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What Is Cryptocurrency And How Does It Work?

Cryptocurrency

What Is Cryptocurrency?

Cryptocurrency is a digital currency that runs on decentralized blockchain technology secured by cryptography. You will be learning everything about cryptocurrency in this content.

Unlike the regular fiat money, cryptocurrency is a digital asset that derives its value from the native blockchain technology powering it.

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Start Your Business in 30 Days Even If You Don’t Have An Idea

Blockchain technology is a digital ledger with access authorization only distributed among select or agreed users. It can record and hold different assets like money, real estate, etc.

Cryptocurrency utilizes a peer-to-peer network system that makes it possible for anyone anywhere in the world to send and receive payments.

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Everything you Need to Know About Cryptocurrency

Cryptocurrencies operate outside the traditional banking system using different crypto coins like Bitcoin, Ethereum, etc. Everything concerning the cryptocurrency ecosystem system begins with the generation of these crypto coins in a process called mining.

Cryptocurrency mining is a complex process that involves cryptocurrency enthusiasts (Miners) decoding and solving complex mathematical problems with specialized supercomputers in return for crypto coins.

These specialized computers consume a massive amount of electric energy and can take up to several days to mine one coin. 

Key Concepts In Cryptocurrency

Decentralization

Decentralization means that there is no single or centralized government authority anywhere in the world providing a legal guarantee to the operation of cryptocurrency. As a result, it is not supervised or controlled in similar ways as the regular fiat currency.

Cryptography

Cryptography is the science and practice of using secret codes to protect information and communications from non-intended recipients. The information is transformed into a secured data format while transmitted across insecure networks.

Encryption

Encryption is the actual practical application of cryptography in concealing information and communications from authorized parties.You can also find our content in video formats. So, subscribe to our channel to get business teachings in video formats. 

How to Make Transactions Using Cryptocurrency

Cryptocurrency transactions begin with users purchasing and selling crypto coins from individual owners (peer-to-peer transactions), cryptocurrency exchanges or brokers. Some of these exchanges include Binance, Coinbase, Remitano etc.

After purchase, crypto coins can be stored in blockchain wallets. These wallets can be either “hot” or “cold”. Blockchain wallets connected to the internet are known as hot wallets, while offline wallets (not connected to the internet) are called cold wallets.

Cryptocurrencies are easily transferable from one blockchain wallet to another with an internet-enabled smartphone or computer device. The purpose for this transfer can be either for trading, buying of goods and services or in exchange for a fiat currency (cash).

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What Are Blockchain Wallets?

Blockchain wallets are digital wallets in which users can store and manage their cryptocurrencies. With blockchain wallets, users can transfer cryptocurrencies to each other and convert them back to local fiat currency if they so wish.  

Top Ten Cryptocurrencies Based on Market Capitalization

1. Bitcoin (BTC)

With a market capitalization in excess of  $870 billion, Bitcoin is the most popular and widely traded cryptocurrency. In the last six years, Bitcoin has seen its price value rise more than 9,000%. 

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Go from idea to starting your business in 30 days

2. Ethereum (ETH)

Ethereum, a decentralized, open-source blockchain with smart contract functionality, is a cryptocurrency and a blockchain platform. With a market capitalization of more than $400 billion, its price value has gone up more than 30,000% in the last six years. 

3. Tether (USDT)

Tether is a stable coin backed by a fiat currency like US dollars, which means that, unlike other cryptocurrencies, its value is hypothetically equal to the US dollars fiat currency.

The Tether cryptocurrency’s value will be less volatile, unlike other non-stable coin cryptocurrencies.

4. Binance Coin (BNB)

The Binance Coin is native to the Binance cryptocurrency exchange. However, over time, it has progressed from being a crypto coin for making payments on the Binance platform to a cryptocurrency widely used across various exchange platforms for many different purposes.

Binance coin has a market capitalization above $66 billion.

5. US Dollar Coin (USDC)

Like Tether, USD Coin (USDC) is a stable coin powered by the Ethereum blockchain and can be used to complete global transactions.

