How Does Cryptocurrency Work? 2021
Turn on the news, and you’ll almost certainly hear something about Bitcoin or how cryptocurrencies are changing the finance industry. The way we view finance has changed, and now cryptocurrencies are aiming to revolutionise the business world.
Today, there are over 7,000 cryptocurrencies that can be bought, sold, and traded. Some are accepted as legal tender by many merchants, while others are being used to fund increasingly revolutionary business technologies in ‘Decentralised Finance’. There is no better time to learn all about cryptocurrencies. Read on to learn, from the experts at Zeply, about how to benefit from this digital asset and the full potential of cryptocurrencies.
At its most basic, cryptocurrencies are a form of digital assets that are designed to act as a decentralised virtual currency. As it says in the name, cryptocurrency uses cryptography to secure its processes on a network that can be distributed over an immense number of computers. Advanced cryptography helps make counterfeiting nearly impossible, and since cryptocurrencies, unlike forex, are decentralised, they are, in theory, immune to government interference or manipulation.
Most crypto news show that the value of cryptocurrency can be influenced by a number of factors, and, while that is true, generally speaking, crypto value is still based on good old-fashioned supply and demand. How quickly a crypto asset reaches market adoption plays a very large contributing factor when determining the value of a new cryptocurrency. Other factors that influence the value of cryptocurrency are crypto halving and crypto mining.
That is also how does Bitcoin work. We can see this supply and demand in play with the current rise of Bitcoin. As the number of Bitcoin assets left to mine reduces, along with significant adoption from major financial institutions, we see a substantial rise in valuation.
The cryptocurrency market is highly liquid and very volatile. Like forex, there are two ways to trade cryptocurrency – traditional ownership of a specific currency or speculative trading of crypto CFDs. Considering the rather hefty amount of capital required to purchase leading cryptocurrencies, such as Bitcoin and Ether, CFD trading allows retail investors to get in on the action.
What is the blockchain?
Now you’ll hear this term thrown around a lot, especially in relation to crypto advancements such as NFTs and DeFi apps. But what exactly is a blockchain? In simplest terms, a blockchain network is an irrefutable ledger of all recorded transactions and tracking of digital assets on a massively shared network.
Non-fungible tokens (NFT) are a great example of the power of cryptocurrencies and the blockchain, as now almost anything of value can be tracked using this incredible technology. You can see the blockchain does more than just build and support cryptocurrency networks.
Today’s business world is based on information, and it needs to be fast and accurate. Blockchain technology is vital to DeFi apps that can track shipping orders, create and manage Smart Contracts, manage payments, and an increasing number of business needs.
How does the blockchain actually work?
But how does the blockchain actually work? Well, imagine a blockchain network as a large collection of blocks. These blocks contain data, and each block is considered to be a record of information – in most cases, this will be transaction information.
All the blocks are connected to the next block and the block that came before it – like a chain. These blocks are securely linked to each other so that no block can be altered or tampered with in any way.
By impossible to alter, that means the blockchain is irreversible. The blockchain network is based on the trust of its members and there is no central authority to govern it. There is quite a lot of technical computer science associated with the development of a blockchain, and thankfully for traders it’s not that important to really understand the technical side.
What are crypto tokens?
If you’re just into cryptocurrency trading, you’ll typically hear about crypto tokens just before a new cryptocurrency is set to launch. That’s because crypto tokens are most often used during the Initial Coin Offering (IPO), a time in which the crypto developers are trying to fundraise for crowd sales. You may sometimes hear a crypto token referred to as a crypto asset, and they are basically a virtual currency token that represents another asset or utility on the blockchain network.
Crypto tokens have several other purposes too – like musicians have used tokens to represent the streaming of a new album while others have used it as a means of payment where the token represents another cryptocurrency, to be accessed on a different blockchain. The most obvious use of crypto tokens over the last 12 months has been in its use as a fuel source for the development and operation of DeFi apps such as smart contracts.
Cryptocurrency wallets explained
No, it’s not the wallet you keep your cash in, a crypto wallet is a method in which you can store, send, and receive cryptocurrency. Major coins, such as Bitcoin, even offer a cryptocurrency wallet when you buy their digital asset.
The Zeply app not only allows you to participate in a cryptocurrency exchange, but we also offer a secure and convenient crypto wallet with two-factor authentication to ensure your digital assets are always safe.
A common misconception is that actually, when you buy cryptocurrency, your assets are stored in your crypto wallet but that is not true. Your coins are actually stored on the blockchain while your crypto wallet merely stores the tally of your total ownership.
Cryptocurrencies fall into two very distinct types; a hot wallet and a cold wallet. The main difference between the two is determined by its connection to the internet but that one difference is a major security factor.
The most commonly used cryptocurrency wallet is the hot wallet. A hot wallet is the most simple and easy to use of the crypto wallet types. The most important factor of the hot wallet is its constant connection to the internet. That connection ensures transactions between two parties are completely seamless. The everyday crypto trader will use a hot wallet owing to the speedy access to your digital assets and the fact that most major cryptocurrency exchanges operate with hot wallet systems.
