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What is Cryptocurrency: Types, Benefits & How to Invest Guide

Knowledge Crunch | Wednesday, February 2, 2022 1:38 PM GMT

As cryptocurrencies have skyrocketed in popularity (and value), more and more people have decided to get in on the action. But, for the uninitiated, the world of cryptocurrencies can seem completely foreign. To help, we’ve decided to make this article as a guide to learn which are the types, benefits and how to invest in cryptocurrencies.

 

 

Table of Contents

 

What is Cryptocurrency?

10 Benefits of Cryptocurrency

4 Types of Cryptocurrency

How to Invest in Crypto in 4 Simple Steps

Frequently Asked Questions (FAQs)

 

 

What is Cryptocurrency?

Cryptocurrency is a digital medium of exchange using strong cryptography to secure financial transactions, control the creation of additional units and verify the transfer of assets. Crypto can be exchanged for goods and services, though they often are used as investment vehicles. 

Cryptocurrency is also a key part of the operation of some decentralized financial networks, where digital tokens are an important tool for carrying out transactions. The most popular cryptocurrency and revolutionary crypto out there is Bitcoin.

So why Bitcoin in the first place? A big part of it is due to its design in preventing a problem called “double-spending.” The concept is revolutionary because these are digital assets, which in the past required someone to verify transactions since there was no way to tangibly account for them. 

With Bitcoin, there is something called a distributed ledger or public ledger that records each transaction and is added to a “block,” which is then appended to the end of a chain of blocks, the “blockchain,” and nobody can tamper with the previous blocks once they have been confirmed. This is done through strong cryptography using something called an SHA-256 cryptographic hash function. 

If you’d like to read more about this, we’ve written a post about it here: What is a Blockchain? Everything Beginners Need to Know.

Now that we’ve covered the basics,  let’s check out the 10 main benefits of cryptocurrency.

 

 

10 Benefits of Cryptocurrency

Cryptocurrency is the alternative to fiat currency and credit cards. It is taking the digital world by storm. Many companies are accepting payments through cryptocurrency these days.

Crypto has the potential to reshape the financial world as we know it and to question the very existence of traditional financial infrastructure. If you’re a little confused by cryptocurrencies, don’t worry.

Here we will break down the 10 advantages of cryptocurrency, so you can quickly learn everything you need to know or if you’d like to go into even more detail… We’ve also written about more benefits of cryptocurrencies which you can find here: The 20 Benefits of Cryptocurrency You Need to Know (in 2022).

 

 

Source: Pixabay

Benefit #1: Easy transactions

By and large, our financial system revolves around third-party intermediaries who process transactions. This means that if you make a transaction, you’re placing your trust in one or more of these intermediaries—and the recession of the early 2000s made a lot of people wonder if that was a good idea. 

The blockchain and cryptocurrencies offer an alternative. They can be viewed by anyone, anywhere, so you can take part in day to day activities in life and the financial markets and make transactions with no intermediaries whatsoever.

When you use cryptocurrency, it removes the need for the middle man. The computing power of crypto enables transactions to take place from one to one on a secure and easily accessible network.  

The transactions would be transparent, and it becomes easier for you to establish the audit trails. There would be no more confusion on who is going to pay whom. The parties who are involved in the transaction would know each other well.

 

Benefit #2: Diversified portfolio

Crypto assets such as Bitcoin have matured from an obscure asset class with few users to an integral part of the digital asset revolution, raising financial stability concerns. 

Before the pandemic, crypto-assets such as Bitcoin and Ether showed little correlation with major stock indices. They were thought to help diversify risk and act as a hedge against swings in other asset classes. But this changed after the extraordinary central bank crisis responses of early 2020. 

Crypto prices and US stocks both surged amid easy global financial conditions and greater investor risk appetite.

Amid greater adoption, the correlation of crypto assets with traditional holdings like stocks has increased significantly, which limits their perceived risk diversification benefits and raises the risk of contagion across financial markets, according to new IMF research.

