Cryptocurrency is a medium of exchange that uses cryptography to ensure the security of financial transactions and digital assets. Generally, cryptocurrencies are decentralized systems based on blockchain technology, or more precisely, a distributed ledger operated by disparate nodes/computers within the system. Cryptocurrency is also tradable and cryptography is used to secure the circulations of cryptocurrency.
The first blockchain-based cryptocurrency was Bitcoin, introduced by an anonymous programmer under the alias Satoshi Nakamoto in early 2009. Satoshi described Bitcoin as a “peer-to-peer electronic cash system” which is totally decentralized with no servers involved and no central control.
How Does Cryptocurrency Network Work?
In the decentralized cryptocurrency network, people can do cryptocurrency transactions. Every transaction is a file that consists of the sender's and recipients' wallet addresses (public keys) and the amount of cryptocurrency transferred. The transaction will be broadcast in the network and confirmed by miners.
Only when miners confirm the transactions by solving a mathematic equation and spread the across the network, will the transactions be validated and kept record by every node/miner, and added in the blockchain eventually. Once the transaction is verified and confirmed, it becomes tamper-proof and irreversible. The miner who worked out the cryptographic puzzle and confirmed the transaction receives a certain amount of cryptocurrency as a reward, which also called a transaction fee.
Unlike traditional transactions that a trusted 3rd-party or a central server can supervise the behavior of all participants. In the decentralized blockchain-based cryptocurrency network, it relies on a consensus mechanism to achieve the agreement on block generation among tens of thousands of nodes around the world, which also guarantees the safety and normal operation of the blockchain network.
Where to Buy/Invest in Cryptocurrency?
Bitcoin is the gold in the crypto market. In December 2017, the price of one BTC hit nearly $20,000. Many stories of becoming millionaires through BTC investments sprung up at that time. Though the price of BTC, as well as other altcoins, plunged sharply in 2018, people still believe that cryptocurrency investment is a great opportunity to make profits and achieve financial freedom. However, where can we buy a cryptocurrency, and how to invest in cryptocurrency?
The cryptocurrency exchange is an online trading platform, integrating exchange, securities, and investment banks. The main way of profit-earning is to charge a fee by offering cryptocurrency listing, trading, and more services. In the crypto exchange, you can buy any cryptocurrencies listed on the platform.
Four Main Transaction Modes
Up to now, there are four main types of transaction modes offered in different cryptocurrency exchanges. Before investing in crypto assets, you should get to know more about them.
1. Over-the-Counter Market (OTC)
OTC is a type of trading that allows you to buy or sell digital currency outside the exchange. In the OTC market, there is no clear eligibility of membership, no strict and controllable rules and regulations, and no prescribed trading products and limitations. Buyers and sellers make agreements and trade with each other.
OTC exchange platform is similar to Alibaba. When two parties made an agreement on the price of the product, the buyer will send money to the platform. When the buyer received the product, the platform will send the money to the seller. In cryptocurrency's OTC market, the buyer sends fiat to the seller's account and confirms payment, then the equivalent amount of cryptocurrency that in the seller's account will be locked by the platform. When the seller confirms that he received the fiat, those locked cryptocurrencies will be sent to the buyer's account.
To trade in the OTC market is flexible, owing to no KYC(Know your customer) requirement. In other words, your personal and trading information will not be saved on the OTC exchange platform.
2. Crypto-to-Crypto Transaction
At present, BTC, ETH, and USDT are considered as the basic cryptocurrency in circulation in the crypto market. Crypto-to-crypto trade means that you can use BTC, ETH, or USDT to buy other kinds of cryptocurrencies like EOS, LTC, ADA, etc. according to the market price.
This is a transaction type that almost all crypto exchanges support. It enables investors to directly and conveniently trade with cryptocurrencies they hold.
3. Fiat-to-Crypto Transaction
Fiat means fiat currency, for example, USD, JPY, Euro, etc. In fiat-to-crypto transactions, investors can use fiat to buy cryptocurrency based on conversion ratio. In general, investors use fiat to purchase USDT, then use USDT to conduct a crypto-to-crypto transaction.
Fiat currency transaction is liable to be used as a tool for money laundering or funds transfer. Therefore, most crypto exchanges, offering fiat-to-crypto transaction, requires users to KYC for anti-money laundering.
4. Futures/Leverage Trading
Cryptocurrency futures trading, also called leverage trading is a transaction type that investors use the cryptocurrency they hold as the margin and start a 10x, 20x, 50x, or 100x greater trade. In leverage trading, investors can choose to buy in (long) or sell out(short), which means to bet on the cryptocurrency's price rising or falling.
For example, you have 10 BTC and predict the BTC price will rise(fall) in a short period. You can put the 10 BTC in the leveraged account in the exchange and select a 10x leverage ratio, which means you use 10 BTC to open a 100 BTC trade. When the price of BTC rises(falls), you can get sell out those BTC and take 10x profits.
Suppose you open a short position, but the BTC price rises with a large extent of the increase, reaching the minimum threshold of the margin. If you didn't transfer a sufficient amount of margin in your leverage account, your position will be forcibly closed by the platform, which means you lost all your principal.
How to Store Cryptocurrency?
Similar to fiat currency, you can also store the cryptocurrencies in the wallet. The wallet here refers to a cold wallet.
1. What is Cold Wallet
A cold wallet is a storage technology developed by an IT company, providing secure storage solutions to blockchain digital assets. A cold wallet is so multifunctional that it can store cryptocurrency, set passwords for multiple transactions, publish the latest information of the crypto market, offer solutions to hard forks, etc. In addition, cold wallets use QR codes to represent public addresses and private keys, which can effectively avoid hacking.
2. Characteristics of A Cold Wallet
-Cryptocurrency/tokens are stored in a distributed manner, and each address stores a certain amount of cryptocurrency/tokens.
-All private keys are stored in a completely offline computer.
-Make sure that the private key has never connected to the Internet or USB flash drive.
-There should be an offline backup for the private key encrypted document and controlled by different people.
-The AES password for the private key must also be controlled by two different people and must not be the same person holding the private key.
-The two groups of people who have the private key ciphertext document or private key password must be in different places, and better in different countries.
-Once a private key is used to send cryptocurrency online, it will be void and will never be used again.
The emergence of cryptocurrency brings us a brand new way of storing and spending money anonymously without the control of the central authority. With cryptocurrencies, transferring funds directly between two parties becomes much easier and more secure. However, it has not yet been widely understood and accepted as a means of payment, let alone fit the existing regulations and legal frameworks in different countries around the world. Like it or not, cryptocurrency as well as blockchain technology is fast developing and could be an important milestone in finance in the coming future.