6. Solana (SOL)

Solana was developed to help power decentralized finance (DeFi) uses, decentralized apps (DApps) and smart contracts. The coin has gained more than 16,500% price value increase since 2020 and currently has a market capitalization of more than $43 billion.

7. XRP (XRP)

 XRP is an open-source, public blockchain and the native cryptocurrency of XRP Ledger. It can facilitate exchanges of different currency types, including fiat currencies and other major cryptocurrencies.

XRP has a market capitalization of more than $39 billion.

8. Cardano (ADA)

Cardano’s ADA token runs on Cardano’s proof-of-stake consensus protocol blockchain platform, validating transactions with low energy costs.

Cardano’s ADA has a market capitalization of more than $38 billion.

9. Terra (LUNA)

Terra LUNA’s price value has risen over 16,000% in the last year and currently has a market capitalization of more than $36 billion.

LUNA cryptocurrency runs on the Terra blockchain payment platform for stable coins that relies on keeping a balance between two types of cryptocurrencies.

10. Avalanche (AVAX)

AVAX runs on the Avalanche blockchain software platform that can create and execute smart contracts. It currently has a market capitalization of more than $25 billion.

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Advantages of Cryptocurrency

Here are some advantages of investing in cryptocurrencies:

User Anonymity and Security

 The blockchain technology algorithm ensures high levels of user security and anonymity. In this way, users’ investments are guaranteed and secured. 

Decentralized Operations

As a cryptocurrency investor, your assets are never under any centralized government authority whose policy action or inaction can wipe out your hard-earned assets.

The decentralized nature of blockchain technology guarantees shared ownership and access to transaction data is available only to authorized members or users. 

Hedge against Inflation

Because most cryptocurrencies have a finite supply point, it is a smart way to protect your assets against the depreciating effects of inflation. In addition, they are, by nature, immune to the inflationary shocks experienced by fiat currencies.

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Disadvantages of Cryptocurrency

The decentralized nature of cryptocurrencies has democratized financial services and made financial inclusion for billions of people a reality. However, are there inherent risks with this breath of fresh air? Let’s find out.

Cybersecurity Issues

Cryptocurrencies are subject to constant cybersecurity breaches by hackers, resulting in crypto assets loss. Mitigating these security risks will require both cryptocurrency exchange platforms and their users to upscale and enhance security measures.

High Volatility

Cryptocurrency prices can be highly volatile as a result of speculation. They can spike to the highest heights (which is good for investors), and they can equally crash to terrifying lows almost immediately in some instances.

Consequently, it can be challenging to expect stable returns on investment, especially for investors with a low-risk appetite, as crypto assets’ value can be wiped out overnight.

Scalability Issues

Indeed, the number of cryptocurrencies and their adoption is rapidly increasing, but scalability at the same level of big fiat currency transaction players like VISA and MasterCard remains a challenge. This is so because the speed of cryptocurrency transactions, especially on larger scales, is still not satisfactory.

This drag on transaction confirmation can be a frustrating experience for users and potentially cause financial losses.

Factors to Consider Before you Buy a Cryptocurrency

With over 5,000 cryptocurrencies actively being traded today, it can be a significant challenge to know the right one to invest in.

Consider the following factors before clicking that purchase button. 

Price

The next “superstar” cryptocurrency can be a low-priced coin right now. A long-term investor must consider this reality. Low-priced coins offer you the ability to diversify your investment portfolio with different cryptocurrencies at an affordable cost. 

Likelihood of General Adoption

A cryptocurrency that may likely be adopted widely outside the cryptocurrency speculation world has an edge over other crypto coins and can be a good investment jackpot.

Don’t just rely on your gut instinct alone, stick around the social media conversations about such prospecting cryptocurrencies and check the blockchain technology underlying its operations.