 

Benefit #3: User autonomy

As long as you know the password/passphrase of your digital wallet, the crypto coins are completely under your management and ownership and no one else can use them.

In transactions that you carry out with ‘your money’, the bank acts as an intermediary between you and a third party. Regarding these transactions, you trust that the bank will perform the transfer as you intended.

It works differently with cryptocurrencies. You immediately do business with other people without the intervention of a bank or third party. Transactions with cryptocurrencies are peer-to-peer transactions or transactions from people to people.

 

Benefit #4: Easy cross-border transactions

Cryptocurrency has been used for payments in some form or another since its inception, and in the last few years, growing numbers of companies have focused on using it to facilitate payments. 

This includes the cross-border space, with companies such as international cryptocurrency payments provider BitPay citing its high speed and low friction as key benefits over more traditional methods.

The trust for a transaction with cryptocurrencies is not derived from an institution as a bank but from the computer code of the specific cryptocurrency. A frequently heard term in the crypto world is, therefore: “trust the code”.

Confidence in the code is greater as more people use the specific blockchain and/or more security guarantees or better encryption are built into the code.

Sometimes the duration or history of a blockchain is also a guarantee of the trust that users derive from the blockchain.

 

Benefit #5: Top security

Some of the major benefits of cryptocurrencies aren’t linked to the currencies themselves, but to the infrastructure that supports them. That’s the blockchain—the decentralized data-storage ledger that tracks every transaction undertaken on it. 

Once you make new blocks on the blockchain (or entry), it can never be erased. And with the blockchain stored decentrally across multiple computers, no hacker can access the entire chain in one go; any information stored in it is safe for good.

When you perform the transaction in cryptocurrency, you cannot reverse it. There will be a reliable encryption technique used throughout the cryptocurrency transaction process to protect from hackers and tampering with the information.

 

Benefit #6: Reduced corruption

Cryptocurrency and blockchain could help prevent fraud and corruption, reduce the costs of enforcement thanks to easily accessible information and faster cross checks, and help supervise the implementation and monitor efficiency and effectiveness of spending, increasing development impact.

The lack of anonymity and the tight traceability makes corruption more difficult, unlike with traditional money. Two additional features will help fight fraud and corruption effectively.

First, the blocks should contain additional data that is typically stored so that there is sufficient information for the purposes of fraud and corruption enforcement. For instance, the block can store the nature of the expense and the project and activity linked to the funds.

Second, the verification of a block should include checking that the additional data satisfies the smart contract. A smart contract contains logical clauses programmed in the code that triggers processes according to the terms of a contract. 

These terms could define the conditions to be met to release funds, dates from which they can be made available, and so on. The satisfaction of the contract helps prevent improper expenses.

 

Benefit #7: No middlemen

Within your crypto wallet, you can create as many account numbers or addresses as you want. This can be useful when you decide not to have too much crypto in your pocket.

Suppose you have €1,000 worth of Bitcoin. You can leave this at one bitcoin address, but if you want to pay with your mobile phone, it is useful to use an app on your mobile to create a separate bitcoin address or account number to which you transfer € 100 for example.

Then you can spend up to €100 on Bitcoin via your mobile phone. You can also make your own account numbers for i.e. fixed expenses, groceries, holidays or for the children. In short, with cryptocurrencies, you are your own banker.

 

Benefit #8: Crypto market available to trade 24/7

Another advantage that cryptocurrencies have over banks is that the crypto markets are always open. With coins being mined and transactions being recorded around the clock, you don’t have to wait for the NYSE, NASDAQ or any other exchange to start trading for the day if you want to buy, sell, or trade crypto. 

This has made such an impact that regular stock exchanges are looking into the option of trading stocks outside of regular banking hours as well—although that might still be some way off.

Coinmarketcap is a useful tool to see the value of cryptocurrencies and is very useful to know how much transaction fees are. As a 24/7 service it can be used by retailers that look for the perfect opportunity to buy and sell cryptocurrencies.

