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What Is Cryptocurrency? Digital Currency Explained

Cryptocurrencies have come a long way since Satoshi Nakamoto announced Bitcoin in 2008. While the word “cryptocurrency” may sound complicated to most of us, in reality, it’s not. It’s just a currency that we can use digitally to make transactions. 

Unlike fiat currencies like the U.S. dollar and the euro, cryptocurrency is a digital currency designed to be run trustlessly through a computer network that’s not reliant on any central authority or intermediaries, such as a government or bank, to uphold or maintain it. Users are able to maintain control over their own funds and transact freely without the possibility of censorship or having their funds frozen.

Read on to understand how cryptocurrency works and how an investor can use it. Buckle up to take the first steps on this side of the world. 

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What is cryptocurrency?

Many people still wonder if cryptocurrency is “real” money. Many cryptocurrencies have direct utility and use cases beyond being a medium of exchange. As an increasing number of online retailers accept this currency as a type of payment, it’s legit that crypto can be used to purchase physical goods or experiences. In fact, one can even sell their coins for cold, hard cash. 

How does cryptocurrency work?

Cryptocurrency is based on blockchain technology, a secure transaction ledger to which new blocks are added as transactions get verified. The blockchain records all movements that crypto holders make, and once a transaction occurs, it’s final.

The distributed ledger is secured via a consensus mechanism, whose aim is to incentivize people to provide security and receive rewards in the blockchain’s native currency in return.

The most common forms of this mechanism are proof-of-work (PoW) and proof-of-stake (PoS). New cryptocurrencies are generally created through these two mechanisms via crypto mining or staking. Proof-of-history (PoH) is another protocol used on Solana, although it’s not a consensus mechanism.

Users interact with blockchains via wallets that allow them to suggest and approve cryptocurrency transactions. Transactions are automatically approved unless the user attempts to send money that they don’t have in their bank accounts.

How does cryptocurrency make money?

Many people treat cryptocurrency as an investment avenue, aiming to make money out of it by buying at a lower price than they sell. This sounds easy but is difficult in practice. 

There are other tactics that allow users to earn interest from their existing coins, much like how banks offer interest in a savings account. The interest rates are usually far higher than that of traditional finance, but they also come with several risks, including the possibility of hacks and systems that aren’t fully tested. 

The most popular interest-bearing tactics include staking, yield farming, and liquidity providing (LPing). In staking, the investor enables their cryptocurrency to collect the interest and fees as a reward for verifying transactions are valid. In yield farming, users lend their cryptocurrency to earn returns, much like a bank. LPing allows users to provide assets to a larger pool of assets, enabling other users to trade with a better experience. LPers receive a fee as a reward, much like Coinbase and Binance receive transaction fees. 

Is cryptocurrency a good investment?

A new investment mostly, if not always, implies a certain amount of risk, and cryptocurrency is no exception. Additionally, different types of coins perform in distinct ways. All in all, whether cryptocurrency is a good investment depends on one’s belief in the space and their personal risk tolerance. 

Advantages of cryptocurrency

Let’s start with the benefits. 

Cryptocurrency is a new technology with several key advantages over existing predecessors. It can be more secure, permissionless, transparent, accessible, privacy-preserving, faster, and offer lower fees than other technologies. It also unlocks new use cases, which before would’ve been impossible. 

Cryptocurrencies are especially useful in countries with weak economies and the rule of law. They even level the playing field globally, thanks to their borderless qualities. At the moment, for regular transactions such as buying a coffee may still be better suited by traditional means but more niche transactions may be better served by crypto.   

From an investment standpoint, cryptocurrency is in its discovery phase. The industry can grow vastly in the future, meaning that there can be a significant upside. Many consider crypto a high-risk, high-reward part of a diversified portfolio.

Disadvantages of cryptocurrency

Cryptocurrency today is by no means perfect in its current state. Disadvantages largely stem from the market’s immaturity, and many of these were also disadvantages of the internet in its early days. Some disadvantages include lack of investor protection, the prevalence of scams, volatility, poor user experience, and there are likely more. 

  • Lack of investor protection: Unlike traditional finance, there’s no investor protection. It is the Wild West. If somebody gets scammed or makes a transaction to the wrong recipient, there’s no way for them to get the money back. 
  • Prevalence of scams: Many people and projects in the space are created for nefarious purposes, as the technology and landscape in its current iteration enable this. Scams are especially common in the NFT (nun-fungible token) or meme coin space. Users must be vigilant and research before they make any investment decisions.
  • High volatility: As with any emerging space, crypto is highly volatile. Prices fluctuate highly from one day to the next, and this may be difficult to stomach for an average investor.
  • Poor user experience: Many crypto applications are difficult to use to the point where you may need to have a technical background to understand the platform. This should improve over time but remains a large hurdle to achieving mainstream adoption.

Many of these disadvantages may be solved as the space matures, but in the short term, there are several risks and disadvantages depending on the investor.  

Cryptocurrency FAQs

Is it safe?

Let’s break “safety” down into a few categories. 

This question has crossed many minds. In practice, the architecture is, thus far, relatively proven to be technologically sound if the technology is used with best practices. However, that doesn’t imply that it’s safe in a broad sense. Many protocols have experienced hacks and cyberattacks and are built with poor economic designs. Many users’ wallets get compromised. Additionally, there are several scammers in the crypto space with less investor protection. 

Is it legal?

The legality of cryptocurrencies depends on the buyer’s residence. The U.S., Japan, and the U.K., for example, have legalized this currency, while China and India have imposed restrictions. Before investing, check a country’s policies, along with the country’s tax laws, as cryptocurrency earnings are often considered taxable income, and regulation varies significantly from country to country. Eventually, the regulatory environment can settle.

What are the different cryptocurrencies available?

There are more than 18,000 types of cryptocurrency out there, but not all of them are popular or even functional. However, the good news is that there are plenty of sources online that rank coins and provide information on the pros and cons of each. 

To date, the two most popular cryptocurrencies are Bitcoin (BTC), which was the first cryptocurrency ever made, and Ethereum (ETH). Other popular altcoins—cryptocurrencies that aren’t Bitcoin—include Solana (SOL), Cardano (ADA), Polkadot (DOT), Litecoin (LTC), Dogecoin (DOGE), Tether (USDT), and Polygon (MATIC)

Cryptocurrency investment for beginners

The first and foremost rule of investing is to create an investment plan. Potential buyers must always decide the type of coins in which they want to invest, get a wallet to store them, and choose a platform to trade them. 

They must stick to trusted financial data sources to avoid getting trapped in scams. If any deal looks too good to be true, it probably is. 

Hopeful investors can protect themselves by not putting all their coins “in one basket.” So, if the plan is to invest heavily in a volatile coin, you can opt for more stable digital assets, which can also mean investment in different types of coins, leading to diversification. 

How to buy cryptocurrency

Buyers can purchase cryptocurrency on a centralized crypto exchange like Coinbase. Just like in traditional banking, this requires opening an account and making a deposit. However, in this case, buyers will deposit coins. Buyers can also purchase on decentralized exchanges where LPers collect fees. However, decentralized exchanges often require a high level of technical ability to use. 

At Worldcoin, we can help potential buyers get started without paying anything. We aim to put a share of our crypto in the hands of every individual on the planet for free. We’re also airdropping free DAI to anyone who downloads our app. Subscribe to our blog to stay more in the crypto market. 

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