Cryptocurrency

What is cryptocurrency?

Cryptocurrencies have been a much talked about digital payment method over the last decade. Unlike traditional currencies such as the euro or the dollar, cryptocurrencies do not have a physical form or control by a central authority such as a government or bank. It operates on a decentralised network where transactions are stored in a public ledger called a blockchain.

Cryptocurrencies are a complex subject, but in simple terms they can be thought of as digital assets that can be used to pay for goods and services or for investment. Some of the more popular cryptocurrencies include Bitcoin, Ethereum and Litecoin.

Crypto-based value is more speculative and its price fluctuates more than traditional asset classes.

In this article you will find answers to the questions:

What is cryptocurrency?

What are the sub-categories of cryptocurrencies?

How to make money with cryptocurrencies?

What are the risks associated with cryptocurrencies?

How to trade cryptocurrencies?

What are the sub-categories of cryptocurrencies?

The world of cryptocurrencies is a rich and diverse one, with each sub-category offering its own unique features and functions. Here is a brief overview of the most common sub-categories of cryptocurrencies and the criteria for their classification:

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On the basis of use:
Means of payment

Bitcoin and Litecoin are designed as a means of payment for goods and services.

Platform currencies:

Ethereum and NEO are platforms that support the creation of decentralised applications (dApps) and their currencies (ETH and NEO) are necessary to interact with these applications.

Stable coins:

Tether (USDT) and USD Coin (USDC) are cryptocurrencies whose value is pegged to traditional currencies such as the US dollar, providing relative stability in the cryptocurrency market.

Functional coins

For example, Filecoin and BAT are cryptocurrencies that offer certain services or functions, such as storing files or charging for viewing advertisements.

Based on technology:
Bitcoin-based

Litecoin and Bitcoin Cash are cryptocurrencies based on the Bitcoin code, sharing similar features and technology.

Based on Ethereumil

The ERC-20 coin standard is widely used for cryptocurrencies created on the Ethereum platform. This standard ensures compatibility and simplifies the creation of dApps.

Based on the type of extraction:
Proof-of-Work (PoW)

Bitcoin and Ethereum, for example, use a PoW consensus mechanism where miners compete to create new blocks and validate transactions.

Proof-of-Stake (PoS)

For example, Cardano and Tezos use a PoS consensus mechanism where contributors contribute their coins to participate in block creation and transaction validation.

On the basis of anonymity:
Anonymous

Monero and Zcash, for example, offer greater privacy and anonymity for transactions.

Pseudonyms

Bitcoin and Ethereum, for example, offer a certain level of privacy as transactions are linked to pseudonymous addresses.

How to make money with cryptocurrencies?

Cryptocurrencies offer many ways to make money, but each method comes with its own risks. Here is a brief overview of the most common strategies:

 

1. Buying and holding
  • Buying and holding a cryptocurrency such as Bitcoin, hoping for a long-term increase in its value.
  • This strategy is suitable for investors who believe in the long-term potential of cryptocurrencies and are prepared to tolerate short-term, but large, price fluctuations.
2. Active trading:
  • Buying and selling cryptocurrencies in the short term, taking advantage of rapid and large price rises and falls.
  • This strategy requires knowledge of the market and experience with technical analysis. The risks are higher and success is more difficult to achieve.
3. Mining
  • Using a powerful computer to create cryptocurrencies and validate transactions.
  • This strategy requires powerful computing and consumes a lot of energy. The profitability depends on the type of cryptocurrency and the difficulty of mining.
4. Contributing
  • Contributing cryptocurrency to a platform that supports a Proof-of-Stake consensus mechanism.
  • You can earn interest on your contribution. The risks are lower than in mining, but the returns are also lower.
5. DApps and DeFi
  • Decentralised applications (dApps) and the use of decentralised financial services (DeFs) to earn interest, participate in lending or receive liquidity premiums.
    This is a fast-growing field that offers new opportunities, but is also more complex and risky.
When investing in cryptocurrencies, it is important to:
  • Conduct thorough research and understand the risks associated with each strategy.
  • Only invest the money you can afford to lose.
  • Use trusted cryptocurrency exchange platforms and wallet services.
  • Follow market trends and news.

Cryptocurrencies are volatile assets and investing in them involves high risks. It is important to consider your financial situation and risk tolerance before investing.

Risks associated with cryptocurrency trading

While cryptocurrencies offer potentially high returns, it is important to understand the risks involved. Be sure to consider the following points before investing:

 

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Volatility

Cryptocurrency markets are extremely volatile. Prices can rise quickly and fall just as quickly. This means that investments can lose significant value in a short period of time.

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The risks of safe storage

Cryptocurrencies are often stored offline in cryptocurrency wallets. If this wallet is hacked or if you forget your passwords, your cryptocurrency could be permanently lost.

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Acceptance and uses

Cryptocurrencies are not widely accepted as a means of payment. Its value depends largely on how many people want to use it.

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Lack of regulations

The cryptocurrency market is relatively new and is not strictly regulated in many countries. This means that investors are more vulnerable to fraud and manipulation.

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Technological risk

Cryptocurrency technology is still evolving. Security breaches can occur and can result in financial losses.

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Scams and fraud

The cryptocurrency market is susceptible to scams such as pump-and-dump schemes and Ponzi schemes. It is important to be vigilant and only invest in trustworthy projects.

Investing in cryptocurrencies requires caution and awareness.

Before investing money, it is important to research the specific cryptocurrency and understand the risks involved.

Diversification into different asset classes helps to mitigate risks.

Consulting a financial adviser can help you make more informed investment decisions.

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    Trading cryptocurrencies: buying and selling

    Cryptocurrency trading is the process of exchanging a cryptocurrency for a fiat currency (e.g. the euro) or other cryptocurrencies. Trading can be done in a number of ways, including:

    1. Cryptocurrency exchange:

    • The exchange is a platform that brings together cryptocurrency buyers and sellers.
    • Buyers submit purchase orders, while sellers submit sales orders.
    • If the buying and selling arrangements match, the transaction takes place.
    • The most popular cryptocurrency exchange is Coinbase.

    2. Peer-to-peer (P2P) trading:

    • P2P trading is a direct transaction between a buyer and a seller.
    • Transactions are usually carried out through an online platform that offers intermediation and a deposit contract service.

    3. Cryptocurrency ATMs:

      • Cryptocurrency ATMs are physical kiosks that allow you to buy and sell cryptocurrency for cash.
      • Vending machines are usually installed in public places such as shopping centres and petrol stations.

    In addition

    To buy and sell cryptocurrencies, you need:

    • Create an account on a cryptocurrency exchange or P2P platform.
    • Pass an identity check (KYC).
    • Transfer money to your account.
    • Submit a buy order to buy a cryptocurrency or a sell order to sell a cryptocurrency.

    When trading cryptocurrencies, it is important to consider the following factors:

    • Market prices: Cryptocurrency prices are extremely volatile, so it is important to monitor the market and buy/sell at the right time.
    • Fees: Exchanges and P2P platforms charge a fee for transactions.
    • Security: It's important to choose a trusted platform and ensure the security of your account.

    Trading cryptocurrencies is a risky business. It is important to do thorough research and understand all the risks before investing.

    In addition to the above:

    • Understand the cryptocurrency you are trading. Explore the technology, value and potential of each cryptocurrency.
    • Start small. Only invest the money you can afford to lose.
    • Go to your investments. Invest in different cryptocurrencies.

    Be patient. The cryptocurrency market is still developing and prices can be volatile. Don't expect a quick riches.

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