So, for investors who are on the go 24/7, crypto might be the best way to generate returns outside of normal working hours.

 

Benefit #9: Banking the unbanked

There are almost two billion people in the world without a bank account. Many unbanked people are shut out of the economy by financial institutions and are forced to work illegally. But crypto advocates believe they have found the solution: accelerate the adoption of cryptocurrency in low-income countries. 

In El Salvador, for example, 70 percent of citizens are unbanked and roughly one-quarter of the working population lives in the United States, from where they send remittance payments to their families back home. 

In the future, these payments could be made using crypto, which would dramatically reduce cross-border fees and allow families to send crypto to their loved ones across borders in an instant. 

Unlike regular banking, sending crypto doesn’t require families to have a home address or ID documents, which many lower-income people lack.  All they will need is a Wi-Fi connection and a digital device to start using crypto and to make secure transactions on the blockchain networks cryptocurrencies run on.

 

Benefit #10: Beat Inflation

Cryptocurrencies aren’t tied to a single currency or economy, so their price reflects global demand rather than, say, national inflation. But what about the inflation of cryptocurrencies themselves? 

As an investor, you can rest easy, for the most part. The number of coins is capped, so the amount available can’t spiral out of control, thus, no inflation. Some coins (like Bitcoin) have an overall cap, altcoins (like Ethereum) have an annual cap, but either way, this approach keeps inflation at bay.

Bitcoin experiences inflation as more of it is mined (as does gold). But because the amount of new bitcoin is automatically reduced by 50 per cent every four years, Bitcoin’s inflation rate will also decrease.

As a practical matter, as long as Bitcoin’s purchasing power continues to rise vs. the fiat currencies, we tend to compare it to, Bitcoin’s few-per cent annual rate of inflation isn’t a major factor for investors to consider.

Now that we’ve gone through the benefits of crypto, let’s move on and explain the different types.

 

 

4 Types of Cryptocurrency

There's quite a bit of variance between today's cryptocurrencies. They rely on different versions of the original blockchain technology that powers Bitcoin, and not all of them are designed to function like fiat currencies (unlike stablecoin cryptos). Examples like proof-of-stake and proof-of-work are just some examples of how they differ.

Making sense of it all requires careful study and a fairly extensive understanding of how cryptocurrencies work under the hood. As a guide for those not immersed in the intricacies of crypto-technology, here's a look at the four major types of cryptocurrency, and what they're good for. 

 

Type #1: Transactional or Payment

As the name suggests, these assets are mainly for payments and are hence called Payment Currencies. For example, you could use payment currencies to pay for goods or services, pay your bills out from digital currencies to local fiat currencies like the u.s. dollar, etc.

While every digital asset can theoretically be used to pay for things, merchant adoption or acceptance by providers of goods and services is more widespread for Payment Currencies.

In particular, cryptocurrencies like Bitcoin (BTC), Litecoin (LTC), Bitcoin Cash (BCH), and others are popular and well-known Payment Currencies.

 

Type #2: Utility or Financial

Utility or Financial cryptos, also known as blockchain platforms, take the functionality of blockchain technology further than just payments.

These platforms allow you to create your own digital assets (usually referred to as tokens), decentralized applications (Dapps), etc. on their platform. Therefore, blockchain platforms become their own “Blockchain Economies” with different assets, applications, and more.

A utility token is a crypto token that serves some use case within a specific ecosystem. These tokens allow users to perform some action on a certain network.

Cryptocurrency mining is usually the way to acquire them but these tokens are not mineable cryptocurrencies. They are usually pre-mined, being created all at once and distributed in a manner chosen by the team behind the project.

Some Blockchain Economies you may have heard of include Ripple (XRP), Polkadot (DOT), Chainlink (LINK) and Cosmos (ATOM)

 

Type #3: Platform or Infrastructure

Infrastructure cryptocurrencies are typically used to pay the computers responsible for running programs on a shared blockchain software network. 

