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Financial Planning

What is Cryptocurrency: The Beginners' Guide

Date:
June 9, 2021

A cryptocurrency is a digital currency not typically issued by a government or central bank. They're usually developed with the intention of remaining free of government regulation or interference. 

Most cryptocurrencies are decentralized - which means every transaction is recorded on a ledger shared and distributed across a large network of computers - instead of the records and ledgers kept by banks or governments. 

Most use blockchain technology, which enables high levels of encryption. The decentralized blockchain networks allow for the exchange of funds without going through banks or other financial institutions.  

"Crypto" refers to the techniques - the cryptography - that encrypt and safeguard transactions across cryptocurrency exchanges.

Cryptos use tokens

Cryptocurrencies use virtual "tokens," which are denominations - like euros or US dollars - the cryptocurrency's units of value. When these digital assets or "crypto assets" are exchanged or deposited, tokens are registered across currency’s network of shared ledgers. 

Your tokens are kept and registered to your cryptocurrency wallet, which is also protected by cryptography. When your wallet is offline and not connected to the Internet, it's called a "cold wallet" or a "hardware wallet." 

Cryptos offer security and lower fees

The security around cryptocurrency is notable, using sets of keys (or a long string of alphanumeric characters). Some are public, and some are private, known only to the user. A "bitcoin wallet" is the device or software where you store a public or private key.

These layers of security enable payments and fund transfers without using a bank or a credit card, allowing users to avoid traditional transfer fees. Keys also provide users anonymity, another hallmark of cryptocurrencies.

Cryptos’ anonymity has a dark side

Cryptocurrencies’ use of private and public keys provides anonymity on all sides of a transaction. It’s a level of secrecy that’s attracted illegal activities, like black market dealing and money laundering. 

Cryptocurrency investing

You can buy tokens through cryptocurrency markets and trading platforms like Coinbase, Cash or Binance, using services like Robinhood or some conventional brokerage houses. Some people treat trading cryptocurrency like any other investment strategy, with different levels of risk. 

Tokens in a cryptocurrency can grow or drop in value, similar to stocks or commodities that are bought and sold on traditional exchange markets. However, cryptos are commonly considered to have high volatility as an investment, as the factors influencing their value can be unpredictable. 

Cryptos are not generally considered a conventional financial product. They still require the know-how of professional investment advice. 

You can also make money with bitcoin mining, which involves generating new bitcoins. But mining is expensive and time-consuming, requiring highly complex computations and significant computer processing power. 

When tokens are exchanged for conventional currency, the transaction is called an "initial coin offering" (or "ICO"). Cryptos are gaining more acceptance in purchase transactions, from start up capital to real estate.

A common argument for the acceptance of cryptos is the universal acceptance of "fiat currency" - the fact that most of the world's conventional currencies are also not tied to a physical commodity, like gold or silver. 

Types of cryptocurrencies

As of January 2021, the total value of all cryptocurrencies worldwide was more than $897.3 billion, out of which $563.8 billion is through Bitcoin (BTC). As the leader in market capitalization, Bitcoin has its own prestige and mythology, including a fictional founder, known as Satoshi Nakamoto.

Other popular cryptocurrencies, referred to collectively as "altcoins," include Ethereum, Dogecoin, Ripple, Tether, Monero, XRP, Cardano, Chainlink and Litecoin.

This is a beginner's guide and not everything you need to know about cryptocurrency. Bright encourages you to work with professional investment advisors and learn as much as you can before engaging in any investment.

Content Team
Bright Money

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