Cryptocurrency’s progress has undoubtedly improved over the recent years, and its popularity has gone over the roof. Through the years, cryptocurrency’s growth wasn’t always on the good side as it had many drawbacks along the way, which hindered its capacity to grow fully. Today, there are many types of cryptocurrencies, and all sorts of investors have started jumping in on them. Before you start trading and investing in cryptocurrency, it’s always wise to understand what it truly is and the risks involved. This article will give you brief information to understand what cryptocurrency is and the risks that come with it.
What is Cryptocurrency?
For starters, cryptocurrency is decentralised digital money. It works together with a technology called a blockchain. Cryptocurrency also works as a medium for exchanging various goods and services online. No authority controls and maintains the value of cryptocurrency, making it encrypted and decentralised. One of the first cryptocurrencies introduced to the public was Bitcoin. Today, there are more than 1000 types of cryptocurrencies.
Cryptocurrency works with blockchain technology. This blockchain is an open ledger that records all of the transactions connected to cryptocurrency. With blockchain, every user who transacts with cryptocurrency has a copy of this ledger, creating a unified record. Every transaction is immediately copied and updated throughout different networks making it almost impossible to change.
Different cryptocurrencies have different values, and most of them behave differently in the market. Many investors are aware of cryptocurrency’s volatility. However, many of them still took the opportunity in cryptocurrency, and most of them have probably made a fortune out of it already.
Proof of Work vs. Proof of Stake
One of the many concerns that people have with cryptocurrency is the security of their investments since there have been cases where several investors’ accounts were breached. Dealing with malicious hackers is common, especially when it involves money. In cryptocurrency, two different validation methods occur in a transaction to prevent fraud: proof of stake and proof of work.
Proof of stake
Proof of stake is used as a validation method in cryptocurrency to limit the power used when checking transactions. When proof of stake is used, the number of transactions a user can verify is limited to the number of cryptocurrencies they are willing to stake. Therefore, if you are willing to stake your cryptocurrency, you will be eligible to verify transactions. According to the CEO of Osom Finance, Anton Altement, proof of stake removes energy-intensive equation solving, making it more efficient and faster transaction verification times.
In addition, if a validator is chosen to verify a transaction, they will most likely be rewarded with cryptocurrency. Also, if you have been chosen to be part of the verification team, your staked cryptocurrencies will be forfeited.
Proof of work
According to Simon Oxenham, a Social Media Manager at Xcoins.com, “proof of work is a method of validating transactions on a blockchain in which an algorithm provides a mathematical problem that computers solve.” Participating computers, commonly called miners, solve mathematical puzzles that assist in verifying a group of transactions. In the end, the first computer that solves the mathematical problem will be rewarded with a decent amount of cryptocurrency.
This validation method usually requires a massive amount of computing power which also consumes a lot of electricity. As a result, miners might not have an actual break-even point with the cryptocurrency they receive, considering the costs of power it requires.
Risks of Investing in Cryptocurrency
Suppose you want to start investing in cryptocurrency. In that case, there are tons of reliable platforms you can find in the market, such as Bitcoin Up and other peer-to-peer networks. Most of these exchanges have tons of benefits that investors can use to their advantage. Keep in mind, investing in cryptocurrency is a good idea, but make sure you are prepared to face the risks that come with investing.
One of the risks that you will face in cryptocurrency is its volatility. Cryptocurrency’s price value in the market won’t always stay the same. There will be unexpected changes in the market that can lead to sudden changes in price. This is normal for cryptocurrency, and it has been around for a long time already. Also, since cryptocurrency is unregulated by any form of government or banks, no one controls or maintains it except for the technology behind cryptocurrency. Cryptocurrency being unregulated means that there is also a chance of funds being hacked.
Taking the opportunity to invest in cryptocurrency is not a bad idea after all. As we’ve mentioned above, many investors already took the chance to invest in cryptocurrency, and most of them have gotten good results. So investing is an excellent chance to earn extra profit, but don’t ignore the risks.