Decrypting Cryptocurrency Secrets: How They Work and How You Can Make a Profit from Them

By now, you have probably heard or encountered the word cryptocurrency at least once either online or offline. It is quite impossible not to have noticed the rising popularity of the crypto community. Since Bitcoin, one of the more popular crypto coins, proved itself as a possible investment, people have started slowly gravitating towards digital currency. Now there are numerous cryptocurrencies in circulation and with crypto trading gaining widespread acceptance, even more, could emerge in the future.

Simply put, a cryptocurrency is the decentralized digital currency you can find online. Cryptocurrency, as the term suggests, is encrypted and relies on a virtual ledger (blockchain) so users can keep track of their transactions. What makes virtual currency so alluring to many is its decentralized nature. There is no central authority overseeing cryptocurrency transactions which means your data is protected from third-party manipulation. Virtual currencies are alternative currencies that private groups or individuals can exchange.

The way traditional financial transaction works is mostly through an outside entity like a bank that handles our money. Because we have no choice but to rely on these entities, we are always at risk of getting exploited. Transactions also come with fees, not to mention we have to abide by the financial entity’s working hours. Cryptocurrency is a means of giving people a better alternative to keeping and transferring our money.

The Cryptocurrency Controversy

Like with all things new and novel, cryptocurrency has had its fair share of critics. A lot of people’s introduction to crypto coins is most likely through someone’s opinion on how virtual money can’t possibly work. Well, known investors and other financial professionals have slammed cryptocurrencies, saying that they are questionable and overly complicated. Many have noted that crypto coins are nothing but a fad, comparing the trade to gambling and pyramid schemes.

While it is true that there is a good portion of the public still does not entirely understand how cryptocurrencies work and the misconceptions about them are rampant, that does not mean that the widespread use of cryptocurrencies one day is an impossibility. For one thing, the cryptocurrency market, though volatile, has been growing exponentially for years. Major tech companies have also announced developing blockchain smartphones and laptops which could make crypto trading accessible to anyone anywhere. As to the argument that crypto coins are nothing but a fad, it is known that digital currency has been on the works ever since computers and the Internet became mainstream.

There is still a long way to go before crypto coins can be utilized in everyday transactions, but we are making great progress every day. Cryptocurrency is not as unthinkable as naysayers might like to believe.

Most of the cryptocurrency’s critics and skeptics cite that they do not actually understand how it works so, ergo, they do not trust it. Maybe you might have the same stance. Fortunately, this article will give clear things up about the confusion and misunderstanding surrounding cryptocurrency.

Cryptocurrency: A Brief History

Not many people realize just how long cryptocurrency – at least as a theoretical construct – has existed. The first cryptocurrency proponents aimed to solve the faults and defects inherent in traditional financial institutions. By utilizing mathematics and computer science principles, cryptocurrencies proposed a more convenient and practical alternative to fiat currencies.

The groundwork for cryptocurrency goes back as early as the 1980s when David Chaum, an American cryptographer, created his “blinding” algorithm which would later become a critical factor in modern encryption. Chaum’s algorithm offered a way to send secure and unalterable information between parties. This was known as blinded money or b-money.

Although Chaum’s attempts at commercializing the idea of blinded money was notable, his company along with b-money went belly up around a decade later. An associate of Chaum developed another cryptocurrency known as Bit Gold which interestingly used a blockchain system similar to what is used today. Unfortunately, Bit Gold met the same fate as b-money.

The modern cryptocurrency era started sometime in 2008 by the now infamous Satoshi Nakamoto, an anonymous person or group who posted to a mailing list a white paper that outlined Bitcoin and how it could work. The paper – Bitcoin – A Peer to Peer Electronic Cash System – discussed how Bitcoin would allow for decentralized control, complete user anonymity, a reliable record-keeping system, and impenetrable security. Up to this day, the identity of Satoshi Nakamoto is a mystery.

A year later, Nakamoto released the Bitcoin software to the public. Supporters eagerly began mining – the process of creating new crypto coins – Bitcoin and modern cryptocurrency started gaining traction. Hal Finney, a computer programmer, made history when he became the first person to receive bitcoin. In 2010, competing cryptocurrencies such as Litecoin and Namecoin started to pop up. Public Bitcoin trades occurred around the same period.

Not long after, Bitcoin received backlash when it revealed that it was traded in the dubious dark web, particularly on the controversial website Silk Road, the online black market where highly illegal items and services were exchanged. The stigma and suspicion surrounding cryptocurrency started then, not at all aided by the fact that the average Joe had not yet heard of the concept of virtual currencies until the controversy.

Despite a tumultuous few years – crypto prices skyrocketing one moment then plummeting the next – and more than a handful of scandals, new cryptocurrencies continued to emerge and gain popularity. Eventually, cryptocurrencies reached public consciousness and more and more people have invested in the crypto trade. Major technology manufacturers like Samsung and Huawei have released plans to develop blockchain technology, which could make cryptocurrency trading the mainstream.

