The cryptocurrency market increased from less than $200 billion in 2017 to nearly $3 trillion in 2021, attracting a flood of new crypto investors.

But everything fell apart in the first half of 2022. While the crypto market is currently valued over $900 billion, the hazards for investors lured to this burgeoning asset class have been increasingly obvious in recent months.

As a result, it's more crucial than ever for investors to do their homework and understand what they're getting into. If you're considering investing in cryptocurrencies, you might be asking what precisely cryptocurrency is. And how does it function?

Here's what investors should know about it, as well as how to make smart crypto investments.


What Exactly Is Cryptocurrency?

In principle, cryptocurrency may be used to purchase goods and services, but in fact, it is more typically purchased and sold as an investment or used to power decentralized finance (DeFi) software initiatives on multiple blockchains.

Bitcoin was the inaugural cryptocurrency, and the number of coins available for purchase has grown to over 19,000 in the years since its introduction. Bitcoin was created to facilitate digital payments, but investors have come to regard it as more of a store of value than a practical digital currency. It is frequently referred to as "digital gold." Bitcoin reached an all-time high of roughly $69,000 in November 2021, before plummeting to around $20,000 in 2022.

Ethereum is the second-largest cryptocurrency, however it functions more like a software platform than a money. Developers invest in the Ethereum network in order to create crypto-oriented apps and software solutions. In November 2021, Ethereum reached an all-time high of $4,878. However, similar to bitcoin, its value fell in 2022 and is currently trading around $1,000.


What Is Blockchain, and How Does It Affect Crypto?

Blockchain networks power cryptocurrencies. A blockchain is simply a digital ledger made up of data chunks that grow in size.

Records are preserved across several computers on a network using a blockchain's distributed ledger. Each computer is referred to as a node, and these nodes verify and store data. When new transactions are completed, they are added to a "block" of data, which is subsequently added to the chain. As new transactions occur, the entire ledger may be updated.

Many cryptocurrency aficionados believe blockchain technology has the ability to support the next iteration of the internet, dubbed web3. Blockchain technology may be used for gaming, banking, and other applications. Furthermore, in order to complete transactions, you must be able to pay the required fee in the corresponding cryptocurrency.


What Is Cryptocurrency's Value and How Is It Determined?

A cryptocurrency's value is determined by a number of things. With so many cryptocurrencies available, determining which are genuinely valuable may be tough.

Demand, like many other assets, is a major contributor to a cryptocurrency's value. If more individuals use a currency or a blockchain connected with a coin, the price is more likely to rise.

Because well-known cryptocurrencies such as bitcoin and ethereum are utilized by more individuals, their perceived value is higher. Because more individuals are using these networks, the values of bitcoin and ethereum are increasing. greater than those of other cryptocurrencies Some analysts also refer to bitcoin and ethereum's first-mover advantage in terms of establishing the market in the first place.

Supply can also impact cryptocurrency prices, or at least investors' perceptions of its worth. Many analysts believe bitcoin will retain its value because there is a limit to the number of bitcoins that may exist. Because only 21 million may exist, scarcity is supposed to contribute to its value, as opposed to a cryptocurrency with no upper limit.

When deciding which cryptocurrencies to invest in, search for coins with a solid use case and a high possibility of widespread adoption. One of the reasons ethereum is valued (second only to bitcoin) is because its smart contract capabilities allows for the development of a variety of applications, including those for banking and gambling.


How Can You Make Use of Cryptocurrency?

It is conceivable to use bitcoin and other cryptocurrencies to make real-world purchases, but experts say it is not practical for most individuals. Because of the volatility and change in the value of cryptocurrency, the amount you pay now may be significantly greater or lower tomorrow.

Aside from being used as an investment, cryptocurrency may also be used to obtain access to blockchain networks such as Ethereum and other networks that allow developers to create software on.

"It is also conceivable to use cryptocurrencies to pay for utilizing networks," says Adam Blumberg, CFP, co-founder and president of Interaxis, a company that teaches financial advisers about crypto assets. "If I wish to conduct an ethereum smart contract transaction, I must pay for it using ether."

There are also crypto debit and credit cards available that are linked to exchange accounts and allow you to merge real-world purchases with your cryptocurrency holdings. Even PayPal enables you to purchase using cryptocurrencies online.

However, the most prevalent application for cryptocurrencies is as investments. And there are indicators that such crypto assets are becoming more widely available. Fidelity, for example, has revealed intentions to include bitcoin in its 401(k) programs. There are also self-directed IRA custodians that connect to an exchange like Coinbase to let you to invest in tax-advantaged retirement plans using your cryptocurrencies.



How Does Cryptocurrency Get Mined?

The technique of leveraging computational power to validate transactions on a blockchain is known as cryptocurrency mining. Miners provide processing power to the network in order to assist finish transactions. In exchange, those who solve cryptographic puzzles and perform other computational tasks may be rewarded with additional cryptocurrency.

Over time, cryptocurrency mining has gotten more difficult – and competitive. Many miners develop or acquire customized equipment to give the processing power required in an increasingly competitive market. This can be pricey, and it does not ensure that you will obtain the mining return. Crypto mining also raises environmental problems, owing to the large quantities of electricity necessary to operate more complex and powerful mining machines.


How Is Cryptocurrency Safeguarded?

There are several options for storing your cryptocurrency. Many cryptocurrency exchanges enable you to keep your coins on their platform. If your coins are stored on an exchange, they may be subject to a hack. While some exchanges retain insurance to assist limit losses, it's vital to note that crypto investments lack the same federal safeguards and guarantees as traditional investments.

A crypto wallet is the most secure way to store cryptocurrency. Wallets are classified into two types:

— Hot wallets are internet-connected and may be accessed via your computer or phone. They are simple to use and may be linked to a variety of internet markets. You may easily transfer your bitcoin from an exchange to a hot wallet and keep it separate. Hot wallets are also known as software wallets.

— Cold wallets do not have internet access. These are hardware wallets that resemble USB drives. Cold wallets are often more costly than hot wallets, but they are thought to be more secure. They are less vulnerable to hackers since they are not linked to the internet. However, this also implies that if you lose You might lose your cryptocurrency forever if you use a cold wallet.


When deciding between a hot wallet and a cold wallet, it's critical to understand the hazards of both.

You can frequently retrieve misplaced keys from a hot wallet. You may generally access them as if they were another account with a password. You can usually get back in if you have the right pass phrases. However, you must be prepared to accept security hazards.

A cold wallet is less resistant to hackers, but recovery may be more difficult. If you forget the keys needed to access your wallet, you might not be able to get to your crypto assets. Furthermore, without a backup, you risk losing your assets.

It's critical to find a system that works for you when it comes to storing your cryptocurrency. It may make sense to hold coins on an exchange for trade purposes. However, you may prefer to use a hot wallet for online transactions and transferring cryptocurrency. A cold wallet may be your greatest alternative for long-term storage, since experts advocate cold wallets for maximum protection. You may get the desired outcome by combining storage choices.

Based on our own research and professional advice, we believe the following are the best crypto wallets for most long-term investors:

Coinbase Wallet is the best cryptocurrency wallet for beginners.

Best Bitcoin Wallet Electrum

Exodus – The Best Altcoin Crypto Wallet

Model T Trezor — The Most Secure Crypto Wallet

The Ledger Nano X is the best cold wallet for the money.

MetaMask – The Best Ethereum and Web3 Compatibility Hot Wallet

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