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Cryptocurrency is digital money that exists solely as entries in a tamper-proof shared ledger rather than coins and notes issued by a central bank.
Cryptocurrency is digital money that exists solely as entries in a tamper-proof shared ledger rather than coins and notes issued by a central bank. Introduced by Bitcoin in 2009 as a way to send value directly between two parties without a bank or payment processor intermediary, thousands of other cryptos have appeared since then and are used for various reasons. What makes all of them similar is the fact that cryptography and a network of computers are used to record and verify transactions rather than a trusted institution.
Almost every cryptocurrency uses blockchain technology — a continuously growing chain of data "blocks" where each contains a bunch of transactions. Copies of the ledger are saved on thousands of independent computers, which means that no entity can secretly change the history without being noticed by the whole network. New blocks are added via consensus, mostly proof of work or proof of stake, which is what enables complete strangers around the world to agree on the same transaction history without having to trust each other.
Bitcoin is the largest cryptocurrency by market capitalization and is mostly used as a store of value. It is quite similar to digital gold. Ethereum does not use the same approach as Bitcoin. Besides its own cryptocurrency (called ETH), Ethereum uses smart contracts, which are programs allowing for the creation of decentralized applications and tokens and, consequently, much wider uses. Apart from Bitcoin and Ethereum, there are thousands of other altcoins used for different purposes (stablecoins pegged to US dollar and so on).
A wallet is not a place to save coins, it is the place to save your private keys, proving ownership of your coins. Coins always stay on the blockchain. There are custodial wallets, provided by exchanges, and non-custodial wallets. The former save the private keys for you and are convenient for beginners. The latter give you more freedom, but you are responsible for saving the recovery phrase. In case you have any coins worth saving, using a hardware wallet (keeping keys offline) is the recommended option.
Almost everybody buys his or her first coins on a centralized exchange. It takes care of the technicalities and allows buying coins for a credit card or bank transfer. When choosing the platform, one should consider what coins it supports, how it is regulated in one's country, what kind of security measures it provides, and the fee structure. It might be a good idea to read independent reviews of the platform to understand whether it is trustworthy enough.
After opening an account, placing an order requires choosing the coin and entering the amount of money. Then one should decide whether he or she wants to make a market order (executed immediately according to the current price) or limit order (only executed at a certain price). It is better to start with a small amount of money while one is still learning how to use the interface of the exchange. Later one might want to transfer coins to his or her own wallet after accumulating a considerable amount of them.
Many newer blockchains allow holders to "stake" their coins. This means that one locks his or her coins to help to validate transactions and gets a share of network rewards. This method is quite easy for everybody and is one of the best options of earning additional income from cryptocurrencies, but the reward varies heavily depending on a coin and a platform, and the funds are often locked for some period of time during which the price can change against one. Some networks use slashing penalty for validator errors, which makes it necessary to carefully read staking terms of a coin.
Lending platforms allow depositing coins and lending them to other users or institutions and getting a profit in the form of interest. It is quite similar to a traditional savings account. The rate is often quite high compared to banks, but it is usually due to the fact that such a high rate brings higher risks: some major lending platforms collapsed in recent years, leaving depositors unable to withdraw their funds. People interested in earning money this way should understand the business model of the platform.
Sometimes new coins are airdropped to early users or holders of a wallet to build a community around them. Several exchanges organize learn-to-earn programs, where one can get small amounts of cryptocurrency after watching educational videos about a certain coin. These are low-effort ways to earn some money, but they are often used by scammers. One should be sure that any airdrop or offer is legitimate and comes from an official source before using a wallet.
Some people trade actively, buying and selling coins depending on short-term movements of the price, while others prefer to just hold their coins for years and rely on the development of the technology. Trading requires much more effort and time than holding and usually gives poorer results when compared with simple holding, because of fees and bad decisions of active traders. Thus, this choice is mostly about how much time one is ready to spend watching charts and how comfortable he or she is in waiting for years.
The price of cryptos can change by several dozen percent within a day, which is much greater volatility than any other market. Therefore, proper position sizing is important. Common recommendations include buying only the amount of money that one is ready to lose, spreading the purchases in time, and avoiding any borrowing to buy extra coins. All of this cannot reduce the risk, but can help to avoid the situation when losing one month means facing an emergency.
Security in crypto is mostly the user's responsibility since the transactions cannot be cancelled after they are made. Two-factor authentication, strong passwords, and distrust of messages about verifying the wallet are basic measures to prevent oneself from getting scammed. In case one saves his or her private keys himself or herself, the best practice is to write down the recovery phrase on paper and store it offline. Saving a screenshot or a text file can compromise it.
In many countries (including the United States) cryptos are considered property, which means that every purchase, sale, or spending of crypto leads to either a profit or a loss for taxes. Even staking rewards and airdrops are considered income received and taxed at the moment of receiving. To save yourself from unpleasant surprises, you should keep a record of purchases with date and price.