Bitcoin, regarded as the first successful cryptocurrency, introduced the world to cryptocurrency’s most important aspect: the blockchain system Bitcoin essentially created the bare bones of how most cryptocurrency is exchanged today.

Blockchain Technology Explained

Now that we know a little of how cryptocurrencies came to be, it is time to discuss how cryptocurrencies work. The blockchain is one of the reasons why cryptocurrencies have achieved such rising popularity. It is the foundation of cryptocurrency, the reason why they have any value that can be traded. The blockchain is the technology that allows digital information to be exchanged but not copied. Each piece of data, as a result, can only have one owner, which is an essential factor when you are dealing with virtual currency.

Think of it like this: all cryptocurrencies may have distinct characteristics, but they all have two main things in common – they have no physical form (as they only “exist” online) and they have no intrinsic value. Crypto coins only move through transactions between individual traders so to keep track of who owns how much at a given time, the blockchain keeps a record of all transactions. That is why blockchain is also referred to as the “digital ledger.”

You might be wondering why it’s called a blockchain. Well, a block is the record of new transactions validated by the network in a given time span. When each block is completed, it is added to the chain of other blocks. A blockchain operates on top of the Internet, on a peer-to-peer (P2P) network of computers that all run the protocol and hold an identical copy of the digital ledger.

Cryptocurrencies like Bitcoin have their blockchains, and each bitcoin owner has a private password to an address on the chain. That is where their ownership is archived. With the blockchain, you would be able to access your account without having a third-party (like a bank) to validate your identity and take a cut in every transaction. The blockchain can be inspected by everyone, but not one single entity can control or monopolize it.

Probably the most revolutionary aspect about blockchain is how it solved the problem of double-spending or the fraudulent technique of spending the same amount of money twice. Traditionally, a central authority prevents this from happening but with blockchain every participant needs to do this job. So instead of a middleman confirming and overseeing transactions, distributed machine consensus based on economic incentive mechanisms (game theory) together with cryptography enables the secure P2P value transactions.

Every transaction requires the sender’s and the receiver’s public keys (or wallet addresses) as well as the amount of money/crypto coins transferred. The transaction must be signed off by the sender with their private key. The transaction is broadcasted in the network after it is confirmed and only miners can do this by solving a cryptographic puzzle.

Basically, to give you a concrete idea on how the blockchain works, let us compare it to how a financial entity like a bank operates. Every time a customer requests to transfer money from their account to another, the bank needs to coordinate, synchronize, message, and confirm within the system for the request to go exactly as planned. However, with the blockchain, the process is much simpler since both parties have access to the ledger of transactions. There is only ever one version of the record of accounts, not two disparate databases, so coordinating and validating the transaction is done in a snap.

What’s more is that the blockchain is not strictly used for cryptocurrencies now. It can be programmed to record more than just financial transactions, and major tech companies like IBM are currently investing millions in developing blockchain technology. A blockchain developer studies the possibilities of the technology. Bitcoin may have been the first to successfully utilize blockchain technology as a digital cash system (and other cryptocurrencies followed suit), but it seems that that was only the tip of the iceberg. There is huge potential just lying in wait with blockchain.

How to Make a Profit from Cryptocurrency Trading

There are several ways you can use cryptocurrencies. You can use it for transactions on websites or services that accept them (and more and more companies have adapted to cryptocurrencies these days). You can invest in cryptocurrency by mining coins (which requires powerful hardware and software). Or you can trade and invest in the cryptocurrency market.

A lot of people believe that cryptocurrencies are a potential goldmine and have eagerly flocked to investing in it. While there are people who have managed to turn a huge profit through Bitcoin investments, it should be noted that cryptocurrencies are (and have always been) high-risk investments. No other financial asset’s price fluctuates like cryptocurrencies’ prices. So before you empty your bank account to invest or trade in cryptocurrency, remember that the crypto market is volatile and unpredictable. If you are too reckless, you might find yourself without a penny to your name.

However, if you are ready to start trading in cryptocurrency seriously and you are confident that you are capable of safely and wisely investing your money, then here is what you need to know.

First, you will need two simple things: a cryptocurrency wallet and a cryptocurrency exchange.

A cryptocurrency wallet is where you will store your coins (in the form of encrypted passwords). It is important to choose the most reliable and updated wallet you can find. All major exchanges offer wallet services, but it is highly advised that you store your assets in an offline wallet on your hard drive or even a hardware wallet. A cryptocurrency exchange is a place where you can trade your coins for other cryptocurrencies and even fiat currencies.

Next, you will need to decide how you want to trade and what particular cryptocurrency you want to trade. The most recognizable digital currency right now is Bitcoin, and it is said that there is a huge potential in making money on trading Bitcoin. However, like trading in any other financial market, crypto trading requires expertise and knowledge about the market.

Once you have chosen what cryptocurrency to trade in, you will have to own some coins so you can start trading. There are websites like Coinbase and CEX that allow you to purchase cryptocurrencies through a bank transfer or by a credit or debit card. Once you have your coins, you can transfer them to the exchange you have chosen to operate on.

