Basic concepts behind cryptocurrencies

Cryptocurrencies are now present everywhere. Pick whoever you want. A random guy you met in the subway, your local barista or the newspaper delivery boy, every single one of them knows something about cryptocurrencies. But the question is... do you?

Let’s be honest: reading an article about Bitcoin is not going to turn you into an expert on the subject. If you want to be ahead of the game and start trading cryptocurrencies with an effective, professional approach, then you should acquire a clear understanding on basic concepts that integrate the crypto-world, for example: cryptocurrency, blockchain and ICO.

Cryptocurrency


“A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.” (Source: Investopedia)

A cryptocurrency offers the following benefits for your portfolio: diversification, high potential, fast return on investment, volatility, less regulation than a traditional asset.

However, investors should keep in mind that cryptocurrencies can turn into a challenging asset to trade, especially if you are not planning to keep them for an extended period of time.

Blockchain


“A blockchain is a digitized, decentralized, public ledger of all cryptocurrency transactions. Constantly growing as ‘completed’ blocks (the most recent transactions) are recorded and added to it in chronological order, it allows market participants to keep track of digital currency transactions without central recordkeeping. Each node (a computer connected to the network) gets a copy of the blockchain, which is downloaded automatically.” (Source: Investopedia)

We can think of blockchain as the technology behind cryptocurrencies. Blockchain plays a key role for cryptocurrencies as it is where all transactions are recorded, without any external (regulators) interference and with no chances to be modified by any means. Blockchain cuts out banks, making transactions considerably cheaper for clients.

Initial Coin Offer (ICO)


“An unregulated means by which funds are raised for a new cryptocurrency venture. An Initial Coin Offering (ICO) is used by startups to bypass the rigorous and regulated capital-raising process required by venture capitalists or banks. In an ICO campaign, a percentage of the cryptocurrency is sold to early backers of the project in exchange for legal tender or other cryptocurrencies.” (Source: Investopedia)

The best way to understand an ICO is to think of it as a crowdfunding platform. Have you heard of Kickstarter? You know… where you upload a project and ask people to give you some money in exchange for products at discount prices. Same idea applies for ICOs, but instead of dealing with t-shirts, headphones or watches, the products behind them are typically cryptocurrencies.


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