Understanding Cryptocurrency

Webull 02/24/2022

Since Bitcoin's development in 2009, cryptocurrency has continued to increase in popularity over the years. Today, thousands of different cryptocurrencies are being traded, and new ones are constantly being created. Crypto is traded on the blockchain, which is a decentralized platform that publicly records digital assets. After over a decade of its existence, cryptocurrency has quickly become widely used and traded amongst people globally.

How the Blockchain Works

The blockchain is a digital ledger technology, or DLT. It allows the assets being processed to be fully transparent via cryptographic hashing and decentralization. It stores encrypted data on blocks that are linked together, forming a chain that needs each piece to be held together. This is crucial to ensuring the protection of private information.

The blockchain consists of blocks, nodes, and miners. Every block contains its respective data along with a nonce, or a randomly generated number needed to create a block header hash. This hash is a 256-digit number that is led by many zeros. Once the initial block is created and the cryptographic hash is attached to it, the data is permanently connected to the assigned numbers unless mined. Mining is complex and requires special software to reveal the nonce that is connected to a hash. Since the hash is such a large number, there are billions of combinations that can be tried before the correct one is located. Once it is, the miner's block is added to the chain, and the change is accepted by the network. Due to the difficulty of this process, it's not easy to manipulate the blockchain.

A node is any electronic device that consists of copies of the blockchain. Nodes are what keep the network functioning and decentralized. Anything that is mined needs to be approved by the algorithm in order for the chain to be updated. Everything that happens on the ledger can be easily checked, so any attempted suspicious activity is evident. This eliminates the need to trust the system, as its transparency and intricate network assure the security of data contained in any block. The blockchain is most commonly used for cryptocurrency, as every transaction is publicly recorded making it impossible to refute any single one.

Bitcoin, the First Cryptocurrency

Bitcoin was first mined a little over two months after its developer, known by the alias Satoshi Nakamoto, proposed the idea of a decentralized digital currency. The first real-world transaction didn't take place until over a year later, in 2010, when two pizzas were purchased for 10,000 Bitcoin—what is now valued at over $100 million. In its infancy, the cryptocurrency didn't have much true monetary value. It was still trying to find its footing in a new realm of possibilities. When other networks began development, the idea of cryptocurrency slowly became more mainstream as a realistic form of currency. The availability of Bitcoin on exchanges allowed the token to be easily purchased by a larger variety of people, acting as the beginnings of how we manage cryptocurrency trading today. Since its inception, the price of one Bitcoin has gone from mere cents to tens of thousands of dollars.

Bitcoin has paved the way for digital currency, and as crypto continues to develop and grow, the future of money has new potential.

Owning Crypto

Your cryptocurrencies live in your digital wallet, which has a wallet address. This is a series of numbers and letters attached to your personal wallet, which you need to send and receive funds. There are several applications you can use to store your wallet. You can use a brokerage account like Webull to buy and access your crypto as well. Once you have your wallet set up and/or an account open, you can send, buy, and receive crypto with your wallet address. While you will need to use USD to make an initial purchase, some cryptocurrencies can only be bought with other tokens. You may be able to add funds by making a wire transfer, using a debit card, or connecting your bank information. Once you have coins in your wallet, you can make new purchases or cash out. It's important to note that when making a transaction on the Ethereum blockchain, you will be subject to gas fees. These are fees you pay when buying another coin with ETH. Just like the price of a token can fluctuate throughout the day, the gas fees can as well.

Risks

As with any investment, crypto comes with risk. You should be fully aware of all possible risks before investing and prepared to lose anything you put into cryptocurrency. Depending on the coins in which you chose to invest, different risk factors may apply to you.

• Scams: Beware of scams. It's not unusual to come across crypto scams, so it's necessary to look out for them just as you would any other type of online attack. These can include but are not limited to phishing scams, manipulative trading, and scam exchanges. Make sure to do your research before investing in a particular token or using a trading platform.

• Volatility: Crypto is not regulated by the US government, and the value of any given coin is constantly fluctuating. The price of a coin can rise just as fast as it can drop. Crypto is volatile, and you are potentially risking loss when you invest.

• Transactions: Paying with crypto is not as safe as paying with USD via credit or debit card, as there is no protection for your purchase if something goes wrong. When you buy something online with a debit card, it is typically easy to acquire a refund if needed. If you pay for something with cryptocurrency, it's unlikely to receive your funds back, unless the person you paid sends it back to you.

Investing in crypto, like any investment, comes with risk. While the above outlines a few major risks, there may be others. To know if buying a cryptocurrency is right for you, it's crucial to do your research on any exchange, wallet app, and coin you are hoping to use or purchase.


Sources:

https://builtin.com/blockchain

https://money.usnews.com/investing/articles/the-history-of-bitcoin

https://www.forbes.com/advisor/investing/how-to-buy-cryptocurrency/

https://www.makeuseof.com/biggest-risks-crypto-investors/

https://www.consumer.ftc.gov/articles/what-know-about-cryptocurrency-and-scams

https://www.oswego.edu/cts/basics-about-cryptocurrency

https://www.nerdwallet.com/article/investing/cryptocurrency-7-things-to-know#:~:text=To%20buy%20cryptocurrencies%2C%20you'll,such%20as%20Bitcoin%20or%20Ethereum