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Updated on 20 May, 2022
InfoChoice is here to help you unpack everything you need to know about cryptocurrency. We’ll dive into what a cryptocurrency is, mining cryptocurrencies, crypto wallets, how to buy cryptocurrencies, what are the cheapest cryptocurrencies, what exchanges exist to buy your crypto and the terminology you need to know to better understand this new revolution in finance.
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Cryptocurrencies are decentralised digital or virtual currencies that take the form of tokens or coins that have a given value – much like your $50 note is worth $50. As with any currency, cryptocurrency can be exchanged for goods and services or traded as an investment, however many retailers are yet to adopt crypto as legitimate form of currency.
A coin must be unique and unreplicable to have any value, which is determined by supply and demand.
Unlike cash currencies, digital currencies are electronic only.
The word cryptocurrency can be broken into two words:
There are currently over 40,000 cryptocurrencies now in circulation.
The first cryptocurrency was Bitcoin. Anything after Bitcoin is known as an Altcoin. Some of the more popular altcoins you may have heard of are Ethereum, Dogecoin, Cardano and Polkadot.
Crypto can be mined or purchased.
Blockchain is the architecture that underpins crypto. It is essentially a decentralised ledger that records all crypto transactions from the day they were made.
Put simply, blockchain allows you to store and instantly transfer information (or data) and currency in a secure manner.
That data is stored in blocks of data and linked to a permanent chain.
Each time data is added to the chain, it becomes more difficult to modify and therefore more secure.
When a transaction is made, the blockchain generates a unique number code known as a hash that is authenticated by a large computer network. Once a transaction is authenticated, it is recorded on the ledger.
It is best to make a trade or keep your crypto safe, using a dedicated exchange.
A crypto exchange is an online platform that allows you to exchange digital assets.
It is the intermediary between buyers and sellers and allows you to:
There are two types of exchanges: centralised and decentralised.
A centralised exchange is a high liquidity exchange that takes profits from platform fee structures. This is not an anonymous entity and does control funds. Transactions are made by a central authority. Unfortunately, security can be an issue.
These illiquid exchanges do not rely on third party control – user’s control their currencies and are therefore less susceptible to fraud or security breaches. Trades take place user to user.
It is estimated there are over 500 crypto exchanges. As there is no regulation surrounding them, anyone could feasibly set one up although investors may not use it. ON top of these there are almost 19,000 markets where you can trade crypto.
To be safe, you need to find the most reputable exchanges and find one that suits your needs which may include exchanges for:
Exchanges to look out for include:
Some exchanges will hold your currency for you, however it is best to store your crypto in a wallet.
While it may be convenient to have a digital wallet to store tickets and credit cards, if you are using crypto, a crypto wallet essential to store your digital currency. How does a crypto wallet work?
The crypto wallet holds a collection of keypairs.
That is:
For those unfamiliar with cryptography, a keypair consists of a ‘public key’ and a ‘private key’, which can be used to encrypt or sign bits of data.
A crypto wallet keeps a record of all your transactions, that way each transaction is tracked and you can keep an eye on your crypto balance.
Most money in the world today exists merely as transaction histories and balances – cryptocurrency is no exception.
You can store you crypto in a digital wallet, a specialised hardware wallet or leave it in a reputable exchange. There are also desktop wallets, mobile wallets and web wallets.
Desktop wallets are installed on your computer and are the most common of the wallets. They give you complete control over your wallet. You are responsible for protecting your money and doing backups. Some desktop wallets are tailored for security, while others focus on anonymity. Electrum, Exodus and Copay are good examples of desktop wallets.
Running as an application on your smartphone, the mobile wallet can store the private keys for your crypto addresses and enable you to pay for things directly from your phone. Don’t lose your smartphone – anyone who can access your phone, can access your coins. Jaxx, Coinomi and Edge are good examples of desktop wallets.
Web-based wallets store your private keys online, on a computer controlled by someone else – exchanges or third parties. There are several online services available which may link to mobile and desktop wallets, replicating the addresses between the different devices you own. One advantage is you can access the web wallet from anywhere, regardless of what device you are using. One major disadvantage is that if they are not implemented correctly, they can put your private keys under the control of the organisation running the website. They are also targets for hackers. You need to make a decision as to whether you want full control of your private keys, or whether you are comfortable with them being owned by the wallet provider. Coinbase, blockchain.info and MyEtherWallet are good examples of desktop wallets.
Hardware wallets are dedicated devices that can hold private keys electronically and facilitate payments. They can be a USB stick or any other piece of specially designed hardware. You can plug in your hardware anywhere and they are considered the most secure … and the most expensive of wallet options. Your hardware wallet is PIN protected, offering another layer of security. Ledger Nano X, Ledger Nano S, TREZOR and KeepKey are good examples of desktop wallets.
Another highly secure wallet, but not for beginners. They are used by advanced crypto players for higher levels of security. Paper wallets are printouts of your private and public keys that act as your wallet. Paper wallets can be confusing. Bitaddress.org and WalletGenerator.net are good examples of desktop wallets. NB: You can store your cryptocurrency in the wallet attached to your exchange. This is a simple and convenient solution that allows you to access your crypto quickly. You don’t control the private key and they can be hacked.
That depends on you. There’s no one size fits all wallet here.
So when determining the type of wallet you want, you should consider the following:
Pros
Cons
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