Is Cryptocurrency Really Safe? How Does It Work?

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Have you been following the news? More specifically, have you heard about how Tesla will soon allow people to purchase its cars with cryptocurrency? If so, then you may already know a thing or two about cryptocurrency- which is great, but that’s only the tip of the iceberg.

But you’re probably now more curious than ever. For example, you might be wondering what Bitcoin really is? Well, it’s a currency that is worth more than $40,000 in U.S. dollars, give and take the wild, daily fluctuations.

So if ONE Bitcoin is worth this much, it may be time for you to learn more about crypto so that you too could share a slice of the pie.

So, if you want to know how cryptocurrency works and if it’s even safe, you’ve come to the right place. Click NEXT to find out more!

History of Bitcoin

Invented in 2009, Bitcoin is a digitally stored currency, meaning that it has no physical form as opposed to paper money or credit/ debit cards. You might think that it is similar to debit or credit cards but these are still physical, even if they represent paper money stored in a bank.

Because of the way it is stored, it also provides more security, and because it is decentralized, it is said that no institution or individual can affect it. However, that doesn’t seem to be the case anymore, especially with Elon Musk in the news recently, who’s twitter posts have been

known to cause enormous fluctuations for a variety of cryptocurrency.
In 2011, a single Bitcoin was worth as little as 8 cents. Now, it sits at around $40,000, likely more, depending on when you’re reading this article.

But Bitcoin isn’t the only digital currency you have to watch out for!

Other Cryptocurrencies

So it all started with Bitcoin in 2009, but nowadays there are more than 6,700 cryptocurrencies traded on public markets. These are used for the exchange of goods and services, but only privately, as they are not considered legal tender.

In addition to Bitcoin, there are other common cryptos such as Litecoin and Ethereum. Of course, there are other lesser known currencies which are supposedly hoping to reach a greatness akin to that of Bitcoin in the upcoming years.

For example, you may have heard about Dogecoin, a cryptocurrency which many say has started off as a joke, but it is now worth $0.48. Elon Musk also helped propel this crypto with the help of a tweet after he brought some. ADA is another example, now sitting at $2.07.

What Is Cryptocurrency and Cryptography?

As we said earlier, all cryptocurrencies are fully decentralized. They represent peer-to-peer electronic money, which is implemented by cryptography. The security risks involved with real money, credit cards, or debit cards are vastly reduced when using Bitcoin. On the other hand, since they are not regulated, they do carry the risk of market volatility and loss for investors.

But they also provide other benefits, namely the fact that transactions with cryptocurrency cannot be traced. As you might have guessed, this allows some individuals to trade illegal goods, or at least highly regulated merchandise (think firearms, drugs) with the help of Bitcoin and other such currencies.

In order to do so, these digital currencies use what is known as cryptography or cryptology. For the most part, cryptography uses codes to send messages between two individuals, which is why they are so secure.

How Does a Blockchain Work?

A blockchain is a way for multiple computers or devices to come to a consensus about a set of information. Basically, a blockchain will create a ledger of financial transactions between individuals. These, of course, operate via cryptography. Each block in the chain, hence the name, is connected to the previous one via cryptography.

Like file-sharing torrents, these are stored and shared across a network of peer-to-peer nodes.

Blockchains are, therefore, incredibly secure against tempering, so it is virtually impossible for people to shut them down or even modify them, adding yet another layer of security to the whole process.

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Understand That a “Secure” Investment May Not Be a “Safe” Investment

Of note is the fact that there is a huge difference between safety and security. Because of the way Bitcoin and other cryptocurrencies work, they are inherently more secure than other types of digital transactions, even online banking or money transfers through digital wallets.

But, remember, these also use state-of-the-art encryption tech in order to protect your digital funds. Plus, if your account is hacked and you call up your bank, the bank may even return your missing funds, up to a certain amount.

But what if you lose your password for your crypto investments? Well, the technology is so secure that there may not be a solution for you.

In fact, some people who invested years ago, in the early stages of Bitcoin, have lost their passwords and ended up losing millions of dollars worth of crypto in 2020.

