Cryptocurrencies — A Guide for Beginners – The Startup
I N T R O D U C T I O N
What is behind cryptocurrencies and the blockchain and how can I trade cryptocurrencies?
First of all, it is important to distinguish between the two terms. A blockchain is a specially built database that distributes, stores and synchronizes information decentrally (i.e. on many different computers worldwide). As the name suggests, the database can be imagined as a chain of data blocks within which each block is marked with a timestamp and a reference to the previous block.
Changing the blocks is therefore almost impossible (you would have to change all the blocks associated with them at the same time, but they are stored somewhere in the world on other computers). Blockchain technology is therefore considered to be very safe from manipulation and failure.
Cryptocurrencies, on the other hand, are a single application of blockchain technology. The “mother of all cryptocurrencies” is the Bitcoin, which went “live” in 2009 as the first cryptocurrency. Influenced by the effects of the international financial crisis, Bitcoin’s primary basic idea was to create a new, faster and cheaper payment system, accessible to everyone, which would function independently of banks and government institutions — the network would, in fact, control itself. This works because every transaction is stored in the blockchain in a way that it cannot be changed and is then traceable by everyone in the network.
However, the fact that the Bitcoin is mainly used as an object of speculation in reality (and thus does not primarily serve its primary purpose) has something to do with the limited quantity. This is because the Bitcoin system was programmed in such a way that the maximum amount is 21 million Bitcoin and can no longer be subsequently influenced by anyone. As the demand for Bitcoin increases, the price inevitably increases, which is of course highly interesting for investors.
10 years after the launch of Bitcoin, there are now more than 2,000 different cryptocurrencies and new ones are added almost daily. Some of them are very similar, others are very different in terms of technology and purpose. In addition to cryptocurrencies, which are in fact only seen as objects of speculation, many cryptos have developed in the meantime that serves a certain purpose. A well-known example is the Binance Coin (BNB), the “in-house cryptocurrency” of the “Binance” crypto exchange. Holders of this cryptocurrency have a clear benefit: they can use the coins to reduce trading fees on this exchange.
Measured by their share of the total market capitalization, the “Top 5 cryptocurrencies” and the still strong dominance of Bitcoin can be quickly identified:
- Bitcoin (BTC) — approx. 56%
- Ethereum (ETH) — about 10%
- Ripple (XRP) — approx. 7%
- Bitcoin Cash (BCH) — approx. 3%
- Litecoin (LTC) — approx. 3 %
A good overview of the different cryptocurrencies and their development can be found here.
Before you can buy cryptocurrencies for the first time, the following steps are necessary:
Online or offline wallet?
First of all, you need your own “wallet” — it is the account for your future cryptocurrencies. A distinction is made between “online wallets” and “offline wallets”. As the name suggests, the access data for online wallets are stored online. This is much more convenient for the user as it enables faster trading. However, access by hackers cannot be ruled out. There are a number of providers on the Internet who make online wallets available free of charge. A very popular and easy-to-use online wallet, for example, is the Trust Wallet for your smartphone.
Offline wallets, on the other hand, are much safer. A popular representative of offline wallets is the paper wallet. Put simply, the access data to your wallet is printed out on a piece of paper (and not stored online), which you then keep in a safe place. But there are also other forms of offline wallets (e.g. special sticks) where you can store your cryptocurrencies. The offline wallet provider TREZOR, for example, offers a selection of handy hardware. Currently, you can even save 10% when buying an offline solution.
The Crypto Exchange
Once you have chosen a wallet type, you have to choose one or more crypto exchanges on which you want to trade. Just as there are a lot of different cryptocurrencies, there are also a lot of trading places. When selecting a stock exchange, pay attention to the number of cryptocurrencies offered (e.g. more specific cryptocurrencies are usually only available on a few stock exchanges, whereas Bitcoin is available on most stock exchanges), the usability, the security standards (a 2-factor authentication is mandatory here!) and the fee structure.
In addition, various trading venues can also be divided into crypto-to-fiat exchanges and crypto-to-crypto exchanges. A crypto-to-fiat exchange is a trading place where you can change “classic” currencies such as the Euro (Fiat) into selected cryptocurrencies (usually the “Top 10” cryptos are offered here). Known crypto-to-fiat possibilities are e.g. Coinbase or Bitpanda.
Crypto-to-crypto exchanges, on the other hand, are trading places where you can only exchange cryptocurrencies for other cryptocurrencies. Here you can also get “more special” cryptocurrencies. Well-known stock exchanges include Binance, Kraken, and Bitfinex. So if you want to invest Euro in a more special cryptocurrency, this trade-in practice runs on two platforms. First, you exchange your Euros on a crypto-to-fiat exchange for one of the “main cryptos” (e.g. Bitcoin) before you send these Bitcoin (BTC)s to a crypto-to-crypto exchange to trade your desired cryptocurrency there.
Choosing the Cryptocurrency
As soon as you have registered on the crypto exchange of your choice and, if necessary, legitimized yourself (as a rule, the exchanges require online legitimization for a certain amount to be invested), trading can begin. But many newcomers are now faced with the question: in which cryptocurrency should I invest? There is no general rule here, as this, of course, depends on the individual goals of the investor. Analogous to the trade with shares also here the rule applies: “Who scatters, does not slip! That is, to set the entire capital to be invested in a cryptocurrency, is clearly riskier, than to distribute it on several different cryptocurrencies. A good overview of the different cryptocurrencies can be found e.g. on CryptoCompare. In addition, every investment — especially in the crypto area — should be very well considered, well analyzed and above all not hastily approached. Trading in cryptocurrencies involves a high risk of loss for your invested capital up to a total loss. The most important rule at the end:
Use only those financial means, whose partial or complete loss you can afford.
Published at Sat, 18 Jan 2020 07:07:20 +0000
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