In recent years, cryptocurrencies have captured the imagination and interest of many investors, researchers, and institutions from all over the world. On one hand, some experts say they are the currencies of the future; on the other hand, others argue that they are too volatile to trust as reliable mediums of exchange. With so many voices speaking on the topic, building a concrete image of cryptocurrencies can be tricky. Hence, research is essential for an informed investment decision.
To help you, here are some of the common questions people have about cryptocurrencies. Whether you are new to the concept or are already looking for the best Monero wallet, here is a quick rundown of key ideas you need to know.
Question #1: What Are Cryptocurrencies?
Experts explain cryptocurrencies in various ways. In essence, however, cryptocurrencies are a completely digital form of money. Unlike traditional currencies, they don’t have a physical form, which means that all transactions that make use of cryptocurrencies happen online. Moreover, cryptocurrencies are decentralized. This means that no government, company, or institution maintains or manages them; all of these tasks fall to the users themselves.
Question #2: How Do Cryptocurrencies Work?
Cryptocurrencies primarily work through two things: blockchain technology and cryptography.
Blockchain technology is what makes cryptocurrencies possible. Blockchain is a decentralized, public ledger where all transactions are recorded. To elaborate, each transaction is recorded as a “block,” which contains a timestamp and transaction data. These blocks are then linked into a chain, which acts as a ledger that crypto users can access.
Meanwhile, cryptocurrencies use cryptography primarily for security reasons. Through cryptography, transactions could be accomplished securely and anonymously. It also prevents double-spending and guarantees an arrangement independent of third-party management (e.g. banks and credit card companies).
Question #3: What Can You Use Cryptocurrencies For?
In its inception in 2009, Bitcoin, the very first cryptocurrency, was intended to serve as an alternate electronic cash system that people could theoretically use in their daily shopping. However, considering the highly volatile values of cryptocurrencies, this is still impractical to accomplish.
Despite its shortcomings, the number of cryptocurrencies continues to rise, and since Bitcoin, their functions have expanded. In particular, traders and investors see crypto as a store of value, which they buy or sell for profit, similar to traditional stock trading.
Question #4: How Many Cryptocurrencies Are There?
According to Statista, there are over 6,000 cryptocurrencies available in the market as of 2021. While the high number may seem surprising at first, it becomes understandable once you know the context. Making a new cryptocurrency is fairly easy. Developers keen on emulating the success of the top cryptocurrencies can easily create their own and put it out on the market. There are companies, for example, who are developing their own crypto, which their customers can use to purchase their products.
Question #5: Are Cryptocurrencies Legal?
Yes, cryptocurrencies are legal. While cryptos get a bad rep sometimes for illegal activities, it is, like any other currency, a tool for bargaining and exchange. It is legal in many countries, including the United States, Australia, the European Union, and Canada.
That said, some countries have banned cryptocurrency due to its unregulated nature. These jurisdictions include China, Indonesia, Bolivia, Turkey, and Egypt.
Question #6: Is Cryptocurrency Taxable?
Yes. In countries where they are legal, cryptocurrencies are considered taxable assets. However, not all countries have set guidelines on how they will be taxed. Hence, if you plan to go into crypto trading, it is best to consult with an accountant, a lawyer, or any other expert who would be more informed on the process to get your taxes in order.
Question #7: Is Cryptocurrency a Good Investment?
This is a tough question because even experts debate among themselves on the topic. From the average trader’s perspective, it is factual that there are individuals who profited immensely from crypto trading. However, it is a high-risk, high-reward kind of situation. The market on cryptocurrency is highly volatile, with values rising and dipping significantly at any given moment. The question then lies on how much capital you are willing to risk.
To help you answer that question, experts recommend investing no more than five percent of your portfolio in crypto trading. This amount may seem exceedingly small, but remember, it is a highly volatile market. The general rule of thumb is not to invest more than you are willing to lose.
Question #8: How Do I Start Using Cryptocurrency?
Getting into crypto is significantly more accessible today. When it comes to choosing which crypto to go for, experts suggest investing in top cryptocurrencies like Bitcoin or Ethereum, but the decision is wholly up to you and your goals. For example, if anonymity is very important for you, then you must consider an alternative like Monero or XMR.
To start buying a cryptocurrency, follow the steps below:
- Join a crypto exchange, an online trading platform for cryptocurrencies.
- Fund your exchange account as you would a traditional investment account.
- Trade the money put into the account with your chosen cryptocurrency.
- Depending on how you want to use them, you can store your digital coins in your exchange account or a digital wallet.
Overall, investing in cryptocurrencies can be tricky. As a developing technology, it can be challenging to see their future and how they could affect the concept of fiat money and currencies as a whole. After all, experts and investors are learning something new about it every day.
For the average trader, the best course of action would be to dig deep and research your crypto options carefully. In this manner, you can make informed decisions and carefully traverse the rapidly changing industry.