In simple terms, cryptocurrencies are a new form of money that you can trade online with other users. The first cryptocurrency was Bitcoin, created in 2009 by an unknown person using the alias Satoshi Nakamoto. Since then, there have been thousands of other cryptocurrencies created using the same underlying blockchain technology as Bitcoin.

This article will discuss how cryptocurrency works to help you understand the novel financial innovation.

How does cryptocurrency work?

Cryptocurrency is a form of digital currency that uses cryptography to secure financial transactions and to control the creation of new units of a particular cryptocurrency. Cryptography is the practice of encoding messages or information in such a way that only people with access to special decoding software can decode it. Cryptographic methods include hashing (which converts large strings of data into short strings of data) and encryption (which takes a message and converts it into an unintelligible format that only someone with the right decryption key can read).

Some cryptocurrencies are only meant to be used as a unit of exchange for goods and services, while others are stores of value and can be used to participate in specific software programs.

How are cryptocurrencies created?

A decentralized cryptocurrency network means that there is no centralized authority or bank that issues the cryptocurrency. Instead, the mining of blocks (groups of transactions) is done by individuals or groups of individuals known as miners who use powerful computers to solve complex mathematical problems to win the right to create a new block and claim the cryptocurrency reward that comes with it.

Cryptocurrency pros

• Cryptocurrency systems aren’t managed by a central authority, as with government-backed currencies. Instead, all transactions occur in a public ledger called the blockchain, which is shared among users on an as-needed basis.

• There’s no need to rely on a single entity to process transactions or monitor the blockchain, because multiple computers on the network verify transactions using cryptography. Because of this nature, there is nobody to control it or shut it down like a bank or a government could shut down a bank or a country.

• Crypto systems are more secure than centralized systems because they rely on encryption algorithms that aren’t hacked easily and because they make use of peer to peer networks which are difficult to tamper with.

• Transactions can be made anonymously and without the need of a central authority

• Cryptocurrency investors can accrue passive income by staking their digital assets on a blockchain protocol. Staking involves using your cryptocurrencies to verify transactions on a blockchain protocol. Though risky, this process can allow you to grow your crypto holdings without buying more.

• Exchange rates are determined by supply and demand rather than central banks.

Cryptocurrency cons

• Cryptocurrencies have become increasingly popular in recent years. However, there are concerns that cryptocurrencies are a scam and that their value is unstable or even inflated by fraudsters and speculators.

• There is no way to verify whether the owner of a crypto wallet is a real person or just someone trying to trick people out of their money through illegitimate means.

• Enthusiasts see cryptocurrency as the future of the global economy. However, if blockchain technology does not achieve its potential, the long-term investors may never see the returns they anticipated.

• Many cryptocurrency projects are unproven and have yet to achieve wide adoption.

• Crypto prices are extremely volatile. While that means many people have made money quickly by buying in at the right time, many others have lost money by doing so just before a crypto crash.

• Individuals may be less inclined to use cryptocurrency as a payment method since its value fluctuates wildly.

• The environmental impact of Bitcoin and other projects that use similar mining protocols is significant, although some digital currencies require less energy to mine.

• In the face of regulatory changes or crackdowns by governments around the globe, the cryptocurrency market could be affected in unpredictable ways.

How to choose a cryptocurrency

Compared with other cryptocurrencies, Bitcoin is different in terms of history and technology. While Bitcoin was the first cryptocurrency and the most valuable one, there are over 20,000 different cryptocurrencies that are traded publicly. And cryptocurrencies continue to grow in popularity. By June 13, 2022, the total market capitalization of all cryptocurrencies had shot up to approximately $970 million.

So how do you know which one is the right choice for you? Let’s have a look at some of the options that might be available on the cryptocurrency exchanges today:

Bitcoin is the original cryptocurrency that was the first to be created in 2009 by Satoshi Nakamoto and has been the most widely used cryptocurrency until now.

Ethereum is a cryptocurrency that was developed to facilitate financial transactions more complex than those supported by Bitcoin.

Cardano is a competitor to Ethereum, led by Charles Hoskinson, one of its co-founders.

Litecoin is an adaptation of Bitcoin that was meant to make online payments easier and quicker.

Solana emphasizes speed and cost-effectiveness.

Dogecoin is Dogecoin is a dog-themed cryptocurrency that was created in 2013 by programmer Billy Markus from Portland, Oregon. It began as a joke but has grown to be among the most valuable cryptocurrencies.

Stablecoins are usually pegged to the the value of another currency or asset such as gold or the US dollar. Stablecoins are a popular choice for those looking to hedge against volatile cryptocurrency prices.

Is cryptocurrency a good investment?

Volatile investments like cryptocurrency are riskier and should be limited to a small portion of your portfolio — one common guideline is no more than 10% of your overall investments.

In addition, as a new investor, cultivating a diversified portfolio can help to lower your risk exposure. If you invest in several different tokens, you can insulate yourself from losses in one holding.

Perhaps the most important thing when investing in anything is to Do Your Own Research (DYOR). It’s important to do your homework and thoroughly research each asset before investing. If you’re looking to invest in crypto products or projects, here are some additional questions to consider:

1) Is the team experienced? Having credible and well-respected leaders is usually a good sign.

2) Does the product have real world usage? Products that have real-life utility tend to be more sustainable.

3) Are there any red flags? If the website looks it was haphazardly created and if the project’s social media accounts are not active, these could be signs of a “rug pull.”

4) Who are the investors backing the project? If there are other investors who are investing in the token or project, it means others consider it promising.

5) Is it already developed or is the company still looking to raise funding to develop its product? The further along the product, the less risky it is.

With so many choices available, it can be overwhelming to sift through thousands of tokens and determine which currency is legitimate and which you should steer clear of. Be sure to take the necessary precautions to protect yourself from fraudsters who see cryptocurrencies as an opportunity to defraud investors. If you have a financial advisor who is familiar with cryptocurrencies, it may be worth asking for their input.

Here are some investing strategies to keep in mind:

1. Diversify your portfolio: When investing in cryptocurrency, it’s important to diversify your portfolio across a variety of different coins and tokens. This will help to mitigate your risk and protect your investment in case any one particular asset experiences a sudden drop in value. 

2. Do your own research: It’s important to carefully research any coin or token before investing. Be sure to read up on the team behind the project, the technology powering it, and the potential use cases for the coin. 

3. Be patient: The cryptocurrency market is still relatively new and volatile. This means that prices can fluctuate wildly and it may take some time for your investment to pay off. It’s important to be patient and not panic sell if the value of your assets drops in the short-term. 

4. Have a long-term outlook: When investing in cryptocurrency, it’s important to have a long-term outlook. This asset class is still in its early stages of development and has a lot of potential for growth in the years to come. 

5. Use a reputable exchange: When buying and selling cryptocurrency, be sure to use a reputable exchange. There are many scams and hacks in the space, so it’s important to be careful when choosing an exchange to use. Make sure to only use exchanges that have a good reputation and offer a safe and secure platform.