A Beginners Guide to Cryptocurrency
By definition, Cryptocurrency means encrypted currency. The name itself emerged from the concept of data encryption. It is a digital currency that you can use to buy and trade commodities just like paper currency. Much like paper currency, it can also be used as a trading instrument too. All transactions with Cryptocurrency can take online form only.
Paper currencies are issued and regulated by Government institutes around the world. Each country issues a national currency e.g. Dollar, Pound Sterling, Yen, etc. Cryptocurrency is unregulated and issued by private corporations. Though, the most popular Cryptocurrency Bitcoin was issued by a group of people.
How Cryptocurrency is Different?
It is an intangible and digital asset with no physical shape. Issuers of Cryptocurrency manage it with blockchain technology and cryptography. Each transaction is then recorded on a public ledger and becomes part of the issuer’s database of blockchain. The popularity of Cryptos meant, they drew demand and became publicly traded commodities just like other currencies and financial assets.
The intangible nature and non-regulated currency are two prominent differences for Cryptocurrency. Practically, transactions in Cryptocurrencies work similarly as digital or online banking transactions work. The concept of digital wallets works as making transactions through credit cards or online account balances.
How Cryptocurrencies Work and Where to Buy Them?
You can buy Cryptocurrency through Crypto specialised brokers and exchanges like Coinbase and Binance directly. You’ll need a normal bank account balance to purchase Cryptocurrency for the first time though.
In some countries like the US, you may directly purchase Cryptocurrency through ATM and traditional brokers. All exchanges and brokers charge a nominal fee per transaction. You may also purchase Cryptocurrency directly from private investors holding Cryptos called peer-to-peer trading. As you need a wallet to store the paper currency, you’ll need a digital wallet to keep your digital currency safe too. Exchanges offering digital currencies provide digital and secured wallets for certain charges.
Much like any other currency, the demand-supply rule applies to popular Cryptos like Bitcoin and Ethereum. However, unlike traditional currencies, these digital coins have seen drastic volatility and price instability over time. Even the most popular digital currency Bitcoin has seen huge price swings since its inception. Uncertainty in future demand, unregulated currency nature, and limited edition of currency all add to the volatility of the Cryptocurrencies.
Advantages with Cryptocurrency Investment and Trading
You may consider using Cryptocurrency just like another paying instrument. A digital currency holds the face of the future. You can enjoy autonomous status and encrypted security features while paying with digital currencies. The caveat here is that you’ll large initial investment to buy digital currency.
Most people see Cryptocurrencies as investment or trading instruments more than a traditional currency feature of paying money. Ease of access through online means and decentralised approach draws demand for these digital currencies. Much like traditional currency money market instruments, Crypto exchanges offer several investment instruments like Stocks, IRAs, and Futures too.
With increasing trading and investment options, Cryptocurrencies are offering wider options for diversification and wealth building. Investors find investing in digital currencies easier than commodities and precious metals.
Risks with Cryptocurrencies
The decentralised nature of digital currencies presents the biggest legal risk to Cryptocurrencies. These currencies are not backed by any Reserves, neither issued by Government backed agencies.
Blockchain technology and cryptography remain the biggest advantage of offering Cybersecurity to investors. It also poses the biggest threat for investors against cyber fraud and theft. Retail investors are particularly prone to hacking and cyber theft attacks.
Traditional financial institutes and governing bodies have also criticised Cryptocurrency exchanges for insufficient regulations against money laundering. Digital transfer of money through encrypted technology provides a privacy advantage for legal users as well as a threat of misuse.
Legal Status and Tax Treatment of Cryptocurrencies
Many countries have offered legal status to Cryptocurrencies recently. Trading and investing in Cryptocurrency has become normal in many countries. However, investors in Cryptocurrency are subject to greater tax obligations in countries like the US. In the US, the authorities have declared capital tax gains on Cryptocurrency trading.
Important Considerations for Investors
In a nutshell, the biggest advantages of Cryptocurrencies like digital presence, decentralised and volatile currencies, are the biggest risks with these assets. Historically, a popular digital currency like Bitcoin has seen huge price fluctuations touching as high as £17,000.
Bear in mind the risk of price volatility and tax implications with investments in Cryptocurrency. Perform due diligence on exchange or broker before making the investment decision.
To learn more we recommend reading Cryptocurrency for Dummies