Cryptocurrency comes under many names. You have probably read about some of the most popular types of cryptocurrencies such as Bitcoin, Litecoin, and Ethereum. Cryptocurrencies are increasingly popular alternatives for online payments. Before converting real dollars, euros, pounds, or other traditional currencies into ₿ (the symbol for Bitcoin, the most popular cryptocurrency), you should understand what cryptocurrencies are, what the risks are in using cryptocurrencies, and how to protect your investment.
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What is cryptocurrency?
A cryptocurrency is a digital currency, which is an alternative form of payment created using encryption algorithms. The use of encryption technologies means that cryptocurrencies function both as a currency and as a virtual accounting system. To use cryptocurrencies, you need a cryptocurrency wallet. These wallets can be software that is a cloud-based service or is stored on your computer or on your mobile device. The wallets are the tool through which you store your encryption keys that confirm your identity and link to your cryptocurrency.
What are the risks of using cryptocurrency?
Cryptocurrencies are still relatively new, and the market for these digital currencies is very volatile. Since cryptocurrencies don’t need banks or any other third party to regulate them; they tend to be uninsured and are hard to convert into a form of tangible currency (such as US dollars or euros.) In addition, since cryptocurrencies are technology-based intangible assets, they can be hacked like any other intangible technology asset. Finally, since you store your cryptocurrencies in a digital wallet, if you lose your wallet (or access to it or to wallet backups), you have lost your entire cryptocurrency investment.
Follow these tips to protect your cryptocurrencies:
- Look before you leap! Before investing in a cryptocurrency, be sure you understand how it works, where it can be used, and how to exchange it. Read the webpages for the currency itself such as Ethereum, and Bitcoin Litecoin so that you fully understand how it works, and read independent articles on the cryptocurrencies you are considering as well.
- Use a trustworthy wallet. It is going to take some research on your part to choose the right wallet for your needs. If you choose to manage your cryptocurrency wallet with a local application on your computer or mobile device, then you will need to protect this wallet at a level consistent with your investment. Just like you wouldn’t carry a million dollars around in a paper bag, don’t choose an unknown or lesser-known wallet to protect your cryptocurrency. You want to make sure that you use a trustworthy wallet.
- Have a backup strategy. Think about what happens if your computer or mobile device (or wherever you store your wallet) is lost or stolen or if you don’t otherwise have access to it. Without a backup strategy, you will have no way of getting your cryptocurrency back, and you could lose your investment.
Guide To Top Cryptocurrency Exchanges
There are more than 1,600 cryptocurrencies in circulation today, with a combined market cap of over $289 billion, according to CoinMarketCap data. Investors around the world are eager to trade in this rapidly-growing space, and a slew of cryptocurrency platforms have emerged to meet the need for infrastructure to support the exchange of digital currencies. Though they call themselves “exchanges,” from an investor’s standpoint they function similarly to e-brokerages and their rapid rise is reminiscent of the explosion of electronic discount brokerage firms during the dotcom bubble of the late 1990s. These exchanges allow consumers to buy, sell, and trade cryptocurrencies, whether through fiat currency like dollars, euros, or yen, or another cryptocurrency like bitcoin or ether. Less common cryptocurrencies, called altcoins, often must be traded against bitcoin and cannot be purchased directly with fiat currency. Not every exchange supports every coin, and many investors use more than one platform. Some exchanges are better suited to less experienced traders and retail investors, while some are geared towards institutions or full-time traders.
The law governing these exchanges varies widely based on location and the type of services each exchange offers. Some exchanges are unregulated, some are not available to customers in certain countries, and all are vulnerable to an ever-changing regulatory environment. After China’s crackdown on cryptocurrency in November 2017, Chinese exchanges were forced to move their operations elsewhere or shut down completely. Other exchanges recently suspended service to Japanese customers following new guidelines issued by the Japanese Financial Services Agency. American exchanges are subject to state-by-state regulations as well as federal guidelines. New York State, for instance, implemented “BitLicense” regulations, which grant licenses to virtual currency businesses, in 2015. There is a dizzying array of offerings and options at exchanges. Though the space is hyper-competitive, each has a different fee structure, trading features, coins on offer, and security and insurance measures in place.
Most exchanges charge trading fees based on a “maker-taker” model, under which “takers” place orders that are executed immediately (read: market order), removing liquidity from the market, while “makers” place orders that sit on the books, below the ticker price for a buy and above it for a sell (read: limit order). Makers create more liquidity in the market and are often rewarded with lower fees and rebates. Takers are typically charged higher fees, which in these exchanges generally hover around 0.1% or 0.2%. Perhaps most importantly, each exchange has a different compliance framework. Thus, it is important to read the fine print for each exchange, before registering to trade. To date, there are more than 200 cryptocurrency exchanges that support active trading, and the combined 24-hour trade volume of the top ten is more than $6.5 billion. Below, take a closer look at some of the major exchanges operating today. All data is as of 3:00 pm EST on June 19, 2018. Fee calculations are based on a bitcoin trade worth $1000.