The global economy move toward a digital ecosystem is inevitable. This is why everything from money transfer to investing is going paperless. The newest addition to the digital payment sector is the use of cryptocurrencies. You might have heard of this addition to the digital ecosystem but you may not have adequate information on what it is, so we’ve done the hard work for you and compiled all you need to know about cryptocurrencies.
If you’re already considering investing in digital currency, you need a cryptocurrency portfolio. This article highlights how cryptocurrencies work and why owning a cryptocurrency portfolio might be important.
What Is Cryptocurrency?
Cryptocurrency is a virtual or digital currency that uses cryptography to enhance security, making it difficult to counterfeit. A cryptocurrency is a medium of exchange, just like normal currencies such as US dollar, Euro, or Sterling pound. The difference is that a cryptocurrency is the exchange of digital information. In addition, unlike normal currencies, no central authority issue it, and governments have no control over it.
Since it’s a digital currency, it only exists in computers. Users distribute cryptocurrency, which involves hosting by many computers remotely located globally. Users trade, online, cryptocurrencies available in the market via cryptocurrency exchanges, which operate more like stock exchanges.
The following are many of the reasons you should own a cryptocurrency portfolio.
The public ledger ensures transactions between digital wallets. The current spender owns the coins. Since they use blockchain technology to secure the transactions through encryption, identity theft is impossible.
A public ledger stores all transaction once they’re created and confirmed. Also encrypted is the identities of coin owners, which guarantees the legitimacy of record keeping.
Accessible and Instant
Anyone can use a cryptocurrency so long as they have internet access. Blockchain technology makes cryptocurrency easy to use, which is why it is in high demand. All you need is a smart device, an internet connection, and just like that, you become your own bank making payments and money transfers. There is no other digital currency system where you own your account.
How Does It Work?
Cryptocurrencies typically exist in computers and transfer of the currency occurs between peers. This implies there is no middleman like a bank. A digital public ledger referred to as “blockchain” records the transactions. Cryptocurrency encrypts transaction data and the public ledger using cryptographic techniques, hence, the name “crypto” currency.
Creators decentralize this currency, and that means users and computer algorithms control cryptocurrency, not a bank or a central government. This implies that the transactions are not subject to governmental control.
Users send the transactions using software commonly known as “cryptocurrency wallets.” An individual who creates the transaction uses a wallet software to transfer balances from one account to another through a public address system. To transfer the funds, the person should be knowledgeable of the password, commonly referred to as a public key, associated with the account needed. The process involves encryption of peer transactions, broadcasting them to the cryptocurrency network where they queue them up and add them to the public ledger.
“Mining” is the name of the process used to record cryptocurrency transactions. All users of cryptocurrency can access the public ledger by downloading the “full node” wallet. This is unlike holding coins in third-party wallets like Coinbase. The process encrypts the amount of currency each transaction entails, and transactions usually lead back to a unique set of keys.
Anyone who owns a set of keys owns the cryptocurrency amount associated with the keys, just like anyone who owns a bank account owns the funds in it. Miners enter transactions in the ledger once and add to it sequentially. They call the ledger and technology facilitating transactions a “blockchain” since it comprises a “chain” of “blocks” of transactions.
The following steps highlight how the transactions work:
- 1Someone requests a transaction.
- 2The process broadcasts the transaction request to a P2P network comprising computers known as nodes.
- 3The network of nodes validates the transaction and the use status using known algorithms. Note that a verified transaction can involve a cryptocurrency contract, record, or other information.
- 4Once verified, the process combines the transaction with other transactions to create a new block of data for the public ledger.
- 5It then adds the new block to the existing blockchain, in a manner that is unalterable and permanent.
- 6The transaction is complete.
10 Important Reasons to Include Cryptocurrency in Your Portfolio
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So what makes up a cryptocurrency portfolio? While Bitcoin is the most common and most valuable cryptocurrency, you can diversify into other cryptocurrencies for a stronger cryptocurrency portfolio. You can add the following cryptocurrencies in your portfolio:
The following are the reasons to include cryptocurrencies in your portfolio:
1. No Third Parties
No one can tamper with cryptocurrencies. This is because the database stores every redundant copy of each transaction. The transactions do not involve banks or governments, which means no one can ever freeze your funds. Since cryptocurrency can experience corrections anytime, you might have to automate trading or deal with the consequences, and that’s about the worst that can happen.
2. Global Economy is Unstable
The economic situation is unstable globally, but the value of cryptocurrency is not dependent on national currencies or the stock market. Incorporating a cryptocurrency portfolio is beneficial when the economy collapses, which implies it is a smart way of diversifying. In fact, the worse the economy gets, the better it is for cryptocurrency such as Bitcoin.
3. No Taxes
With cryptocurrency transactions, there are no third parties. Not even the government. This means that since the government does not influence these transactions, there will never be a viable way of implementing taxation. If taxing of cryptocurrency transactions ever occurs, they would have to be voluntary.
4. Transactions Cannot Be Reversed
As with other common payment systems, there is a likelihood that the sender will make a reversal of the funds. For example, if you have delivered goods to a client and orders a payment reversal, you will lose a lot as a seller. Cryptocurrency is safe since it is the only payment method that has no reversal. Once a user issues a payment, the transaction is complete.
5. No Tracking
When you use a cryptocurrency, encryption ensures there is no way of tracking it. Unless the user publicizes the wallet address, no one can trace the transactions. As a wallet owner, only you can know how much your wallet has. In an unlikely event that someone publicizes a wallet address, you can generate another address. The level of privacy is very appealing.
6. Appreciating Value
Cryptocurrencies appreciate in value. For example, when Bitcoin was first introduced in 2009, they were worth a few cents. Today, one Bitcoin is worth over $6,000.
7. No Identity Theft Issues
With credit cards, you give merchants your information, and hackers can steal credit card information, which can lead to identity theft. However, with cryptocurrencies, this is unlikely as the owner sends only the exact amount he or she wants to send.
8. Lower Charges
The transactions cost is little compared to normal transactions because there are no third parties involved. For instance, Bitcoin users can move funds between themselves with no additional fees. Users pay only a small fee when using online exchange platforms for transactions.
9. Immediate Settlements
Traditional debt settlement takes time. It can take several days or weeks to start and complete bank transfers, depending on the location of the transacting parties. However, with cryptocurrencies, it is instant and only takes a few minutes regardless of the geographic location of the two parties.
10. No Paperwork
Opening a bank account or transferring funds between banks requires a lot of paperwork. But with cryptocurrencies, everything is digital and you do not need proof of address, ID card, or passport.
A cryptocurrency is a virtual currency that uses cryptography to encrypt transactions, which makes it difficult to counterfeit. Unlike the normal currencies, no government issues this currency, which means governments have no control over cryptocurrencies. It has no intrinsic value, which means you cannot redeem it for another commodity, such as gold.
This currency has no physical form and exists only in the network. Using decentralized networks means they involve no central banks in transactions. This is why adding cryptocurrency to your portfolio is a good idea.
Mining is the process of recording transactions on the blockchain. You should include the cryptocurrency portfolio as it has many benefits. There are no third parties, no taxes, and you’re shielded from global economic instability. There are no identity-theft issues, settlement of payments occurs within a few minutes, transactions cannot be reversed, there is no tracking, no paperwork, and the currency can appreciate in value.
Sounds good, huh? We think so, and we hope this article has addressed well how cryptocurrencies work and reasons for including them in your portfolio.