Introduction
Since the origin of Bitcoin in 2008, the cryptocurrency market has expanded, becoming a complex environment that resembles, in some aspects, the traditional stock markets, such as New York Stock Exchange (NYSE) and Nasdaq, both in the U.S.A, or London Stock Exchange and Euronext, in Europe.
However, as cryptocurrencies were created as an alternative answer to the traditional markets, there are some evident differences, especially as the cryptography market develops and becomes more and more complex.
In this article, we are going to detail the mechanisms behind the cryptocurrency market in a simple way, so you can find out where to buy and how to store your digital money. Just keep on reading!
Exchanges: the digital platforms that trade cryptocurrencies
The three ways that anyone can obtain cryptocurrencies are: (1) through processes of Proof of Work — PoW — and Proof of Stake — PoS —, (2) by buying in digital platforms known as exchanges and (3) via commercial transactions carried out with a cryptocurrency.
As PoW and PoS processes require an enormous computing power or large investment, we are going to leave them aside in this text. Here we are going to focus on showing how an average user can buy digital money and use them as an investment. For commercial transactions, check more information in our blog.
Given the low regulatory barriers imposed to participation compared to the financial market, there are several cryptocurrency exchange companies hosted in different countries. Such is not the scenario of the stock exchange, in which a number of regulations limit who is allowed to establish a broker company for stock trading.
Stock exchanges are also different because they impose access restrictions to buyers. Characteristics such as age and nationality can prevent someone from taking part in traditional exchanges. Conversely, cryptocurrencies can be acquired on exchanges by anyone. Moreover, cryptocurrency transactions cannot be monitored as the stock transactions can, although they still follow some regulations concerning identity verification, which are made to avoid fraud and money laundering.
There are two types of cryptocurrency exchanges: Centralized exchanges (CEX) and decentralized exchanges (DEX). The centralized ones work similarly to the stock market. A person that is willing to buy cryptocurrency releases a purchase order, which will be automatically matched with a sales order. This modality is called centralized because buyers and sellers must interact via an intermediary.
On the other hand, decentralized exchanges do not require intermediaries: the negotiation happens directly between buyers and sellers that are connected. It allows more price deliberations. Cryptocurrencies, as it is for shares, can be bought and sold to produce capital gains.
Wallets: the safest place to store your cryptocurrencies
When buying cryptocurrencies through an exchange, you will need a place to keep them protected. Your crypto tokens can be stored in an account you have in an exchange – although this is not a recommended practice.
Companies that trade cryptocurrencies are a desired target by cybercriminals because of the high volume of transactions they regularly deal. Thus, even if you research a lot and choose the most well recommended exchange and that certainly implements all the necessary security measures, it is always safer to keep your money in what are usually called wallets.
Here, a wallet is similar to the physical wallet that you carry in your pocket: it is a place to store your cryptocurrencies, with the difference that this one is placed in a virtual environment. Your wallet will keep your private key (the key that gives you access to check your balance) and the public key (the one used by others to send you money).
The two main types of wallets are software wallets and hardware wallets. Each one works as follows:
- Software wallets: are computer software installed in your device. They work over the internet, so you can verify your balance and make transactions using any device that has the wallet enabled.
- Hardware wallets: they are connected to a physical appliance, such as an USB flash drive. In this case, making transactions or checking your account balance requires always the use of that device.
There is no right answer when deciding the best option – the choice will depend on your own needs.
However, when investing in cryptocurrencies you need to be careful with some aspects. Take time to research and evaluate which exchange fits you better and do not believe in astounding offers. Likewise, investigate the different types of wallets to be certain of the safest modality to store your money – there are some great free options out there.
And, of course, if you have any doubts, keep following our blog and check our cryptocurrency world tips!
