How to mine, buy and trade digital currency?

How to mine, buy and trade digital currency?

The use of digital currency has witnessed a considerable increase in the last few years. The initial apathy that had clouded the crypto world has finally shifted and given way to curiosity and recognition of the currency as a brilliant investment option.

Cryptocurrencies like Bitcoin and many others have finally hit the mainstream, with more and more people getting into the trade. However, cryptocurrency built with the power of the underlying blockchain technology varies vastly from the conventional currency in almost all ways.

The Blockchain Technology

Although the blockchain technology first emerged in conjunction with Bitcoin and other digital currency, it is now used in a wider range of applications. The potential of Blockchain technology is yet to be tapped in full!

The concept of Blockchain technology had very humble beginnings in the realms of data structures and cryptography. In the 1990s, Merkle trees, a secured chain of blocks, which are basically data records connected to its previous record were created which resembled the present day blockchain.

The distributed blockchain came into existence in 2008. The blockchain allowed autonomous working without the control of a central authority, could store the data of every transaction carried out and utilised the P2P network to timestamp each transaction.

Key features of Blockchain
  • Transaction data storage – Blockchain stores every transaction carried out in the system in a ledger. These transactions are verified and stored as the blocks in a Blockchain.
  • Verification with a distributed system – each transaction is verified by P2P network of nodes.
  • Unalterable – once a transaction is signed, verified and added to a Blockchain, it cannot be altered.

Read more about the working of Blockchain here.

What is mining?

After every slew of the transaction is carried out in a Blockchain, it is amassed into a block, which is then appended onto the Blockchain. Since there is no central authority involved in a Blockchain, the transactions are loaded into blocks by the network nodes. These network nodes are dubbed as miners.

Every time a bulk of transactions is added to the blockchain, some cryptocurrency is received as the reward. This has the potential to lead to a situation where miners create many blocks leading to a devaluation of cryptocurrency. In order to avoid this, the techniques of block creation are made tougher to conduct by making the miners solve complicated mathematical problems.

Know more about cryptocurrency mining here.

How is mining conducted?

Mining is the process of creating new cryptocurrency by adding new blocks on a Blockchain.  For the successful creation of a block, it must be accompanied by a hash function that fulfils certain requirements necessary for carrying out mining.

The best possible method of finding the most feasible hash would be to calculate the hash value continuously till the matching hash value is derived. On finding the right hash, a new block will be added to the blockchain and the miner who arrived at the right hash and created it is rewarded with certain units of cryptocurrency.

This means that miners are in constant competition with each other to calculate and identify the correct hash value, build a new block and to receive their pay-out of cryptocurrency. However, with the increasing blocks, the complexity of the calculations required for the hash values also increases.

The technique limits the number of blocks created. Many functions have a preset limit of the blocks to be created. Bitcoin is an ideal example with its generation to completely stop as it reaches 21 million. Beyond this limit, the generation of new blocks will not create bitcoins.

What are the requirements for mining?

Cryptocurrency mining is not as simple and easy to conduct now as before. The standard PC isn’t a viable option anymore, with the requirements of quality and quantity in hardware requirements seeing an undeniable rise, to increase the volume of mining.

From a reasonably good processor and a high-end GPU to several GPUs working in conjunction and specialised chips configured for the purpose of crypto mining, the requirements have grown. Coupled with the cost of power given the continuous running of machines, mining of cryptocurrency is a very costly affair.

 Buying Cryptocurrency

Investments in cryptocurrency have grown considerably over the years after the initial reservations on the technology died down. Today, there are many options available in buying cryptocurrency. Before we get into that, let us analyse the various features that need to address before going ahead.

  • Location

Cryptocurrency trade is illegal or regularised in many countries even now. Hence before you plan to buy the currency be aware of the laws governing the place.

  • Type of cryptocurrency

All cryptocurrencies are not available for sale in all websites. Depending on the type of cryptocurrency you would like to buy, find a website that sells the particular currency at a price.

  • Payment Method

Cryptocurrency is usually bought with credit cards, cash or even bank deposit as a payment method.

  • The fees involved

The fees of different website differ from one another. Hence, before selecting a website, do a comparison study of the fees before getting registered and verified at a particular exchange.

Cryptocurrency wallets

Cryptocurrency wallets are an essential addition in trading of cryptocurrency. They are similar to banks in that they help in the secure and safe storage of digital currency. While banks store money, cryptocurrency wallets stores and ensure the security of passwords that represent the digital currency.

Cryptocurrency wallets may differ depending on the cryptocurrency to be stored. For example, you may need one type of wallet to store a Litecoin while another to store a Bitcoin. With the popularity of cryptocurrency and Blockchain technology, multi-coin wallets that can store different types of currencies are now available. Though costly, they provide many safe and easy to use options to choose from.

Security is one of the prime attributes that need to be taken care of when buying a cryptocurrency wallet. This is because once the digital money is stolen it cannot be retrieved. Wallets are of different types such as:-

Online wallets – these wallets are available online and are the easiest to set up. They are also the least safe of the lot.

Software wallets – they are similar to an app that can be downloaded and used. They are safer than the online wallets.

Hardware wallets – these wallets are portable devices that can be operated by plugging into the USB of the computer. They are the safest cryptocurrency wallets.

Trading cryptocurrency

Cryptocurrency trading has seen a significant rise recently. To initiate a cryptocurrency trade, it is essential to have two major components namely a cryptocurrency wallet, to store the cryptocurrency and a cryptocurrency exchange that is chosen wisely to trade on. This is similar to trading on the stock exchange where you need a bank account to access the stock exchange.

Before trading cryptocurrency

If you are getting into cryptocurrency trade for the first time, there are some points to be kept in mind before entering the trade. Although cryptocurrency exchanges follow the general mechanics of stock exchanges, they differ in the specifics being totally different entities. Hence it is important to learn about it on a deep level before proceeding to trade.

 


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Further Reading

Want to learn more about cryptocurrency? Here’s a reading list for you.