For example, the crypto asset that powers Ethereum is called ether, and it may be considered an infrastructure cryptocurrency, as people must purchase it in order to create and use decentralized applications running on the network. 

Tokens focused on interoperability can also be categorized as infrastructure cryptocurrencies. Their goal is to provide a way to link multiple blockchains together and allow users to transact across these networks.

Some platform or infrastructure cryptos you may have heard of include Ethereum (ETH), Ethereum (ETH), Cardano (ADA) and Solana (SOL).

 

Type #4: Entertainment and Media Cryptocurrencies

Cryptocurrencies have the potential to transform several markets within media and entertainment, but particularly those where participants would benefit from the security and transparency that blockchain would offer, such as distribution of payments, funding, algorithm  monetization and contract enforcement.

Blockchain technology is still in the early stages of development, but given the excitement around the many ways it could be put to use (such as NFT’s), it’s not too soon for media and entertainment companies to start thinking about the possible implications for their businesses and the industry as a whole. 

You may have heard of some entertainment and media Cryptocurrencies such as Basic Attention Token (BAT), Theta (THETA), Chiliz (CHZ) and Enjin Coin (ENJ).

If you’d like more information on the different types of cryptos there are, we've written a piece about it here: 4 Types of Cryptocurrency Categorized with Examples (2022). Now let’s see how you can invest in crypto with 4 easy steps.

 

 

How to Invest in Crypto in 4 Simple Steps

Buying any type of cryptocurrency is often the first step that investors take into the world of understanding cryptocurrency and it can be an unfamiliar landscape for someone used to traditional financial products.

Like any kind of investment, cryptocurrencies are speculative and are subject to much more volatility than many tried-and-true investments, such as stocks, bonds or mutual funds.

Thankfully, it’s pretty simple to learn the ropes. You can start investing in cryptocurrency by following these five easy steps.

 

Step #1: Join a cryptocurrency exchange

To buy cryptocurrency, first, you need to pick a broker or a crypto exchange. These are online platforms dedicated to facilitating trades in cryptocurrency, usually by offering trading pairs (e.g., USD to Bitcoin) and usually by matching buyers with sellers.

To trade on ZuluTrade, you’ll need to be able to trade with a broker. ZuluTrade has plenty to choose from and you’ll be invited to connect with one when creating your online account.

The leading crypto exchange by volume and customer base is Coinbase. That said, other reputable and regulated crypto exchanges.

 

Step #2: Set up a crypto wallet

Cryptocurrency exchanges are not backed by protections like the Federal Deposit Insurance Corp. (FDIC), and they’re at risk of theft or hacking. If you purchase cryptocurrency through an exchange, you have more options:

  • Leave the crypto on the exchange: When you buy cryptocurrency, it’s typically stored in a so-called crypto wallet attached to the exchange. If you don’t like the provider your exchange partners with or you want to move it to a more secure location, you might transfer it off of the exchange to a separate hot or cold wallet. Depending on the exchange and the size of your transfer, you may have to pay a small fee to do this.

 

  • Hot wallets: These are crypto wallets that are stored online and run on internet-connected devices, such as tablets, computers or phones. Hot wallets are convenient, but there’s a higher risk of theft since they’re still connected to the internet.

 

  • Cold wallets: Cold crypto wallets aren’t connected to the internet, making them your most secure option for holding cryptocurrency. They take the form of external devices, like a USB drive or a hard drive. You have to be careful with cold wallets, though—if you lose the private key associated with them or the device breaks or fails, you may never be able to get your cryptocurrency back. 

 

Step #3: Research and choose the cryptos you’ll invest in

Cryptocurrencies are built on solid software and there are genuine and promising applications for them. Furthermore, people do make gains  investing in cryptocurrencies, but people also lose a lot of money in cryptocurrency scams. 

Therefore, before you put any money at all into a cryptocurrency, you should spend some time investigating whether the currency is legitimate or not.