The downside to the need for an internet connection is that a hot wallet was a security vulnerability. It is not advisable to store a large portion of your cryptocurrency in a hot wallet as you may expose your total investment to cybersecurity risks such as cyber theft. Experienced and professional traders will typically store most of their investment in a cold wallet for security and their trading amount in a hot wallet for quick access.
There is no more secure way to store your cryptocurrency investments than in a cold wallet. A cold wallet is not connected to the internet and will only make a connection to the internet when making a transaction. With such minimal connection to the internet, the risk of cyber theft is significantly reduced.
The most commonly used cold wallet is known as a hardware wallet and it is used by many professional traders. A hardware wallet is a physical medium, usually quite USB-like in form, and is used to store cryptocurrency private keys. These sorts of devices can be disconnected from the internet at any time and it’s near-impenetrable to would-be hackers. Your hardware wallet contains a public address to which cryptocurrency from a hot wallet can be sent to. This is the only time an internet connection would be required – to use the hardware wallets dedicated software to safely conduct transactions that are signed with your private key.
However, the most privacy-conscious of crypto traders have an even more secure option. A paper wallet is the most highly secure means to protect your cryptocurrency. Exactly as the name sounds, a paper wallet is a physical copy of your public wallet address and your private key. Together all your important details are in one place. This could quite literally be a small laminated card with the details printed on it. Pop the card in a safe or safe deposit box and your cryptocurrency is at its most secure.
What are cryptocurrency exchanges?
Just like stocks, commodities, and forex, there is a marketplace or platform in which to conduct trades. The online platform that facilitates the exchange of one digital currency for another, based upon a market valuation, is known as a cryptocurrency exchange. Anyone who has dabbled in other financial instruments will be quite familiar with this process as it doesn’t really differ too much.
Zeply offers a user-friendly crypto app that allows you to seamlessly buy and sell cryptocurrency using traditional fiat currencies, buy crypto instantly and, soon, buy crypto with PayPal. Exchange tools are incorporated into one place and helpful beginner tips mean anyone can trade in mere moments.
You’ll find some cryptocurrency wallets facilitate cryptocurrency trading functionality, but they are not the same as an exchange. A cryptocurrency exchange will cover a much larger range of digital assets and creating an account with a legitimate cryptocurrency exchange will allow traders to buy and sell cryptocurrencies from their crypto wallet.
Wallets offered by most cryptocurrency exchanges are custodial wallets – meaning the private key will be controlled by the exchange and not you.
Why trade cryptocurrencies?
No matter how you choose to trade cryptocurrencies, be it CFDs or genuine ownership, there are more than a few advantages to trading in digital assets. To keep things simple, we have gone ahead and identified the most important advantages of cryptocurrency trading.
Lower Fees – When compared to other financial instruments, like forex or stock trading, cryptocurrency transaction fees are significantly lower.
High Liquidity – The cryptocurrency market operates 24 hours a day 7 days a week. This is unlike any other financial instrument. That means you can capitalise on price movement at literally any time of the day or night, and invest in cryptocurrency at at any time.
High Volatility – One of the biggest driving factors of such an advanced and evolving market place is the strong short-term speculation. Such speculation leads to a highly volatile marketplace, as shown by the crypto charts, owing to the constant progression of new technologies and new uses for cryptocurrencies. This continual advancement is a sign of continued volatility too.
High Transparency – Cryptocurrency transactions are completely reliable, fully transparent and free from any alterations or tampering. This is owing to the significance of blockchain technology and is a large advantage over other financial markets.
Accessible to all – Cryptocurrencies are a divisible asset. That means you can buy very small fractions of a digital asset. Divisible assets are perfect for new traders or just traders with a low investment threshold. This makes cryptocurrencies accessible to all levels of retail investors.
Our final thoughts
High liquidity, hugely volatile, with over 7,000 assets traded in a 24/7 marketplace, the call of cryptocurrency trading is certainly challenging to ignore. Cryptocurrencies have developed into more than just a solution to a growing financial issue, the digital asset is fuelling revolutionary change to how businesses operate in a globalised world.
Traders can choose to own cryptocurrency or speculate on the market by trading in CFDs. Whatever the choice, a basic understanding of cryptocurrencies will aid in successful crypto trading.
How Does Cryptocurrency Work? FAQ
DeFi has become a very common term in recent cryptocurrency news. Not every cryptocurrency offers DeFi services but it certainly pays to have knowledge of this advancement in blockchain technology. To find out more, be sure to take a look at our crypto guides at Zeply
Cryptocurrencies are all a form of digital asset that aims to create a decentralized form of currency, free from government control. However, traders need to research each cryptocurrency option individually to determine their unique purpose and uses. To see how you can buy and sell crypto with ease, check out our guides at Zeply.
There are many different reasons to trade cryptocurrencies over other financial instruments such as forex or commodities. Traders should weigh up these factors when determining whether to trade in digital assets. Need some advice? Be sure to visit our guides on buying, selling, and trading cryptocurrencies at Zeply.