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Understanding Cryptocurrency

Cryptocurrencies are electronic forms of currency, ones which are not tangible and instead exist only in an online capacity. You have likely heard of “Bitcoin” if nothing else, or perhaps “altcoin”.

These terms refer to cryptocurrencies. But what is cryptocurrency? It is a type of money that is used to anonymously make purchases online in a secure fashion, without revealing personal information or having receipts of your purchases show up on a bank statement. Think of it as a way to buy or sell services or goods online without using hard earned cash.

Fiat Money

First of all, money is anything that is widely accepted as a unit of account, payment, store of value, or medium of exchange. Money is what people pay in exchange for goods and services. A store of value is when money is stored for future use. The most common money characteristics include acceptability, divisibility, and the standardization. Money must also be easily transported, even if that transportation is online. As such, cryptocurrency is starting to become a new form of money in so far as it is traded via online exchanges.

Cryptocurrency Exchanges

Cryptocurrencies for beginners starts with an exchange. Exchanges are where people can buy or sell cryptocurrency using fiat money from their bank accounts. In such locations there are different fees and limits, much the same as there are when you try to trade your dollars for Euros. In order to start trading your fiat currency for cryptocurrency you need to set up an online payment method and bank account. Then you buy the BitCoin that you want and start using it to make online purchases. Your bitcoins are stored in a virtual setting the same way your fiat currency is stored in your physical bank and viewable online. Now, bitcoin is not the only option out there, but it is the oldest and most popular. So, if you wanted to invest in other cryptocurrencies (referred to as “alt coin”) then you might have to use fiat currency to buy Bitcoin, then exchange that Bitcoin for another altcoin.

Buying Goods and Services

Once you have your online money you can start buying things. There are now many popular locations online such as Overstock.com or NewEgg.com which accept bitcoin as payment methods for goods. Here you just add things to your cart and check out as you normally would—but you pay with cryptocurrency.  You can hire freelancers like web developers who accept bitcoin or altcoin as payment too in much the same capacity.

Cryptocurrency trading comes in two forms. First, you trade the money you have for another virtual coin for spending purposes. Second, you trade them the way you would stocks, hoping that hanging on to a particular type of coin will earn you higher profits in the future as the value of that coin increases. Note that investing in cryptocurrencies like this is not going to be a viable investment plan for most people, especially those who are getting started in it today. These coins and their investment potential have been around for many years so people who are just now hearing about it are far behind the game. Trying to make money trading cryptocurrencies today is going to get you the same type of profits for the same large effort as penny stocks. Meaning, you are going to spend most of your time looking at a computer screen in search of a miniscule news detail that will help you make a few dollars here or there when you trade one type of currency for another. Presently there are a handful of smaller altcoins but their worth is drastically different from bitcoin and bitcoin is not easily tradable for any other type of currency at a profit.

Another way to think of it is regular fiat currency, for those who are new to the game. If the US dollar is at an exchange rate of 10 USD for .10 cents of another currency, you are not going to make any type of profit trying to trade your dollars for that other currency. Conversely, if country A and country B are worth about .10 cents and .8 cents respectively for every 10 US dollars, then you might have a small chance to make a profit by trading country A currency for country B currency, but the amount will still be inconsequential compared to the US dollar. This is something that most people do not understand about cryptocurrencies and unfortunately, most of the paid publications and blogs you find online will try and convince you otherwise. They will use big keywords like “get rich” or “make money” or “invest with bitcoin” to lure newcomers into an already established market. Understand that this is the case with almost all investment opportunities: once you are hearing about it everywhere in the news, the good investment opportunities are over and now people are just flooding the market. Those who previously made money with bitcoin did so because they started using computers to mine the coins before they become widely accepted. Today, those who buy hardware to do the same will find that by the time their hardware arrives, it is already outdated. This is an unfortunate truth, but people are better off merely using bitcoin to make their anonymous purchases.

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