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How To Make a Cryptocurrency Transaction
Before we learn how to make a cryptocurrency transaction, we'll have to learn some basics about crypto itself. Like, what gives a cryptocurrency its value? Why bother with this funny Internet money when you transfer some cash from your PayPal account?
By the end of this page, you'll understand the value of crypto. Not only will you know what a cryptocurrency is and how to make a transaction, but you'll also know why you might want a crypto wallet sooner than later.
But we're getting ahead of ourselves.
A cryptocurrency is a combination of two beneficial technologies: money and cryptography.
Have you ever come across a CAPTCHA? Y'know, when you're on a website, they ask you to click on pictures with motorcycles to prove you're not a bot? That's cryptography in action. Cryptography works in the background to ensure our messaging apps are secure against third-parties snooping.
Cryptocurrencies are digital or virtual currencies secured by similar privacy and security protocols. It's essentially cryptography applied to money and exchange.
But wait – how exactly do you create money from nothing? Even if the "nothing" is a bunch of computer code. Why do cryptocurrencies have value?
This page explains how to make a cryptocurrency transaction. But first, we'll provide some background on the technology itself. If you want to cut to the chase, use the subheadings to find your specific concern.
- A cryptocurrency is a digital asset on a network distributed across millions of computers. Similar to "Napster" or other P2P file-sharing sites.
- Governments and music labels couldn't stop people from downloading music because the app structure was too decentralized. They would have had to purge the world of computers to prevent people from sharing music. Likewise, cryptocurrencies can exist outside the control of governments and banks or other central authorities.
- Decentralized systems don't fall apart at a single point of failure. Cryptocurrencies can provide cheaper and faster money transfers, especially without third-party authentication and security fees. Security is built right into the system.
- Transacting with cryptos is as easy as downloading an app on your phone.
- If you’re just looking to make a few transactions, nothing huge, then start by opening an account on a platform like Coinbase. Verify your identity, and you’re off to the races! No need for a digital wallet or any prior crypto knowledge!
Why is Cryptocurrency Valuable?
Today, we have bank cards that represent paper money. Paper money used to be redeemable in gold and silver. Gold and silver were valuable because people valued using them in jewelry. Whatever people use as money has always had an origin from something worthwhile.
Except for cryptocurrencies... or so it seems.
Many don't realize cryptocurrency is both a currency and a payment system. The payment system is the source of its value. But even crypto enthusiasts have trouble with this concept so let's dig in a little deeper.
Technological limitations have always separated currencies from their payment systems. When you wire money worldwide, you need to rely on third parties. And you have to trust those third parties just as they have to trust you.
That's why cryptocurrencies were invented - to get around this reliance on third parties. The mysterious creator of Bitcoin, Satoshi Nakamoto, said of his invention:
"A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work."
In other words: the innovation stems from how the payment network works. The coin or digital currency unit can only express the network's value. A cryptocurrency coin is an accounting tool. The usefulness of cryptocurrency comes from its payment network. This is called a blockchain.
What is the "Blockchain?"
Blockchain technology makes cryptocurrencies possible. It is a distributed ledger that is essentially a database shared and synchronized across space and accessible by multiple people. It gives transactions public "witnesses" instead of a centralized ledger that relies on financial institutions or third parties.
The blockchain ledger lives in the cloud. Observed by anyone at any time and monitored by its users, the blockchain allows for the transferring of bits of information from one person to another. These information bits are like digitally-secured property titles. Nakamoto called them "digital signatures."
The blockchain verifies these digital signatures without depending on a third-party trust agency. An Internet ledger everybody has access to is helpful. It records the amounts, the time, and the public address of every transaction. The blockchain guarantees the integrity of the system. The currency unit is merely a digital form of a property title. The real star of the show is the blockchain.
The value of cryptocurrencies isn't embedded in digital coins but in the payment network. If somehow cryptocurrencies abandoned the blockchain, the value of the digital coins would plummet to zero. The reason for this is that the blockchain isn't just about money.
The blockchain is the perfect invention for transferring information that requires security, confirmations, or assurances of authenticity. It diminishes the potential for human error. Hierarchical structures are replaced by peer-to-peer technology. In an economy that runs off contracts and exchanges, having algorithms guarnetee trust and security is like... well, it's like giving up your CDs for a smartphone with an app that streams music for free.