Blockchain projects are typically laid out in a whitepaper - a publicly available document detailing the blockchain's mission and how it works. Even Bitcoin, which was published anonymously, has a publicly available whitepaper that is still widely read and circulated.

 

Step #4: Manage your investment

Having a well-developed and proven strategy while trading cryptocurrencies is a very important thing for surviving in the crypto market. If you like the idea of day trading, one option is to buy bitcoin now and then sell it if and when its value moves higher. But if you see a future for bitcoin as a digital currency, perhaps your investment plan is to buy and hold for the long haul.

It’s always helps to have a strategy, we also made a few articles specifically for trading crypto - You can find these here:

6 Strategies for Day Trading Crypto (Guide for 2022)

How to Read Crypto Charts: Guide for Beginner Investors (2021)

28 Crypto Terms to Know Before You Invest in Crypto (2022 List)



Now Over to You

Cryptocurrency investing offers the potential for huge returns. But, it can just as easily lead to massive losses. Before using this guide to invest, be sure to consider the associated cryptocurrency risks. As a rule of thumb, you shouldn’t invest more in crypto than you’re willing to completely lose – as that could realistically happen.

We hope you enjoyed this edition of the knowledge crunch blog just as much as we enjoy writing them! Stay tuned for more and be sure to check out our other helpful blogs with advice and tips to reach your investment goals with ZuluTrade. 

Join the best trading community today!



Disclaimer: The views expressed do not constitute investment or any other advice/recommendation/suggestion and are subject to change. Reliance upon information in this material is at the sole discretion of the reader. Opinions expressed in this article do not represent the opinion of ZuluTrade Social Trading Platform and do not constitute an offer or invitation to anyone to invest or trade. Every metric and the statistical number is a result of a past performance which does not constitute a promise or a certainty for a future one.

 

 

Frequently Asked Questions (FAQs)

 

Q1. What’s the difference between Bitcoin and cryptocurrency?

Bitcoin being the first cryptocurrency has a head start over other cryptocurrency technologies. Since then a lot of different cryptocurrencies have come and some are even specializing in a few sectors.

The most important thing is competition. Due to heavy competition, cryptocurrencies are continually improving themselves and the technologies that they are using.

 

Q2. What’s the most popular cryptocurrency in the world?

As the harbinger of the cryptocurrency era, Bitcoin is still the coin people generally reference when they talk about digital currency. Its mysterious creator — allegedly Satoshi Nakamoto — debuted the currency in 2009 and it’s been on a roller-coaster ride since then. However, it wasn’t until 2017 that the cryptocurrency broke into popular consciousness.

 

Q3. What are the disadvantages of cryptocurrency?

Although they’re are many advantages to cryptocurrency, it needs to be understood that cryptocurrencies are still a nascent technology. Hence, there are still many significant disadvantages to investing in cryptocurrencies. To name a few: 

- Scalability

- Price volatility and lack of inherent value

- Regulations

 

Q4. What’s the difference between cryptocurrency and money?

Unlike traditional currency, cryptocurrency is not regulated by central authorities or backed by governments. This makes the virtual currencies less credible than the real one (Fiat or digital money in bank accounts). 

Cryptocurrency is also much more volatile than fiat money. The volatility is primarily driven by the speculative nature of the trade, where investors are focussed on wealth creation quickly by booking profits. 

 

Q5. Do you have to pay taxes on cryptocurrency?

Depending on what country you're in, the tax system cryptocurrency falls under is the same as that for stock trading: capital gains tax. How much tax you pay depends on multiple factors, such as when crypto is sold and how much you or your family earns in a year.

 

Q6. Is cryptocurrency legal?

The legal status of cryptocurrencies varies substantially from one jurisdiction to another, and is still undefined or changing in many of them.

The majority of countries the usage of cryptocurrency isn't in itself illegal, its status and usability as a means of payment (or a commodity) varies, with differing regulatory implications.

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