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By now, you’ve probably heard of bitcoin. You might even know someone who’s invested in it or another cryptocurrency. You might have even thought about investing in crypto yourself.
However, the buzzword-heavy space can be a difficult one to wrap your head around.
Crypto Credit:Kathleen Adele
Cryptocurrencies are new-age digital currencies with some key defining characteristics. They leverage cryptography to provide a high level of security, meaning they are incredibly difficult to counterfeit or double-spend. Most run on blockchain technology, meaning they are decentralised and not controlled by any one entity, such as a central bank or other financial institution.
Cryptocurrencies have gained significant traction recently and particularly during the pandemic, where many young investors were flush with both time and cash (in the form of government stimulus). This prompted prices to soar, which then caught the attention of many larger institutional investors.
The first port of call when buying cryptocurrency is an online exchange, which acts similarly to a share brokerage platform, such as CommSec. Some of the more popular local and international exchanges are Coinbase, Kraken, BTCMarkets and Independent Reserve.
Once you’ve set up an account, transferred some money and run through the mandatory “know your customer” process, you can then get to purchasing your crypto. On most exchanges, this is as easy as picking what you want and hitting a big green “buy” button.
If you’re crypto curious, by now you’ve probably also heard about “digital wallets” that people store their funds in, and possibly also heard some horror stories of investors forgetting their private keys (wallet passwords) or accidentally falling victim to some sort of phishing scam.
The good news is that by buying crypto via an online exchange, all the wallet setup, security and custody are managed for you by the exchange, so you don’t have to worry about setting up and managing your own digital wallet.
However, if you’re investing in crypto in a big way, it might be worth considering setting up your own personal wallet. This is the right option if you’re anxious about security but, be warned, it also involves many risks.
At its core, the blockchain is a ledger – a long, publicly viewable record of transactions flowing to and from wallets. If you go onto an exchange and buy some bitcoin, that transfer is lodged on the ledger.
However, while a bank might run or store a ledger on its servers, blockchain technology is distributed. Thousands of computers across the world each have a copy of bitcoin’s ledger. These computers then cross-reference each transaction with each other to prevent any fraudulent activity.
Every 10 minutes, these computers package all the transactions received during that time as a “block”, which is cryptographically linked to the preceding block. These blocks are unable to be modified or changed. It is these blocks that form the “blockchain”.
Mainly because it was the first cryptocurrency, launched way back in 2009-2010, where it first traded at about 9¢.
Bitcoin’s programming also dictates that no more than 21 million bitcoin can be created, with the coins becoming exponentially harder to mine every four years.
It’s highly unlikely that cryptocurrency in its current form will replace traditional currency any time soon.
Sending a bitcoin transaction costs about $US2.50 in fees. It also takes about 10 minutes to make the transaction. Both of these features mean using bitcoin as an everyday currency to buy your lunch would be highly impractical.
Bitcoin is not the only crypto in the market and there are numerous other smaller projects that are quicker and cheaper to use, however, by and large, they are still more complex and slower than Visa or Mastercard’s networks.
But outside of being an everyday use currency, crypto is fast becoming increasingly popular as an investment for both retail investors and major funds, with bitcoin frequently likened to “digital gold”.
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