The Potential for Huge Losses

Take the story of Stefan Thomas, a man who made national news when it came out that he was sitting on around $220 million in Bitcoin with no means to access the funds. The German-born programmer was given 7,002 Bitcoin years ago, in exchange for an explainer video. Back then, the currency was valued at a few dollars each.

Nowadays, that same digital wallet is holding a life-changing amount of money, and Thomas cannot access it. The reason behind it? A lost password that he’d written down on a piece of paper, which has since been lost.

The small hard drive that holds the digital keys to the wallet, the IronKey, offers users 10 attempts to log in. So far, Thomas has tried to log in 8 times, to no avail.

So, yeah, cryptocurrency is THAT secure, but it doesn’t exactly sound safe, does it?

Understand Why Crypto Is So Risky

But if Thomas’ story wasn’t enough, there are also two other reasons as to why crypto is considered riskier than holding cash, namely a lack of federal insurance and regulation and market volatility.

Let’s say you have a checking account with $100,000, a CD with a $100,000 investment and a savings account with $50,000. All these funds would be protected! The money you hold in a bank account is FDIC-insured for up to $250,000 per depositor, per account class, and per bank. So even if your bank goes out of business, you will not lose your money.

Huge Fluctuations VS Inflation

The same cannot be said about cryptocurrency investments, as you stand to lose everything.

But it doesn’t end there, because they fluctuate widely just like stocks, but unlike real cash which only fluctuates a little with inflation or deflation. Once you deposit money in a bank, you will not grow rich overnight. With crypto, a single coin could move by 20% or more by the time you drink your coffee first thing in the morning.

Then there’s the real issue of new coins coming on the market, some of them being complete scams, with the founders running away with the investors’ money.

Can You Use Bitcoin to Buy Things?

Bitcoin, along with other currencies, can be seen as both assets and currency. You can use them in the exchange of goods and services. But what;s holding them back are their unpredictable, high volatility and high transaction fees. It doesn’t look like regular people will be using them, well, regularly, any time soon.

So, yes, you CAN use cryptocurrencies to make purchases. However, right now it seems that a large number of people are buying currencies as they wait for the prices to go up, in the hopes that they will do so in the same fashion that Bitcoin did.

Will You Really Make Purchases With Bitcoin?

So, you can make purchases, but is it always ideal? Because right now they are better seen as assets that will increase in value, those who purchase cryptocurrencies are holding on to them for the time being.

That leaves you with another option: to follow the same pattern. However, don’t just look at Bitcoin billionaires and think you’ll amass the same fortune. Experts say that cryptocurrencies are not the best for investors, especially beginners, with low-risk tolerance.

So, take into consideration the fact that cryptos have limited government oversight, a high degree of volatility, and the fact that the majority of them lose most of their value very quickly. Over half, in fact, fail in the first four months while others survive by the implication of other individuals, such as Elon Musk. Do you want your investments tied to such risks?

What Should You Do If You Want to Invest?

First, you need to know how much money you can invest. It’s always a smart move, no matter the investment, to select how much you’re going to invest from the get go and take it from there. This is solid advice, especially for beginners that may get swept up rather quickly.

After you’ve decided that, it’s time to pick your cryptocurrency. Aiming to invest in Bitcoin from the onset is an incredibly risky move, and you may not even have that amount of money laying around. Dipping into your savings for some Bitcoin is also a bad idea, given that you do not know how the cryptocurrency will fare in a few years.

After you’ve selected your cryptocurrency carefully, it’s time to pick a platform. There are, luckily, many out there, since you can’t buy crypto from the bank. Unifimoney Robo, Coinbase, and BlockFi are just a few places to start researching.

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To put it simply, cryptocurrencies are secure, decentralized currencies that you can start investing in whenever you feel like it. You can, of course, purchase goods with them- soon enough, you could even buy a Tesla with Bitcoin, which is something that made the news not too long ago.

If you’re looking for a way to make safe transactions, then you cannot get any safer than with cryptocurrencies such as Bitcoin, but you must always keep in mind that there are also dangers out there- remember the story about Stefan Thomas. No matter what you do, do not trust a piece of paper with your password, and you should be good.

Lastly, if you’re going to start investing, don’t dip into your savings, as it’s incredibly difficult to tell how the market will fluctuate, and you may end up losing everything!

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