You can also day trade in cryptocurrencies by trading a particular crypto coin against other cryptocurrencies or fiat currencies.

However, beginners are recommended to trade in cryptocurrency stocks instead. Trading in cryptocurrency stocks lets you avoid in trading cryptocurrencies directly, which is a tricky and risky business more suited to experienced traders. GBTC is a trust that owns Bitcoin, and it sells shares of it. You can buy a GBTC stock (the main Bitcoin stock) instead of trading crypto coins.

An interesting fact about crypto trading: unlike the stock market, the crypto market is open 24 hours.

Here are some trading tips to keep in mind:

You can save money on commission fees by using an exchange (like GDAX) instead of a broker.

Take time to learn technical analysis (trying to predict future trends by analyzing price and volume data). You will be able to go a long way if you learn how to read a chart. You will be able to understand financial concepts like candles, RSI, and moving averages which can give you an idea which prime spots to buy and sell. Cryptocurrencies might be unpredictable and seemingly impossible to pin down, but some basic indicators can still clue you in on what could happen next. And if you’re not good with technical analysis (or do not have the time and resources to learn it), you can follow those that are.

Decide if you are going to be a long-term investor or a short-term trader. There are tax considerations when it comes to cryptocurrencies (it depends on the country and state), so you will need to figure out which plan will best suit your situation.

Bitcoin (BTC) is the leading cryptocurrency in the economy; do not ignore it. It is recommended to invest or trade in Bitcoin since it is the most known and lucrative crypto coin on the market. However, for those that are already investing or trading in BTC, there might come a time when Bitcoin prices slow down. When this happens, it is typically not a good idea to jump ship and go to the alternative crypto coins. There might be a chance that investing or trading in altcoins could result in success but it is unlikely. You do not need to only stay in Bitcoin, though it would be wise to have at least part of your investment in BTC.

The cryptocurrency stock market is not the same with the general stock market. While both share some similarities, there are some instances where you need to treat the crypto stock market differently. For instance, in the stock market, when a company’s stock price drops, it is only logical for you to sell that stock. However, the same can’t be said about crypto. Take note that the crypto market is highly volatile and incredibly unpredictable. Huge changes can happen in the blink of an eye. A crypto coin doing terribly could do a complete 180 in just a couple of hours.

Keep a watchful eye out for scams. This last one goes without saying, but it is important to highlight anyway. Cryptocurrency does not have the cleanest reputation, and everyone is aware of that. There are a handful of scams in the crypto community, and it is wise, especially for beginners, to always be vigilant. Anything or anyone that promises free coins, insane returns, or anything suspicious like that, do not fall for it. Be careful and always double check a site or an exchange before engaging in crypto trading.

Pros and Cons of Cryptocurrency

Obviously, like in every advancement in technology, cryptocurrency has its pros and cons. Before deciding to get into the crypto trade, it is important to understand the advantages and disadvantages that come along with it.

Pros:

Emphasis on privacy. The problem with mainstream Internet today is that there is no real privacy anywhere. Cryptocurrency proponents considered privacy as one of the main concerns thus made blockchain a robustly protected network. User information can’t be leaked, and users can even remain anonymous.

Cheaper than traditional transactions. Cryptocurrencies do not require a third-party payment processor, so there is no need for mandatory transaction fees to fund the processors’ work. When there is a cryptocurrency transaction fee, it is considerably lower than what banks or other payment processors charge.

Avoiding government or corporate monopolies. The main goal of cryptocurrencies is to provide a reliable means of exchange outside the direct control of national or private banks. You will not have to rely on these entities that ultimately consider the customer’s interest second to their own.

Built-in scarcity. Because of how they were programmed, a majority of cryptocurrencies offer inflation protection. A cryptocurrency’s source code permits only a finite number of units ever to exist. In this manner, a crypto coin has the same value as a precious metal.

Cons:

Risk of data loss. If users do not take the proper precautions and store their private keys on a single device or single cloud storage if they lose or damage that device, they might never be able to access their crypto coins. This could lead to irreversible financial harm.

Unregulated and ripe for potential illegal activity. Unfortunately, the anonymity and security that makes cryptocurrencies so appealing to the public are also what makes it incredibly appealing to criminals engaged in the online black market. Because there is no central authority, no one can track the illicit activities bought by crypto coins. That is why cryptocurrencies have long been associated with illegal activities.

Cryptocurrency mining has environmental drawbacks. Mining for cryptocurrencies uses incredibly large amounts of energy which could negatively affect the environment. If cryptocurrency does make it to the mainstream, mining for coins could increase our carbon footprint, worsening the state of the Earth.

Conclusion

Cryptocurrency proponents and advocates are confident that, as long as it is properly and responsibly secured, digital currency could encourage a shift away from physical cash. They believe that we can have a future where we do not have to accept the inherent flaws and risks of physical currencies. From B-money to Bitcoin, cryptocurrency has been around for over three decades now, and it does not seem to be going away any time soon. It would not be too surprising if blockchain technology will be adopted by the mainstream soon.

In any case, there is no denying that we are heading to a digital future.