This article will give a brief guide to the basic operations with digital assets, telling you how to use cryptocurrency without breaking the law and without risking your money. The points we will cover include the acquisition and storage of cryptocurrency, its purchase, and sale, and using coins to pay for goods or services.
What is a cryptocurrency for?
Cryptocurrency is a currency that exists only in digital terms and is protected by cryptographic methods. These are chains of transaction data that are stored in blocks sealed with keys. This data is public and available to all network members; moreover, it is reserved on millions of computers worldwide. The basic principles of cryptocurrency follow from this: decentralization and lack of control by the state or banks, as well as anonymity – although the public keys of the wallets are known, no one knows the names of their owners.
Each cryptocurrency has value in traditional or fiat currencies; coins like bitcoin, ether, and others can be bought and sold. In addition, cryptocurrency can be used to purchase goods and services. However, in our country, at the moment, cryptocurrency is not an official means of payment. Therefore, before using cryptocurrency in Russia, it makes sense to familiarize yourself with the main provisions of the law “On Digital Financial Assets.”
Bitcoin was the first cryptocurrency in history. It remains the most popular digital asset in the world and has the highest capitalization. However, since 2009, thousands of other cryptocurrencies with different characteristics have appeared. They are called altcoins.
How is cryptocurrency stored?
It will help if you store your digital assets in a cryptocurrency wallet. How to use and create it depends on the chosen type of wallet. In essence, a cryptocurrency wallet is two keys, that is, two sequences of characters.
The public key is similar to your bank account or card number. It is available to everyone, and you can use it to transfer cryptocurrency to your wallet.
Only the owner of the wallet has a private key. With it, he can access the funds and “unlock” them for transfer to another network user.
The keys can be written down on paper – it will be a paper cryptocurrency wallet. The downside is that with the loss of the record, you will also lose money.
There are software wallets that are installed directly on the computer. The downside is that they need quite a lot of free space (about 150 GB for one currency). In addition, in the event of a breakdown or theft of the device, you will lose money.
In addition, the keys can be written to a particular device like a USB flash drive connected to a computer. Such wallets are called hardware. Their advantage is mobility and good security. Before using a hardware wallet for cryptocurrency, you need to set a pin code and remember it or save it in a safe place.
Wallets that are not connected to the Internet are called cold wallets. Funds on them are not in the user’s online access, but at the same time, they are more protected.
Wallets connected to the network are called hot wallets. These include applications or programs, wallets on exchange websites, and online services.
Online wallets, in turn, can be custodial and non-custodial. The first one means that you have control over your funds and the owner of the site where the wallet is located. Custodial wallets are somewhat similar to Internet banking. On the one hand, if you forgot or lost the keys, they can be restored; on the other hand, if the site is hacked, you can say goodbye to the money. Custodial wallets can often be opened directly on a cryptocurrency exchange (we will discuss trades below). Non-custodial wallets mean that only you have access to the money. No one will store your keys and back them up unless you take care of them yourself. At the same time, any hacker attack on the site will not threaten the money in your wallet.
Hot wallets are good for quick transactions on exchanges or staking, while cold wallets for cryptocurrencies are best for storing large amounts because nothing threatens your money offline.
How do you make money on cryptocurrency?
There are several ways to make money with cryptocurrencies. So, you can invest your funds in digital assets for a long-term period. In this case, you must choose stable investments showing steady growth.
Another way to make money is staking. This requires coins based on the proof-of-stake algorithm (bitcoin will not work). Staking is like a bank deposit: you provide a part of your coins to a validator, and he uses them to create new chains in the blockchain and new currencies. For this, you are paid a reward. We wrote more about staking in another article.
Tech-savvy users make money by mining: they acquire powerful equipment with which they calculate keys and create new blocks in the blockchain, resulting in new coins appearing. Over time, mining becomes more and more expensive, so today, its popularity is falling. This method is unsuitable for beginners due to the high cost and laboriousness.
One of the most common ways to make money on coins and tokens is to trade and profit on the difference in rates. For this, exchanges are often used, not just one, but several at once. Types of trading on the stock exchange differ in terms:
Medium-term trading – one transaction can be closed in a day or two or more. This type of trading requires the least time and is suitable for beginners.
Intraday – involves carrying out operations within one day, usually in a few hours.
Scalping – operations in 1-5 minutes with earnings on minimal fluctuations. This type requires experience and long practice.
Technical Analysis: Overview and Examples
Technical analysis is required to predict course changes. So, any quotes are characterized by long-term trends and corrections – small jumps that do not affect the primary trend. For example, the price of an asset has been falling for several weeks and has already shown a 20% drop in total. But at some point, the price unexpectedly increases by 3%, after which it continues to fall again. This 3% is called a correction.
Let’s take, for example, one of the popular tools for such analysis – Fibonacci levels in cryptocurrency. How to use them? First, identify the minimum and maximum price fluctuations for a specific period. Next, refer to the mathematical Fibonacci sequence: 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610 and so on. The well-known principle of the golden section is based on this sequence. You can notice that all the numbers in this chain have the same ratio. In trading, two main patterns are used:
0.382 is the ratio of any number to what is two after it in the sequence;
0.236 is the result of dividing any number in the Fibonacci sequence by the number two after it.
In an uptrend, resistance levels are calculated similarly – the minimum is taken as zero, and the price is likely to stop its growth at these levels.
Fibonacci levels are just one example of how a trader can predict price action by knowing the trend. Experienced players prefer to combine different tools: for example, moving averages or the RSI indicator since it is too risky to use only one analysis tool in cryptocurrency.
Summary
We briefly answered the question: “How to use cryptocurrency?”. This information will be enough for beginners to open a cryptocurrency wallet and purchase coins for further sale or investment.
Cryptocurrency has no physical expression and is a chain of transaction records protected by keys.
Cryptocurrency is stored using cryptocurrency wallets. There are different options for recording the public and private keys that give users access to the funds. Wallets are cold – offline and hot – connected to the Internet. Hot wallets are divided into custodial (when the wallet owner has access to the keys and the platform where it is located) and non-custodial (when there is no such access).
The main ways to sell, buy or exchange cryptocurrencies are exchanges, P2P platforms (something like a message board for buying and selling), and online exchangers.
Cryptocurrency can be earned in many ways: by investing, staking, or trading.
Trading on the stock exchange is becoming increasingly popular, but it requires a careful study of the asset, changes in its price, and the development of technical analysis tools.
