Whether you're completely new to cryptocurrency or just looking for your next investment, crypto can be a minefield.
Here's a quick explanation of how crypto works, some advice on investing in crypto, and the cryptocurrencies that are expected to explode in 2023.
What is Cryptocurrency Used For?
Cryptocurrency, just like currency, can be used to pay for goods and services wherever it's accepted. Traditional currency normally has a physical version you can put in your wallet. This is often through notes or coins or basically, what we call "money" in everyday parlance.
If you bank online or use a debit or credit card, then you'll know that you don't necessarily need physical cash to pay for things and trading money for goods or services can be done using bills, coins, cards, or even a digital wallet on your cellphone.
In practice, cryptocurrency is used mostly for online purchases and doesn't have a cash form. Just as your bank will keep a record of how much money you have on a ledger and through accounting, there's a record of your cryptocurrency, too.
The key difference between traditional currencies and cryptocurrencies is that crypto uses the blockchain.
What Is a Blockchain?
Rather than having a centralized ledger to track transactions, the blockchain technology that crypto utilizes acts as a shared and decentralized ledger.
When transactions are made, a record is made and recorded on what's known as a “block”. With each transaction, a block is added sequentially and creates a “chain”. The ledger is available to everyone and each user has a copy of the ledger. The name, as you have probably guessed, comes from this chain of blocks that make up the records.
As every user has a record of the ledger, it also means that it's much harder to nefariously alter the record as you'd have to do so for everything single user.
This technology protects cryptocurrencies from counterfeiting, doesn't require a central authority such as a bank or government, and is protected by advanced cryptography, hence the name.
How Are Transactions Made?
Everybody has two keys: a public key and a private key. The public key will act as your address, much like having an account number with a bank so people can send you money.
There are different algorithms used to encrypt transactions and the encryptions are done using the sender's private key, which acts as a signature on the transaction. The transaction is then decrypted by the recipient's private key.
When transactions are made, they're validated and added to the block using mathematical problems. This is known as mining and the first person or machine to do this is rewarded with some cryptocurrency for their effort, at least in “proof of work” mining.
Proof of work mining is famous for leading to the hardware arms race to validate transactions and “mine” cryptocurrency, which requires insane amounts of energy.
There's also proof of stake mining, which uses far less energy than proof of work and is a popular option, especially to reduce the environmental impact of blockchain technology and cryptocurrencies.
Cryptocurrency is looking to become very important in the future which is why so many people are drawn to it.
How Does Cryptocurrency Make Money?
There are two ways to make money with cryptocurrency. The first is via the mining that we just mentioned, but with proof of work mining, this requires very specialized computer hardware and is now generally beyond the reach of the average person.
The other way to make money is through investing in cryptocurrency. Just like any other asset, you make money from buying and selling.
Put as simply as possible, when somebody buys a given cryptocurrency, they increase its overall value and when somebody sells their cryptocurrency, they decrease the overall value.
You want to buy cryptocurrencies whose values are expected to increase and sell when their value is at its highest.
Is Cryptocurrency a Good Investment?
Just like any other investment, there are risks inherent in investing in cryptocurrency. There's no guarantee the value of your investment will increase.
With other types of investment, we can look back at historical data to make predictions in an attempt to mitigate risk, but cryptocurrency has been famously quite volatile and is a moderately new type of investment opportunity.
As with any other investment, it pays to do your research and invest using the best information you can get and always plan an exit strategy for your investments.
Is It Smart to Invest in Crypto in 2023?
Every passing year gives us more historical data and an understanding of market trends, especially with crypto.
For risk-averse investors, crypto might still be too risky, but for those considering investing in crypto, there's never been a better year to do it as it's historically increased in value and cryptocurrency is likely to be used more in the future.
Can You Lose Money in Crypto?
With all investments, losses are possible. Just like gambling, you should only play with what you can afford to lose.
When investing in cryptocurrencies, losses are always possible so it's wise to limit your investments to what you're willing and able to lose.
So Which Cryptocurrencies Should You Invest In?
It's important to look at each cryptocurrency carefully before you invest, but here are a few that have been touted as looking to explode in 2023.
Algorand (ALGO)
Algorand is a decentralized network created in 2017 by MIT professor and Turing Award winner Silvio Micali who specializes in cryptography. The Algorand project is a blockchain like Ethereum but with quicker transaction processing.
Rather than using proof of work, Algorand uses pure proof of stake verification, where all holders of the ALGO cryptocurrency get 4-6% APR.
The Marshall Islands has adopted SOV, which is powered by Algorand.
Cardano (ADA)
Cardano is a project that was founded with the involvement of one of Ethereum's founding members, Charles Hoskinson.
Cardano is a proof-of-stake cryptocurrency that was designed to tackle issues with scalability, interoperability, and sustainability. As a blockchain gets larger, the number of transactions per second decreases.
Cardano uses a system that Cardano has called Ouroboros that allows the solution to scale as the number of users increases.
The coin or cryptocurrency for Cardano is called ADA.
Decentraland (MANA)
Decentraland is a virtual world that uses blockchain technology. Think of it as an online game where the currency used in-game is cryptocurrency.
The users or players also have a democratic voice in the project based on how much MANA they hold. They can vote on both in-game and organizational policies.
Players can get MANA through marketplaces or by buying and selling in-game assets.
Ethereum (ETH)
Ethereum is the world's second-largest cryptocurrency and famously switched from proof-of-work mining to proof-of-stake mining to become more environmentally friendly.
Ethereum also lost 70% of its value alongside several other major cryptocurrencies, but it is rising again which could make it a good investment for those looking to start investing in cryptocurrencies.
The native cryptocurrency for the Ethereum blockchain is called Ether (ETH).
Ripple (XRP)
XRP is an older cryptocurrency from Ripple (Ripple Labs) with the banking system in mind. The goal of Ripple is to provide quick and cheap payment services and is looking to replace SWIFT. Their cryptocurrency is called Ripple or XRP and offers quick transactions for very low fees.
Ripple's blockchain for XRP doesn't use either proof-of-work or proof-of-stake, which is quite odd for cryptocurrencies as this means that their cryptocurrency isn't truly decentralized.
With Ripple, they use a Unique Node List: a list of trusted sources that uses a majority rule to see what gets validated.
One of the biggest advantages of blockchain technology is decentralization and if the validators on the “Unique Node List” decided to collude, this could cause security problems.
While validators in proof-of-work and proof-of-stake are rewarded, there aren't any rewards for the members of the Unique Node List, which also raises some issues.
In terms of value, however, this is a cryptocurrency that's being suggested as a good potential investment in 2023.
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Tether (USDT)
Tether is a stablecoin, a cryptocurrency that's pegged to a commodity or currency to provide the cryptocurrency with more stability.
Tether is the largest stablecoin in the world and the third-largest coin overall behind Ether and BitCoin.
Don't let the “stablecoin” moniker fool you, though. Tether can still be subject to fluctuations and did drop to $0.9455 in May 2022. Generally, the price of USDT is over $0.99.
It can be a useful coin for protecting against losses rather than a coin to invest in to make money. Basically, if you want to look to protect cryptocurrency earnings from losing their value, USDT can be used as a safe port in a storm.
Of course, there are a lot more than just these cryptocurrencies to invest in and it all really depends on the risks you're comfortable with, your research, and the amounts you're able to invest.
Always start by doing your research and remember that most things that look too good to be true usually are.
For help with investing in cryptocurrency, consider looking for a financial advisor that specializes in crypto.
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