The Pre-determined Maximum Supply

Some cryptocurrencies have a pre-determined maximum supply cap, which If there is a sustained interest while the supply remains fixed, the price can go up due to the law of demand and supply. For the early adopters, this could mean a huge cash-out. 

Apart from Bitcoin (the most popular and most traded cryptocurrency), consider buying the following cryptocurrencies:

Note: This is not an exhaustive list and also not investment advice. Seek advice from experts before making any investments decisions.

1. Ethereum (ETH)

2. Terra (LUNA)

3. XRP (XRP)

4. Cardano (ADA)

5. Avalanche (AVA)

6. Binance Coin (BNB)

7. Dogecoin (DOGE)

8. Cronos (CRO)

9. Shiba Inu (SHIB)

Strategies to Make Money Using Cryptocurrency

Investing

Investing is one of the strategies one can use to make money with cryptocurrencies. This involves buying and holding crypto coins for some time. Cryptocurrencies can be volatile in the short term but tend to have significant long-term potential for growth. 

The buy-and-hold investment strategy involves carefully identifying and purchasing stable crypto assets that will be around for the long term and selling them off after a long period of holding and value appreciation.

Trading

Unlike the buy-and-hold long term investment strategy, cryptocurrency trading exploits short-term gain opportunities in the crypto market.  

To succeed with this investment strategy, you need to have a proper analytical and technical understanding of crypto assets market performance.

Due to the volatility of cryptocurrencies, your ability to make accurate predictions about price increases and decreases will influence your trading position – either long or short term.

Cryptocurrency exchange platforms provide an opportunity for cryptocurrency trading. 

Staking

Staking offers cryptocurrency owners the opportunity to make a profit on their coins without engaging in trading activities.

Cryptocurrency staking involves locking up your crypto coins in a digital wallet for an extended period. This helps maintain the smooth running and security of the blockchain in return for earned rewards in interest percentage yields.

In most cases, these returns are typically much higher than those offered by banks for your fiat currency.

Lending

Some cryptocurrency exchange platforms facilitate crypto lending. You can also choose to lend coins to the exchange platform and other investors and generate interest on that loan. 

Blockchain Social Media Marketing

Multiple blockchain-based social media platforms exist that will reward users with free crypto coins for creating, curating and advertising their content.

Mining

Cryptocurrency miners are rewarded with new coins when they solve complex mathematical problems that lead to the release of additional crypto coins to the blockchain.

This involves a huge upfront investment in specialized computer systems procurement and technical expertise. However, the rewards far outweigh the investments.  

How Small Businesses can Benefit from Cryptocurrency

Below are some ways the adoption of cryptocurrencies by small businesses can impact and improve their value delivery to clients and stakeholders.

Wider Reach

The decentralized nature of cryptocurrencies provides small businesses with the competitive advantage to increase their reach.

Improved cross-border reach improves the bottom line since, for instance, the value of Bitcoin anywhere in the world remains the same. Besides, transactions are quicker, more predictable and less costly.

Transaction Cost Reduction

The inherent costs involved in business transactions with fiat currency often born by small businesses take a significant toll on their profit margin.

Small businesses accepting cryptocurrencies bear little or no COTs in crypto assets transactions with their clients. Consequently, sensitive bottom lines are protected from multiple running costs. This provides an overall competitive marketplace advantage.

Elimination of Charge-back Fraud

Businesses lose a lot of money due to chargeback fraud – a situation where customers will purchase a product and then cancel the payment, often after using the product. 

Adopting cryptocurrency eliminates this, as payments recorded on blockchain ledgers are permanent and irreversible. 

Enhanced Customer Privacy

The adoption of a cryptocurrency payment system guarantees the privacy of customers. Valuable information of customers can be easily compromised on the internet with regular fiat currency online payment methods.

This is so because of the required details users are mandated to provide at the point of registering for these services. With cryptocurrency transactions, customers don’t have to reveal their identities or drop any of their other details. 

How Small Businesses can Receive Payments in Cryptocurrencies

Small businesses can enable cryptocurrency payments via a cryptocurrency payment gateway or peer-to-peer transactions.

