Everyone’s talking about it, but do you secretly have no idea what cryptocurrencies are? Does the word ‘blockchain’ make you feel dizzy? Don’t worry! It’s a confusing new world and it’s always good to take small steps and go at your own pace.
If you are going to invest in anything, you should always take the time to learn about what it is. Only by doing this can you figure out the risk-return ratio and decide what suits you as an investor. And it’s no different with cryptocurrencies.
This article aims to introduce you to crypto in an understandable way. In a few minutes of reading, you should know a little more about crypto, tokens, and blockchains.
Crypto in a nutshell
A cryptocurrency is a digital currency that is secured by cryptography. Often it requires massive computing power to crack digital cryptography. So much so that trying to break it doesn’t usually pay off for hackers.
Cryptocurrencies only exist digitally and are stored in digital wallets. All transactions are encrypted and recorded on a digital log. Unlike a traditional database, however, the records are stored on a network of hundreds or thousands of computers at once.
The word ‘crypto’ in cryptocurrencies
Let’s start with the word ‘crypto’ which is derived from the word cryptography. Cryptography was used in ancient Egypt about 4,000 years ago to exchange data and messages, without a third-party being able to read them. Only the receiver (and possibly the sender) has the correct key to decipher and read the information.
Bitcoin was created in 2009 by a pseudonymous person called Satoshi Nakamoto. Nakamoto invented Bitcoin to create a currency that was free from government interference, and better suited to a digital world. Bitcoin is still the largest cryptocurrency, but thousands more cryptos have been created since then. There will only ever be 21 million BTC, making the digital currency scarce and valuable. It also makes Bitcoin very interesting to trade.
When you invest in cryptocurrencies, there’s no way to ignore Bitcoin. The price of BTC largely determines how the price of other cryptocurrencies are doing. In this article, you can read more about Bitcoin and how it works. Understanding the foundations of Bitcoin will help you better understand other currencies and the crypto markets as a whole.
When it comes to crypto, you’ll often come across the term ‘blockchain.’ This is the technology which makes most cryptocurrencies work. In simple terms, it’s just a system that tracks financial transactions and records them in a digital log. The main difference to banks and traditional currencies is that crypto transactions are recorded on a network of multiple computers instead of one central place.
Blockchain in simple language
Here’s an example. Let’s say you want to keep track of all the costs you incur while travelling with four friends. In the traditional financial system, one person would control the account book and be responsible for updating all the costs. With a blockchain system, all four friends have a copy of the account book. They can all see the costs and transactions, and it can only be updated with agreement from all four friends. This way, no one can cheat the system. It’s fair and transparent.
The potential of cryptocurrencies
Although cryptocurrencies are still in their early days, they offer huge potential. The secure technology of a blockchain is useful as a means of payment, but it doesn’t stop there. The system lends itself to exchanging all sorts of things through a super-secure network.
So what you find is that some blockchains are used for other types of transactions. This has led to the rise of other crypto tokens, which are created using existing blockchains such as Ethereum.
If you are interested in investing in crypto, tokens are also an important concept to know. Tokens can be anything, such as a share of a company, a deed of ownership, or a bond. There are also tokens that don’t give you a direct share in a company, but piggyback on the company’s value. The more successful the company is, the faster the value of the currency rises and vice versa.
Are you interested in investing in crypto?
You can now invest in cryptocurrencies with BUX Zero, right alongside your existing portfolio of stocks and ETFs. Of course, make sure you only invest with money you can spare. Crypto is still very volatile so while there is potential for nice returns, you can (partially) lose your money.
All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.