Cryptocurrency, also known as ‘Crypto’ (meaning secret or hidden in Greek), is digital currency in which transactions are verified and maintained in a decentralized system. This virtual currency uses blockchain technology to securely verify and record transactions in a permanent online ledger enforced by a disparate network of computers. Unlike traditional currency, Cryptocurrency doesn’t rely on a centralized authority such as a bank or financial institution to verify transactions.
Cryptocurrency payments are recorded as digital entries in a secure and clear way that anyone can see. When you send cryptocurrency, each transaction is added to a public ledger without revealing personal information. It is called ‘Crypto’ because it uses encryption to keep transactions safe from unauthorized access, and advanced codes protect the information shared between digital wallets and the public record.
How does Cryptocurrency work?
Cryptocurrencies use a decentralized system called the blockchain to maintain a public record of every transaction ever made. This means that no central authority like a bank controls it, thus allowing transparency. Cryptocurrency units are created through a process called mining, where computers solve complex math problems to generate coins.
When you own cryptocurrency, you have a special key instead of physical coins. This key allows you to send your cryptocurrency directly to others without needing a third-party. You can also buy cryptocurrencies from brokers and store them in special digital wallets.
Cryptocurrency vs. traditional currency
The government prints traditional money like paper notes and coins which you carry or deposit in a bank as cash. You use this money to pay for things and services you need. This traditional currency is backed by the government, while cryptocurrency isn’t controlled by any government or bank.
While you store traditional money in a bank, cryptocurrencies need to be stored in digital wallets which function like apps on your phone or computer to keep your money safe and allow easy access online. However, unlike bank accounts that are insured against loss, cryptocurrencies don’t have any protection incase you lose them.
Types of cryptocurrencies
The first cryptocurrency is Bitcoin which was created in 2009. Even today it is the most well-known and most widely held cryptocurrency. Apart from Bitcoin various other types of cryptocurrencies came into existence. In this article we discuss the popular four types of cryptocurrencies.
Bitcoin (BTC)
Bitcoin is the original cryptocurrency and currently the largest cryptocurrency by market value. Many people refer to it as Digital Gold because it’s often seen as a reliable investment. Bitcoin is accepted by many online shops and lets you purchase goods and services with ease. So far it is a cryptocurrency of choice with a long history of steady growth.
Ethereum (ETH)
Ethereum was launched in 2015 and quickly became the second-largest cryptocurrency after Bitcoin. Unlike Bitcoin, Ethereum is designed for a broader range of applications. It supports smart contracts, which are self-executing programs that operate without fraud or the need for middlemen. This feature allows the creation of various decentralized applications (DApps)such as games and non-fungible tokens (NFTs). Gamers can use it to own, buy and sell in-game assets.
Tether (USDT)
Tether is a type of cryptocurrency known as a stablecoin which means it’s tied to the value of the US dollar. It’s currently the third-largest cryptocurrency and is popular for helping stabilize other cryptocurrencies. When the crypto market fluctuates, investors often convert their assets to Tether to avoid losses. This allows them to buy cryptocurrencies when prices drop and sell them when prices rise.
Litecoin (LTC)
Litecoin is a lightweight version of Bitcoin created in 2011. It has some unique features such as faster transaction times and enhanced storage efficiency. Litecoin is often used as a TestNet for Bitcoin. It lets developers try out new features before they are implemented on Bitcoin. As one of the older cryptocurrencies, it has an active and large community supporting it.
What is a Cryptocurrency Wallet?
A cryptocurrency wallet is a software program that stores your crypto keys and enables you to access your coins. It functions as a wallet for your cryptocurrency, similar to a wallet where you keep cash and cards. Instead of holding physical items, it stores the passkeys you use to authorize transactions and provides the interface that allows you to access your crypto.
Wallets are categorized based on internet connectivity as hot or cold. Hot wallets are connected to the internet and are user-friendly; however, they are less secure and pose more risks. On the other hand, cold wallets are stored offline and do not require internet connectivity. They offer enhanced security and reduced risk. Hot wallets are typically used for daily transactions, while cold wallets are preferred for long-term holdings.
There are several different types of cryptocurrency wallets as explained below:
Cold Wallets
Hardware Wallet – A hardware wallet is a physical device that stores cryptocurrency private keys in an offline (cold) format. Crypto hardware wallets can connect to the internet to send and receive digital assets, but their default storage state is offline. The most popular hardware wallets are Ledger Nano S and Trezor.
Paper Wallet – A paper wallet is a physically printed, scannable QR code wallet that facilitates your cryptocurrency transactions. Paper wallets have long been considered a secure method of storing cryptocurrency offline, providing protection against hacking and online theft. Because of this, many cryptocurrency holders prefer offline storage methods like paper wallets over online storage methods.
Hot Wallets
Desktop Wallet
A desktop wallet is a type of software wallet that is typically non-custodial. The cryptocurrencies associated with a specific wallet aren’t managed by any central platform or third party. Instead, the end-user is the sole individual who can send or receive funds using private keys. Popular desktop wallets include Exodus, Bitcoin Core, Guarda, and Electrum.
Mobile Wallets
A mobile wallet is a mobile-based application that stores private keys. In addition to storage, a mobile wallet enables its user to send and receive virtual currencies. These applications are available on major app stores such as the Play Store for Android and the App Store for iOS devices.
Web Wallets
A web wallet is an online service that allows you to store, send, and receive cryptocurrencies through a web browser. In some web wallets, the private keys are held and are susceptible to DDoS attacks. They can be hosted or non-hosted and are ideal for small investments and to facilitate quick transactions. Some examples include MetaMask and Coinbase.
How to buy and sell Cryptocurrency?
The buying and selling of cryptocurrencies can be done following the steps below:
Choose a Cryptocurrency exchange
Visit a cryptocurrency exchange to buy and sell cryptocurrencies. This is a platform where you can swap fiat currencies, like USD, GBP or EUR for various cryptocurrencies. Different exchanges offer various cryptocurrencies, wallet storage, interest-bearing account options and accordingly charge their asset-based fees.
Setup a digital wallet
The next step is to set up a digital wallet to store your cryptocurrency units securely. This wallet is essential for managing your cryptocurrency transactions.
Fund your account
Next fund your account to begin trading. Most crypto exchanges allow users to deposit fiat currencies using debit or credit cards, although the available options may vary by platform.
Utilize trading platforms
Consider using trading platforms such as MT4 that offer advanced features – personalised alerts, interactive charts and built-in risk management tools – for a more efficient trading experience.
Finally select a cryptocurrency like Bitcoin, Ether, or Litecoin, and look at the deal ticket to see the buy and sell prices. Choose how much you want to trade, then click buy if you think the price will go up or sell if you think it will go down. Assess how much you’re making or losing in the ‘open positions’ section and set stops or limits to protect your trade from losing too much money.
Advantages of Cryptocurrency
The advantages of cryptocurrencies include cheaper and faster money transfers. Additionally, you are not required to provide any personal information, thus protecting your privacy. Another advantage of cryptocurrency is its global nature, allowing you to bypass foreign exchange rates, although cryptocurrency is not legal in some countries. You also do not have to worry about bank account restrictions such as ATM withdrawal limits. However, cryptocurrencies also have certain drawbacks, such as price volatility, high energy consumption associated with mining activities, and the potential for use in criminal activities.
Now that you have a basic understanding of cryptocurrencies and the way they work, brace yourself to enter the world of trading Cryptos. At Orient Finance, trusted financial brokers in Dubai, we’re here to support you every step of the way with expert guidance and the right tools. Whether you’re just beginning or looking to enhance your trading skills, our financial experts can help you succeed.