Cryptocurrency payment gateways provide everything you need to know about cryptocurrency transactions. Also, they allow businesses to automate payment transactions.

In addition, businesses can use other tools designed to make the transaction process seamless, secure and convenient.

The cryptocurrency payment gateways are highly encrypted and are more secured than traditional regular fiat money online payment gateways. They also reduce to the lowest minimum the number of intermediaries involved.

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Some Examples Of Cryptocurrency Payment Gateways.

  • Coinbase
  • NOWPayments
  • BitPay
  • Coingate
  • B2BinPay
  • Blockonomics

Frequently Asked Question About Cryptocurrency

How do I Invest Cryptocurrency?

The first step in starting your investment journey in cryptocurrencies is to sign-up with the various cryptocurrency exchanges available today – Binance, Remitano, Coinbase etc.

A verifiable means of identification like a national ID card, international passport, or driver’s license is required during the sign-up process.

Once sign-up and verification processes are completed, kindly log back into your account and begin to buy crypto coins of your choice for either long term buy-and-hold investment strategy or short-term trading purposes.

Is Cryptocurrency a Good Investment?

Yes, but always consider the investment golden rule that says – only invest an amount you can conveniently forgo in the event of a loss.

Is Cryptocurrency Legal?

Officially, the Central Bank of Nigeria prohibited banks and other financial institutions from dealing in cryptocurrencies. Engaging in cryptocurrency transactions in Nigeria is not an illegal activity. Using cryptocurrency transactions to launder money and commit other crimes is unlawful. 

How Much do I Need to Start Investing Cryptocurrency?

One does not need to “break a bank” to raise funds to start a cryptocurrency investment. Instead, you can adopt an incremental approach to investment by beginning small with as little as $25.

Can I Lose my Cryptocurrency Assets?

Yes! It is possible to lose your cryptocurrencies when your cryptocurrency exchange account is hacked or access to your private blockchain wallet is lost.

It is highly recommended that you do the following to prevent these breaches:

  • Choose your cryptocurrency exchange platform after due security diligence. Robust security infrastructure should be your number one priority.
  • If possible, move your cryptocurrencies back to your private blockchain wallet after completing your transactions on the cryptocurrency exchange platform.
  • Keep your crypto assets in a cold wallet as against a hot wallet. A hot wallet can be prone to data breaches because it is connected online to the internet.
  • When you store your crypto assets in a cold wallet, ensure your wallet key is kept safe. Losing access to your wallet key means losing all your crypto assets.

What Happens if my Cryptocurrency Assets Depreciates?

Crypto assets are highly volatile investment instruments. Hence it’s necessary to bear in mind that asset depreciation can happen. When assets depreciation occurs, it is advisable to stay put and wait for a positive rebound, especially for long term investors.

Investment portfolio diversification is recommended; by having a portion of your crypto assets tied to stable crypto coins.

Stable cryptocurrency coins have their value tied to a fiat currency – the US dollar, for instance. This arrangement protects these stable coins from the volatile shock waves experienced by non-stable coins.

Can I Invest Together with my Spouse?

Yes, yes, and yes again… Couples that invest together smile together, right? Depending on your investment strategy as a couple, you can pull resources together and open a single account on a cryptocurrency exchange.

One advantage of this strategy is that the transaction fees on your account will be minimal compared to when you both are running multiple accounts.

Before you invest together, know your spouse!

Conclusion

In conclusion, cryptocurrencies have come to stay, bringing with them huge opportunities for financial inclusion and wealth creation.

Now is the right moment to take advantage of these opportunities by taking the bold step and investing in various promising crypto coins you can afford.

Take the bold-baby steps today. We will like to read about your thoughts on cryptocurrency in the comments. So talk to us; which currency are you looking at investing in and why?

Entrepreneurs.ng is an entrepreneurial support platform. We help entrepreneurs start, market and grow sustainable businesses. Reach us directly on WhatsApp- 08038874148.

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