Cryptocurrency investment: what you need to know Cryptocurrency definition: what are they and how do they work?

Cryptocurrency definition: what are they and how do they work? If you’ve been hearing about Cryptocurrency investments more and more lately, you’re probably wondering what the hype is all about. What are cryptocurrencies and how do they work? To answer these questions, let’s take a closer look at cryptocurrencies and their technology, starting with some cryptocurrency definitions to help us understand better what they are, how they work, and why it might be important to get involved in them. 

A brief history of cryptocurrency

The idea of digital currency has been in circulation since the advent of the internet. After spending decades in various trial-and-error stages, cryptocurrency finally broke into the mainstream in 2009 when Satoshi Nakamoto introduced Bitcoin. Bitcoin serves as a peer-to-peer network where people can transact money with each other without relying on a third party. When Nakamoto created this electronic form of cash, he also designed its underpinning technology, known as the blockchain, which records every single transaction (such as buying a certain amount of cryptocurrency) in an encrypted block. He decentralized the payment system so that individuals could hold and transfer money without interference from traditional banks or governments.

What are they?

Cryptocurrencies are digital, decentralized forms of currency. That means there's no physical form, like coins or banknotes. Instead, cryptocurrencies exist on the internet as computer code. Bitcoin is the most popular cryptocurrency right now; it’s an online payment system in which people pay each other without any outside interference such as a central banking system or regulation by the government. Other popular currencies include Ethereum, Litecoin, Ripple, and Monero.

Crypto articles often discuss topics like how cryptocurrencies work, types of cryptocurrency, trade-offs with bitcoin versus credit cards, key features that make Bitcoin a compelling payment method for international commerce, and legal issues involving cryptocurrency.

How do I get started investing in them?

The first step is finding a cryptocurrency that's appealing to you. The best way is to research the different types of cryptocurrency. There are plenty of lists online, such as this one from Investopedia to get you started. Once you've found some potential currencies, conduct more research on the value of these coins over time. After you've decided which coin suits your interests best, purchase it on a trusted site like Coinbase or Bitcoin Market. Keep in mind that cryptocurrencies can be lost forever if the wrong steps are taken, so don't invest any money that's not disposable for now. If possible try investing just 10% of your savings into cryptocurrencies at a time until you're comfortable with taking more risk with your investments.

How can I make money from them?

What is the downside of investing in crypto? The upside is that it’s very possible to make a profit by investing in cryptocurrency. However, the risks are also much higher than traditional investments. It’s important to weigh your options before deciding whether or not it's worth the risk.

Who uses them?

Almost every crypto transaction is verified with the help of a cryptocurrency miner. Miners use hardware to try and solve the complex math puzzle which essentially confirms the crypto transaction. The difficulty level changes every 2 weeks to ensure that 1 block is created in 10 minutes. When a cryptocurrency miner solves this math problem, he or she will be rewarded with some cryptocurrency such as Bitcoin, Bitcoin Cash, Ethereum, or Litecoin, just for verifying their transactions. This then creates new units of coins for them (usually a small amount).

Are there risks involved in using or investing in cryptocurrencies?

Yes, crypto is risky. Yes, crypto scams exist. These risks can be mitigated by performing your due diligence on the cryptocurrency before purchasing or trading and avoiding fraudsters. You should also consider your long-term financial goals before investing any of your savings in crypto, as it has the potential for big gains but also the potential for massive losses over a relatively short period. 

For example, if you had invested $1,000 in Bitcoin in 2012 with an average price of $10 per Bitcoin, that investment would have grown to around $250K as of January 1st, 2018 (a 25x increase). That sounds great, right?

Should I invest in any of them?

If investing in the stock market is risky, then the cryptocurrency market is about 10 times riskier. But for people who don't want to risk their money but would like to profit from investing, it's one of the few ways left. For example, say an investor purchased $100 worth of Bitcoin back in 2011 when one bitcoin was only worth less than a dollar. Today that same $100 would be worth over six-thousand dollars! This is not just an isolated incident either. Since its release, cryptocurrency has continually increased in value without fail. That being said there are still some problems with crypto that investors should be aware of before putting any money into it.

Thanks for reading! We hope you found this post helpful. If you have any questions or suggestions please let us know in the comments below.