A beginner’s guide to cryptocurrency

What exactly is a cryptocurrency?

It helps to comprehend cryptocurrencies by remembering that bitcoin arose from the ashes of the global financial crisis of 2007-08.

Bitcoin – the first cryptocurrency to achieve a global foothold — was promoted as a digital version of money that didn't rely on banks and was immune to government intervention. It was created by an individual or group under the pseudonym Satoshi Nakamoto. Anyone, at any time, for any cause, could exchange bitcoins with anyone else.

However, bitcoin is only the first application of a technology known as "blockchain," which is steadily making its way into (and possibly shaking up) other fields like real estate, music, and gaming. The bitcoin blockchain is only used to keep track of bitcoins; however, ethereum and later initiatives use blockchains to run "smart contracts" – programs that can be triggered on demand. As a result, blockchains can be used as a substitute for not only banks and government record-keepers, but also computer servers.

Blockchains use a distributed network of computers to maintain and update a permanent digital record of each transaction, obviating the need for a central ledger or record-keeper. They utilize cryptography, which is a set of mathematical techniques for converting information into virtually unbreakable code, to ensure that the persons exchanging bitcoins are who they say they are and to allow computers on the network to preserve identical, immutable records. Although bitcoins or any other item tracked by a blockchain can still be lost or stolen, this prohibits them from being duplicated or spent more than once (more on that later).

Anyone can look at the data on a public blockchain like bitcoin; anyone can look at the list of transactions (even as they happen, which is like attempting to read the labels on boxes moving down a conveyor belt) or follow the activity of any individual account holder. However, because account holders' identities are encrypted, it is impossible to determine who is behind the accounts that are performing those transactions.

But, how much is it worth?

Cryptocurrencies are worth whatever the market indicates. More than $2 trillion has been invested in bitcoin and other cryptocurrencies, presumably in the hope that future investors will be prepared to pay more for them.

You may argue that all of this is prestidigitation, or the creation of money out of thin air. Technically, each bitcoin began as a reward for performing the computationally demanding cryptographic labor required to record transactions into the blockchain (a process known as "mining"). However, their worth is determined by what people are willing to pay for them, which is determined by where they predict the price to go in the future.

Bulls point out that bitcoin's supply is capped at a level that maintains scarcity; there will never be more than 21 million bitcoins, despite the fact that the world's population is currently at 7.9 billion people and expanding. According to them, the more extensively bitcoin is utilized, the higher the demand for it, which will drive up the price.

Bears claim that the dramatic price swings – bitcoin has already experienced two boom-and-bust swings in 2021 — would discourage most people from joining on the cryptocurrency bandwagon. Crypto's vulnerability to price manipulation and the whims of momentum-driven investors may also be a factor.

Parthajit Kayal and Purnima Rohilla of the Madras School of Economics in India warned that the price of bitcoin could fall to zero if the benefits bitcoin provides "are taken away by the government or the coins are hampered by fraudulent activities or if a better alternative emerges in the market," according to a paper summarizing economic research on bitcoin. There are plenty of options; according to Statista.com, there are over 7,500 cryptocurrencies in circulation right now.

Is it, in fact, money?

Cryptocurrency as a medium of exchange leaves a lot to be desired. To begin with, just a few companies now accept these coins as payment.

A few software organizations, a couple of sports franchises, and a smattering of merchants and restaurants throughout the world are among the places where you can spend bitcoins. There are workarounds, such as Purse, which allows you to swap bitcoins for Amazon gift cards, but the need for such services highlights how ineffective Bitcoin is as a substitute for US cash right now.

Also, bitcoin hasn't kept its value in the short term, which is a fundamental characteristic of any money. The value of the US dollar fluctuates in relation to other currencies, and its purchasing power diminishes over time due to inflation. However, it does not rise by 33% in a week, as bitcoin did in the first week of October, or fall by nearly a quarter in a week, as bitcoin did in mid-May. According to a 2017 study, bitcoin values are 30 times more volatile than the dollar, euro, or yuan.

Furthermore, fees must be paid in order for your cryptocurrency payments or other transactions to be included to the blockchain. These fees are typically a modest fraction of the transaction's value, much lower than what retailers pay to credit card processors. However, if you need your transaction to be completed fast, you may have to pay a higher cost. Otherwise, you may have to wait for hours or even days.Why would anyone use bitcoin or comparable technology as a medium of trade, given the wild price swings and other disadvantages? Perhaps because crypto currencies, like cash, can be spent anonymously but from afar. That could explain why ransomware operations and dark web contraband purchases use digital currency as a payment method.

Stablecoins, a type of token whose value is related to the value of the dollar or another non-cryptographic asset, are available for individuals who truly want to use their cyber coins as currency. Tether is the most popular of these; its developers promise that each Tether token is backed by $1 in cash and other reserves (though the value of those assets is debatable), and its price has maintained at or near $1 for much of its lifetime.

What's the best way to get started?

The majority of cryptocurrency is available for purchase by anyone. All you need is a mechanism to send your order to the blockchain for the currency you're working with The simplest way to do so is to utilize a cryptocurrency exchange like Binance or Coinbase. These are the cryptocurrency equivalent of a shopping mall, with several different cryptocurrencies available. Typically, these websites will offer a digital wallet that functions similarly to a checking account, but is protected by a personal cryptographic key rather than a PIN. You fund your transactions with cash or cryptocurrency, and the wallet keeps track of your holdings and retains the digital receipts that trace everything you've bought and sold.

A "custodial" wallet is one that is stored in the cloud and managed by a third party who can assist you in recovering your password. One disadvantage is that it is based on centralized computers, which can be hacked, as the BitMart exchange did earlier this month, resulting in $150 million in cryptocurrency losses. Such losses may be reimbursed by insurance, as BitMart appears to have been. However, this isn't always the case.

If you're concerned about this, you can complete one more transaction on your exchange to transfer your assets to a "noncustodial" wallet that you own. It might be a software application on your computer or phone, like MetaMask's, or a specialized, high-security USB drive (sometimes known as a "hardware wallet"). In either case, it's solely your responsibility to keep it up to date - and if you forget your password, you'll lose your cryptocurrency.

Beware of the sharks if you leap into the crypto pond. Cryptocurrency users lost more than $7.7 billion to scams and other crypto-based crimes in 2021 alone, according to Chainanalysis.

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