How Does Blockchain Work? How Does Bitcoin and Cryptocurrency Work
May 7, 2022
Written by Brent
How Do Cryptocurrencies Work?
Cryptocurrencies (crypto's) are digital and decentralized currencies created using cryptographic techniques. Decentralized means that unlike the U.S. Dollar or the Euro, they can circulate even without management by central monetary authorities like banks and governments. You can buy and sell crypto's or use them as forms of payment in exchange for goods and services. However, most traders use them as investment vehicles like stocks and precious metals.
Cryptocurrencies are pretty similar to the stock market; they are both value systems. When you buy crypto or a stock, you hope that it will become more valuable in the future. However, unlike stock valuations that depend on estimations of an organization's future cash flows, cryptocurrencies have no comparable valuation metrics. That's because cryptos do not have underlying companies, and variations in their values depend entirely on how much investors buy or sell them. That makes them volatile and less predictable than traditional trading assets.
How Cryptocurrencies Work
Cryptos run on Blockchain technology. A Blockchain is simply an open, digital ledger of transactions as codes; it's like a virtual checkbook that all crypto traders have on their computers. Whenever you buy or sell a cryptocurrency, the virtual checkbook updates the new transaction across all the computers in "blocks" and links it to previous transactions on a "chain." So, everybody who uses cryptocurrencies has identical and accurate records of previous transactions.
How Do You Invest In Cryptocurrency?
While some cryptocurrencies like Bitcoin allow traders to buy them in U.S. dollars, others only accept payment through other cryptos. Cryptocurrency investors don't hold their assets in conventional banks. Instead, they use digital addresses known as wallets—online apps that hold crypto tokens. The wallets have private keys that allow you to unblock and send cryptos and public keys to receive cryptocurrencies from other traders.
As cryptocurrency is increasingly becoming popular, some traditional online brokerages like Robinhood, TradeStation, and Webull now offer access to cryptos and stocks. Alternatively, you can buy cryptocurrencies through pure-play crypto exchanges like Gemini, Kraken, and Coinbase that exclusively operate in cryptos. While the latter may not allow you to access bonds, stocks, and other core assets, they usually have better wallet functionality and wider selections of cryptocurrencies.
One of the most significant challenges in crypto trading is the market's instability. Volatility makes it challenging to predict the future and decide when to buy or sell tokens. Fortunately, you can use a cryptocurrency trading bot to monitor the market 24/7 and trade when profit margins peak.
Which Cryptocurrencies Can You Invest In?
According to CoinMarketCap.com, there are currently over 17,000 publicly-traded cryptocurrencies. By mid-January this year, the global cryptocurrency value was approximately $2 trillion. New cryptocurrencies emerge by the day, showing how fast the global economy is adopting the digital currency.
If you're not sure which cryptocurrency to invest in, you may start by considering the first ten cryptos by trading volume. These include Bitcoin, Ethereum, Tether, BNB, Cardano, USD Coin, Solana, XRP, Terra, and Polkadot, respectively, at the time of this article's publication. Find the one with the highest relative stability and profit margins.
Cryptocurrencies have a promising future. As more governments are processing bills to regulate the crypto market, more people will embrace cryptocurrencies.
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