Maybe you’ve heard terms like Bitcoin, Ethereum, and other digital currencies and now want to trade or invest in them. Perhaps, you’re unsure whether these virtual currencies are usable forms of money. This article explains the basics of Bitcoin and other virtual currencies available today.
What Is Cryptocurrency?
A cryptocurrency is a digital asset that people purchase, trade, or use as a payment method. Organizations and individuals create cryptocurrencies for varied reasons. However, all virtual currencies have some common characteristics.
Before purchasing Bitcoin or any other virtual currency, it’s crucial to understand how these new assets work, who controls them, and who creates them. You may also want to know how to purchase them. While investing in virtual currencies can be a way of building wealth, the undertaking carries significant risks. Therefore, investors should be mindful of cryptocurrency scams.
How Bitcoin and Other Digital Currencies Work
The world has thousands of digital currencies today. Some have unique traits, but most work in the same ways. It’s difficult to avoid jargon when discussing virtual currencies. However, investors can understand their concepts before spending their hard-earned money on them.
Cryptocurrencies use blockchain technology. This technology is a virtual record of every transaction conducted using the virtual currency. Blockchain stores the copies of this record in computers in various parts of the world. Ideally, this blockchain compares to a general ledger or a traditional double-entry bookkeeping system in which transactions create credit and debit in multiple sections.
In simple terms, the blockchain functions like a general ledger. For instance, a person can start with a few coins and send one to another user. The blockchain will note that the individual has sent one coin and has the others in their digital wallet.
Each transaction grouping leads to a block that chains to the previous one. The transaction becomes irreversible after adding the block to the previous ones. That’s why Bitcoin users describe the system as immutable.
Some cryptocurrencies have their blockchain. For instance, Ethereum and Bitcoin have their blockchains. However, some virtual currencies use the existing blockchains instead of starting theirs.
Also, blockchains and most virtual currencies are decentralized. And this is the attribute that distinguishes them from traditional currencies like the U.S dollar. Essentially, no government backs or issues decentralized currencies. Therefore, no entity can control these digital currencies and their underlying technologies.
But some digital currencies, like the digital Yuan, are centralized. That means the Chinese government, through the central bank, issues, and controls this digital currency. People can buy or trade this virtual currency through a government-authorized crypto exchange called the Bitcoin Prime Auto-trading app. Thus, the digital Yuan is centralized, and the government controls it.
Cryptocurrencies and Security
Most people consider virtual currencies secure than conventional money. That’s because blockchain technology records all transactions, and it’s immutable. But this doesn’t mean people can’t lose their tokens.
Currently, the cryptocurrency world has many scams. But this is also the case for traditional currencies and financial systems. However, some factors make cryptocurrency scams more worrisome. For instance, you can’t reverse a Bitcoin transaction. Cryptocurrencies have less conventional financial service platforms and regulations. And some people want to invest or send money quickly due to the fear of missing out on opportunities.
But you can invest well by selecting an established virtual currency like Bitcoin. But even then, you can lose money when holding or sending your tokens if not careful. Therefore, take the time to learn how virtual currencies work and the best ways to invest in them.
Before investing, investors should understand Bitcoin and other virtual currencies to avoid losing their money. Also, learn different ways to invest in cryptocurrencies and the regulations surrounding them in your country. That way, you can make more informed investment decisions.