It has been a turbulent year. With all the uncertainty, people are flocking to Cryptocurrency and losing faith in traditional financial institutions. Mainstream adoption of cryptocurrency seems inevitable—in the last decade, Bitcoin has outperformed every other asset including real estate, gold and the S&P 500 (the stocks of 500 large-cap U.S. companies).
If you’re considering trading cryptocurrency this year, this article will give a basic overview:
What is Bitcoin and Why the Popularity?
In a nutshell: Bitcoin is digital currency, with no single institutional control (decentralized), and can be exchanged securely via a public ledger (blockchain).
Centralized vs Decentralized
Decentralization means that no central authority controls your assets. Typically, your money sits in a debit or savings account, which means it is subject to the bank’s fees, terms, conditions, and control. Not so with Bitcoin, where the individual has control. Transactions are enabled by blockchain technology, which is not governed by any single external authority (also referred to as a “trustless system”; you don’t need to trust any other person, “trust” is in the technology).
Additionally, traditional currency is backed by the government. In other words, tied to the economy. This means government decisions have a direct effect on the value of your money. On the other hand, Bitcoin’s value is pegged to all users worldwide. The intent is that power will always be in the hands of owners. Automatic inflation controls are hardwired in the technology; Bitcoin is firmly capped at 21 million. This why you’ll hear Bitcoin referred to as “digital gold.”
How is Counterfeit and Fraud Prevented?
Each Bitcoin is identified by a private key/code, which means it cannot be counterfeited. And transactions are verified through a process called “consensus.” Fraudulent attempts to “double-spend” (sending the same Bitcoin to more than one address) are negated with time-stamping technology.
The Basics for Getting Started
You’ll need: (1) a wallet; (2) a form of currency to purchase/exchange for cryptocurrency.
Wallets for Storing Your Bitcoin or Cryptocurrency
There are four types of wallets for storing cryptocurrency:
1. Hardware Wallets
Hardware wallets (cold storage) are external drives like thumb drives; most will need to be plugged into a computer. Similar to having a physical personal safe, your coins will be stored and protected by various passkeys. Even if you lose or destroy your hardware wallet, you can still regain access with a unique code.
2. Software Wallets
Software wallets are computer programs downloaded to your computer or phone. As with hardware wallets, you’ll have passkeys and can recover your coins if you forget your password or your computer is damaged.
Software wallets are considered safe and secure, but not as secure as a hardware wallet. Since your wallet is connected to the internet, there’s a chance it may be hacked.
3. Paper Wallets
Paper wallets are literally that—paper. Your Bitcoins are printed onto paper, and absent any backups, you could permanently lose your coins. Think of it like a gift card, loaded with money; if you lose the actual card, you will lose the money.
You can create a paper wallet online. You’ll first need to generate a wallet, then make prints, and add your funds. Bitaddress.org is open-source and the oldest paper wallet generator. This article is a helpful guide.
4. Hot Wallets
Hot wallets are provided by online exchanges such as Binance, Kucoin, or Bittrex. In this sense, your wallet is more of an online account, only accessible via the exchange. And your private keys will be held by the exchange rather than you holding them in a wallet.
Exchanges/hot wallets are convenient because your coin storage and marketplace are all in one location. But the risk is if the exchange gets hacked, you may lose your money. While exchanges have protection measures in place, it is advisable never to keep large amounts of money on an exchange.
How to Make Purchases and Trades?
Once you’ve decided on your wallet, here are some ways to purchase or trade cryptocurrency:
From Your Wallet
Many hardware and software wallets enable users to trade directly from the wallet interface.
To get started with an exchange, you’ll typically use an email address to create an account. In order to trade and buy, most exchanges person a brief identification check (“KYC”; know your customer). Then you’ll need to transfer funds into your exchange account, usually by debit card wire transfer or credit card.
Peer-to-Peer (P2P) or Decentralized Exchanges
There are forums and online groups that facilitate exchanges directly between people. Sellers usually set their price and mode of payment like PayPal, Venmo, bank transfer or credit cards. The advantages are avoiding transaction fees when trading on exchanges.
Decentralized exchanges are a mix of P2P and regular exchanges. You’ll connect your own wallet to the exchange, and trades will go directly from a buyer’s wallet into the seller’s.
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