Cryptocurrency aka Crypto is a new form of digital money powered by cryptography.
It all started in 2008 with Bitcoin. You could use it to send funds to anyone anywhere globally. What made crypto different from normal bank transfers or other financial services like PayPal or Alipay is that there was no middle man for the first time.Wait, what is a middle man?
A middle-man is a central authority like a bank or government that intervenes in a transaction between the sender and recipient. They have the power to surveil, censor or revert transactions and they can share the sensitive data they collect about you with third parties. They also often dictate which financial services you have access to.Things are different with crypto. Transactions directly connect sender and recipient without having to deal with any central authority. Nobody else will have access to your funds and nobody can tell you what services you can use. This is possible because of the blockchain technology upon which cryptocurrencies operate.
Blockchains use cryptographic techniques to ensure that your funds are safe. Similar techniques have been used in the banking industries to ensure the security of monetary transactions for years. So you could say cryptocurrencies have a bank level of security.
Once you have purchased cryptocurrency, you need to store it safely to protect it from hacks or theft. Usually, cryptocurrency is stored in crypto wallets, which are physical devices or online software used to store the private keys to your cryptocurrencies securely. Some exchanges provide wallet services, making it easy for you to store directly through the platform. However, not all exchanges or brokers automatically provide wallet services for you.
There are different wallet providers to choose from. The terms “hot wallet” and “cold wallet” are used:
Typically, cold wallets tend to charge fees, while hot wallets don't.
Cryptocurrencies are usually built using blockchain technology. Blockchain describes the way transactions are recorded into "blocks" and time stamped. It's a fairly complex, technical process, but the result is a digital ledger of cryptocurrency transactions that's hard for hackers to tamper with.
In addition, transactions require a two-factor authentication process. For instance, you might be asked to enter a username and password to start a transaction. Then, you might have to enter an authentication code sent via text to your personal cell phone.
While securities are in place, that does not mean cryptocurrencies are un-hackable. Several high-dollar hacks have cost cryptocurrency start-ups heavily. Hackers hit Coincheck to the tune of $534 million and BitGrail for $195 million, making them two of the biggest cryptocurrency hacks of 2018.
Unlike government-backed money, the value of virtual currencies is driven entirely by supply and demand. This can create wild swings that produce significant gains for investors or big losses. And cryptocurrency investments are subject to far less regulatory protection than traditional financial products like stocks, bonds, and mutual funds.
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