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December 12, 2017

How to Build an Understanding of Cryptocurrencies

How to Build an Understanding of Cryptocurrencies

There are plenty of articles on the internet that talk about cryptocurrencies in-depth. Yet, it is easy to get turned off by the jargon that at first can be hard to follow. If you’re searching for a starting point for your education on cryptocurrencies, this is a good start. Below are some of the most important facts about cryptocurrency.

What is cryptocurrency?

To put it simply, cryptocurrency is a digital fund that uses encryption in order to generate money and verify transactions. These transactions are recorded on a public ledger, AKA blockchains. Cryptocurrency coins are created through a procedure called mining.

How did cryptocurrencies emerge?

Cryptocurrencies emerged as a product of another invention. Satoshi Nakamoto, the unofficial founder of Bitcoin, never intended to invent a new currency but instead tried to create a peer-to-peer electronic cash system. His original goal was to invent something that many people had failed to create before the emergence of digital cash; he wanted to create a new electronic cash system that was completely decentralised to prevent inflation. However, instead of just creating a peer-to-peer electronic platform, Nakamoto gave birth to the cryptocurrency Bitcoin.

Are cryptocurrencies important in the world of investing?

Cryptocurrencies are quickly becoming popular investment vehicles. Bitcoin, the most widely accepted form of cryptocurrency, reached an all-time high when it settled at around $17,000 per coin by December 2017. Some Forex traders have diversified their portfolio by purchasing cryptocurrency investments because digital funds are now seen as hedge to a failing economy. In addition to the general public’s acceptance of cryptocurrencies, Reuters reported that global trading platforms like CBOE and CME will soon support the trade of Bitcoin futures contract. With this shift in investing trends, it’s important for investors to learn everything about cryptocurrencies in order to have a broader perspective in keeping their assets diversified.

What are the economical factors that affect cryptocurrencies?

The prices of cryptocurrencies are extremely volatile, and they fluctuate depending on the sentiments of investors. If investors are bullish about a cryptocurrency, its value will increase. However, when there’s little demand for it, then prices will stagnate and eventually decline.

While cryptocurrencies are decentralised, meaning there are no governments that regulate them, their prices get affected if say the government bans its citizens from even accessing their digital funds. China was one of the first countries that tried to ban cryptocurrency transactions. More recently, the UK has made moves to regulate cryptocurrency to pin down people who are using Bitcoin for money-laundering purposes.

There are also a lot of economic factors that affect the prices of cryptocurrencies. For example, some developed countries have already injected Bitcoin into their legal frameworks. When a country acknowledges a cryptocurrency, trust among investors is built and demand rises. In addition, the growing adoption of Blockchain technology — which is what makes cryptocurrency transactions secure — also affects the prices of digital funds positively. The more people that trust blockchain, the greater the demand for the technology.

How do cryptocurrencies work?

Cryptocurrency can be easily defined, and its history is quite interesting. However, its practical usage can be a bit tricky if you’re not familiar with the trade. CoinWire states that the best way to explain how cryptocurrency works is to break it into four steps:

Mining – this is the process where individuals verify blocks of cryptocurrency using complicated mathematical methods. Once a block has been verified, it is then added to the blockchain, which acts like a public ledger. Those who were able to successfully verify a block are then awarded with a coin. The process may sound simple, but mining one cryptocurrency takes a long time.

Acquisition – There are other ways to get coins apart from mining. The most convenient way of course is to simply purchase the cryptocurrency of your choice through online exchanges. You can purchase cryptocurrency with cash in the same way people buy stocks.

Storage – Just like fiat money, cryptocurrencies need to be stored digitally. When people take ownership of a coin, what they’re essentially doing is gaining access to its use. In short, it’s already stored online for everyone to see, but only the owner can use it through a private key. The cryptocurrency cannot be used without the owner’s key.

Transactions – In order to make a transaction, owners must use their private keys as well as input the address of the recipient that will receive the cryptocurrency. It can take a few minutes for the transaction to finish (about 10 minutes for Bitcoin). Once a transaction has been verified, the new owner will receive full access and rights to the digital funds.

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