From Barter to Bitcoin: Cryptocurrency 101

3/10/2022

 

Note to reader: Cryptocurrency is highly volatile. Trading cryptocurrencies carries a high level of risk and should be done with caution. Before investing, carefully consider your investment objectives, experience level, and appetite for risk. Educate yourself on all the risks of trading cryptocurrency and seek advice from a professional, independent financial advisor.

Beimagefore money, people used bartering to acquire and exchange goods and services. The terms "money" and "currency" are widely used interchangeably, but these two terms aren't identical. Money is an intangible concept, whereas currency is the tangible (physical) manifestation of the concept of money.

People have used different materials to represent money. Stones, salt, wheat, seashells, beaver pelts, and gold have all been used as a medium of exchange. Just as the digital age has changed our culture and the way we interact as humans, it’s no surprise that our money has undergone a metamorphosis in the next phase of its evolutionary timeline.

Remember that money today is unlimited and operated by a centralized authority, such as a government or bank. Money's basic form is numbers, while currency comes in the form of paper notes, plastic cards, and now, cryptocurrency. It's important to delineate between the two to grasp how virtual currency works.

Cryptocurrency
Cryptocurrencies are digital currencies or assets that use cryptography to enable secure trading and ownership by verifying transactions in a network. Think of cryptocurrencies as virtual currencies. They have no physical coinage, and they operate without a centralized authority. Instead, they're intended for payments by transmitting value across a decentralized network of users.

The individual units of cryptocurrencies, such as Bitcoin, Litecoin, Ethereum, and Dogecoin, can be referred to as coins or tokens, depending on how they’re used. Some are used as stores of value and exchanged for goods and services, while others help run computer networks carrying out complex financial transactions.

Cryptocurrencies are created through a process called "mining." Mining is an energy-intensive process of computers solving complex puzzles to verify and authenticate transactions on the network. As a result, owners of the computers are rewarded by receiving newly created cryptocurrency.

Bitcoin was the world's first cryptocurrency made to make cross-border payments faster and cheaper. In 2009, one bitcoin was roughly equal to $1, and now its value has grown to $48,000 (coinmarketcap.com). Bitcoin is a decentralized currency not controlled by any central authority like a government or bank. It remains the leading digital currency in the crypto space.

Virtual money, bitcoin, and most other cryptos are supported by blockchain, a technology that maintains secure, tamper-resistant records of transactions and keeps track of who owns what.

Blockchain
You can’t understand the new world of crypto without understanding blockchain. Blockchain is a database technology at the heart of nearly all cryptocurrencies. It’s a shared, digitally distributed, decentralized public ledger that stores data of any kind.

Blockchain is a database, and while conventional databases can store the same information as a blockchain database, blockchain is totally decentralized. Instead of being maintained by one centralized administrator–like a bank or government–there are many identical copies of a blockchain database located on multiple computers spread out across a network.

How to buy cryptocurrency
There are four steps involved in buying cryptocurrency:

1.

Know where to buy.
You can buy cryptocurrency in many ways, but the method beginners usually start with is through a reputable cryptocurrency exchange, brokerage, or payment services. These online exchanges work similarly to a stockbroker who gives you tools to buy and sell digital currencies. It’s where you’ll buy, sell, and store your crypto.

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A cryptocurrency exchange is a platform dedicated to facilitating cryptocurrency trading, and each has its own rules for buying, selling, and trading. As a beginner, look for an exchange that offers an easy-to-use interface, customer support, and education resources.

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A few traditional online brokerages offer cryptocurrencies. If you're looking to trade a variety of asset types like stocks, EFTs, mutual funds, bonds, etc., you might consider choosing this method.

2.

Decide how to pay.
The most popular payment options for first-time buyers of cryptocurrency are from “fiat currencies” such as the U.S. dollar. Fiat money is a government-issued currency that's not backed by a commodity like gold or silver, so there's no intrinsic value; it's a promise from a government or bank that the currency can be exchanged for its value in goods. As a newbie to crypto, you’ll likely have to use regular money to purchase it.

3.

Fund your account.
Depending on how you pay, you’ll need to fund your account before purchasing. Most exchanges allow debit and bank transfers, and some will let you purchase with a credit card, although be cautious if you choose this method. Cryptocurrency is volatile, and interest costs can increase your loss if the investment decreases in value.

4.

Choose your crypto.
You can select from many options, so decide what your goals are for this investment before you buy. For example, do you want it to increase in value? Will you carry out transactions using cryptocurrency? Knowing what your objective is will help you make your decision.

What you should know before investing

 

Cryptocurrencies are a volatile, high-risk investment. It's not uncommon for one to drop 30% in a week, then hit a high the next. As a result, returns are neither stable nor guaranteed.

 

The gains from cryptocurrency are taxable.

 

Unlike the money in your checking or savings account, cryptocurrency is not NCUA or FDIC insured. So if the crypto exchange you're on closes down or goes bankrupt, you are out of luck.

 


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