot be changed or taken away. As a result, anybody is able to look at and confirm the deals at any moment, and no individual being can change the blockchain. In this way, openness is fully assured and everyone can see exactly what’s going on, which ensures fairness for all investors and traders in the digital currency. There is nothing going on behind closed doors.
The danger of prices climbing due to increasing costs is small – It is always possible for a fiat currency to be affected by inflation. As governments issue more and more fiat money, its value has the potential to diminish over time due to outside influences like economic changes. In spite of this, the Bitcoin and other crypto currencies have a cap on the total amount issued, meaning inflation is unlikely to be a problem. It is estimated that the mining or production of Bitcoins will come to an end around 2050.
Cryptocurrencies are direct transfers from one person to another, eliminating the need for third-party participants such as banks when compared to traditional fiat money transactions. This implies that there are no extra costs for handling, and the turnaround time is significantly faster.
Despite the fact that each and every transaction is documented on the public blockchain, it is still difficult to identifiy any one particular person involved in the transaction. Thus, privacy and anonymity are maintained. Consequently, you can be positive that nobody is keeping track of your source of income, thus allowing you to transact without feeling watched, which is quite advantageous in numerous countries worldwide.
Cons of Cryptocurrencies
As cryptocurrencies are still quite new, there are some issues that need to be rectified. Here are some cons of cryptocurrencies.
Cryptocurrencies such as Bitcoin are beginning to be adopted by certain merchants when it comes to payment, however, the majority of online retailers and businesses still do not recognize them as a valid form of payment. Regardless, it won’t take long for digital currencies to become the primary form of currency and to be widely acknowledged.
The benefit of having your traditional money in bank accounts is that if there are any issues such as hacks, breaches, or any other sort of loss, the bank is liable to reimburse you, as they are insured especially for this. In any instance where your cryptocurrency wallet is infiltrated, resulting in money being taken, or you cannot gain access to your wallet, nothing can be done about it. Once lost, it is gone.
The value of crypto currencies, similar to other kinds of tradeable assets, can go up or down in the market. It is a good idea for those who invest in crypto coins to keep their investments for the long haul and not worry about short-term changes unless the fluctuation is exceptionally high.
Trading Crypto Currencies – Getting Started
Having provided a short overview of cryptocurrency, its benefits and drawbacks, you may now be considering investing in this form of currency.
Beginning is quite uncomplicated and easy, you will need
- A crypto currency wallet, and
- A crypto exchange platform where you can trade.
A crypto currency wallet can be thought of in the same way as a bank account for traditional fiat currency. This is an online platform where you can keep your cryptocurrency, receive payments into your account, and make payments out of it. Crypto currency wallets typically have a secret code and a publically visible code. The public address can be given out to other people who would then be able to send money to your wallet, but the private key should be held securely, much like the pin code for a debit or credit card.
An exchange for crypto currency is analogous to a forex exchange for traditional fiat currencies. Essentially, it is a website or web application that you can use to sign into your account and trade either cryptocurrencies for other cryptocurrencies, or buy and sell cryptocurrencies with fiat money. It is important to take into consideration that certain crypto currency exchanges do not allow fiat currency while others do. CoinTrust.com provides thorough reviews of several of the top crypto currency exchanges which can be beneficial when choosing the right crypto currency exchange that is suitable for you. It is true that only encrypted password information is held in crypto currency wallets. However, for those who wish to buy and sell or just put money into crypto currency investments, it is not necessary for them to gain technical details about the system.
How to Go About Investing in Crypto Currency
A lot of folks are just aiming to trade crypto currencies, nevertheless there are certainly people who are interested in investing in them. When it comes to investing in crypto currencies, it’s a matter of personal preference as to which options you go with, depending on how much and how often you want to make investments. The available options are as follows –
- The GBTC trust – The GBTC trust stands for the Bitcoin Investment Trust. If you are looking to trade Bitcoins on the stock market then this is the only option as of now. Basically, it is a trust which means that it is an organization that owns a certain number of Bitcoins and allows investors to put in money and buy percentage shares proportionally. So, for instance, a gold trust, 1 share maybe worth 1/10 th of an ounce of gold and likewise in a Bitcoin trust such as GTBC 1 share maybe worth 1/10 th of a bitcoin (just an example – this is not actually what a share in GTBC maybe worth).
- A crypto IRA – A second option is to use an IRA to facilitate investing in crypto currencies. IRAs are retirement accounts that allow investors to use the funds within the account to invest in a wide array of assets as they deem fit. The main advantage of using an IRA to invest in crypto currencies is that you can continue to invest while enjoying the tax benefits that come along with IRAs.
- An online crypto currency exchange – A crypto currency exchange has already been described earlier in this article. This remains one of the most popular ways for most users to invest in cryptocurrencies. It is basically like a forex exchange, but instead of traditional fiat currencies you can deal with alt coins or crypto currencies. Some exchanges support both fiat and crypto currencies. There are several crypto currencies that are safe and secure to use. CoinTrust.com also has an extensive review of most of the popular crypto currencies which I urge you to read if you are someone who is trying to narrow in and choose one crypto currency exchange to start trading or investing on.
- A crypto exchange cum wallet – Some platforms such as Coinbase and GDAX offer both a crypto currency wallet and is a trading or exchange platform in itself. These are usually the best option for beginners as it is the most simple and easy to use and comprehend.
Cryptocurrency for Beginners: How to Get Started
What are the steps to begin investing in, trading, and exchanging cryptocurrency? Here is a procedure to guide you from novice to cryptocurrency expert.
Step #1: Get a Bitcoin Wallet
The first step is to get a Bitcoin wallet. To accomplish this, create an account with a cryptocurrency trading platform or install a Bitcoin wallet application on your device.
Step #2: Buy Some Bitcoin
Once you have a wallet set up, you can begin purchasing some Bitcoin.
You can pay for this with a credit card or by moving money from your bank account.
Step #3: Start Trading Cryptocurrency
The next step is to start trading cryptocurrency. There are numerous exchanges available to purchase or sell digital currencies.
Step #4: Start Mining Cryptocurrency
If you’re looking to increase your involvement with cryptocurrency, you can begin by mining it. This entails utilizing your PC to calculate intricate numerical issues so as to confirm deals on the blockchain.
Step #5: Stay Up to Date
In conclusion, it is critical to keep informed about news and progress within the cryptocurrency field. This will aid you in coming to knowledgeable conclusions about when it would be opportune to purchase and dispose of distinct digital currencies.
The Bottom Line: Cryptocurrency For Beginners
Let’s be honest: cryptocurrency is here to stay.
Some investors have generated remarkable gains from it, while other people have suffered losses.
Is this complicated, unpredictable, and thrilling for you? Is it the right fit?
If you choose to invest, the best way to get the highest gains and lowest losses is to transition from being a novice to an expert in cryptocurrency.
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