Who Uses Crypto?
If you listen to those who have the most to lose from cryptocurrencies, only criminals and Silicon Valley entrepreneurs profit from it. But this is patently false. Cryptocurrency adoption is widespread in developed nations like the United States, the United Kingdom, Canada, and the countries of the European Union.
Likewise, emerging economies in Africa have adopted cryptocurrencies. A recent survey suggested that 33 percent of Nigerians owned crypto.
Residents in India, China, and Brazil have all adopted cryptocurrencies to transfer money across borders without unnecessary expenses.
The United States and Canada have a pro-crypto attitude. Many countries sweep cryptos under the regulatory rug when enforcing fraud and anti-money laundering rules. Not so for the Americans and Canadians.
European Union member states have traditionally been less warm in their reception. However, that is changing as the EU governments and parliament have reached an agreement on cryptocurrency regulation.
In most places, governments tax cryptocurrencies as capital gains.
Cryptocurrencies are illegal in Algeria, Egypt, Bangladesh, China (for residents, as of September 2021), and North Macedonia (the only European country with a complete prohibition).
Colombian citizens can own crypto, but the country's financial institutions are forbidden from involving themselves.
Who Accepts Crypto?
Cryptocurrencies like Bitcoin are accepted by companies like Paypal, Microsoft, Wikipedia, and even Home Depot (America's largest home improvement retailer).
And, of course, we at RealChems accept cryptocurrency as payment.
Why Should You Use Crypto?
There are several benefits to using crypto.
Protect Your Assets – Crypto's decentralized structure means your assets aren't susceptible to a third-party trust relationship. When trading, you can keep what you earn. There's no middleman fee.
Protect Against Theft – Transactions are validated and recorded in a public ledger. Identities are encrypted.
Protect Against Inflation – Despite their volatility, cryptos have retained their value while inflation reaches record highs. Cryptos can serve as a financial cushion in an uncertain world.
Secure and Transparent – Cryptos are public and private where it counts. Public enough to ensure the payment network remains honest. But private enough to secure your identity.
How and Where to Buy Crypto?
To buy cryptocurrency, you must find a broker or a crypto exchange.
(You can also mine cryptos, but that'll lead us down a rabbit hole on what "mining" crypto even is. Besides, one needs tremendous computing power and the resources to do it, so it isn't worth the effort for basic transactions.)
A crypto exchange is a platform where buyers and sellers meet to trade cryptocurrencies. They are similar to online brokerage platforms. The most popular is Coinbase and Gemini, but you can choose from plenty of others.
The problem with cryptocurrency exchanges is that governments don't regulate them. So, in case of a hack or unforeseen event, people with cryptos in these exchanges could lose their money.
Crypto exchanges tend to market toward beginners and, therefore, charge higher fees than if you went another route.
A crypto broker takes the complexity out of the process. Robinhood and SoFi are two of the most well-known crypto brokers.
Like a "regular" broker, a crypto broker is a middleman between you, the consumer, and the cryptocurrency exchange. If you don't mind paying a small service fee, using a crypto broker is a great way to enter the field without much prior knowledge.
Once signed up to a brokerage or a crypto exchange, you can deposit money into your account. With money in your account, you can purchase cryptocurrencies. And don't worry if you can't afford whatever the price of bitcoin is currently at. You can buy fractional amounts, for example, 1/100 millionth of a bitcoin.
The ten biggest cryptos on the market right now are:
- Bitcoin (BTC)
- Ethereum (ETH)
- Tether (USDT)
- Binance Coin (BNB)
- Cardano (ADA)
- Dogecoin (DOGE)
- XRP (XRP)
- Solana (SOL)
- U.S. Dollar Coin (USDC)
- Uniswap (UNI)
Some things to keep in mind when buying crypto through a broker or exchange:
You'll have to verify your identification. This is to prevent fraud and meet government regulatory requirements. A crypto platform may ask for a copy of your driver's licence or passport.
Some credit card companies process cryptocurrency transactions as cash advances. So if you transfer money from a credit card to a crypto exchange, be wary of higher interest rates and cash advance fees from your bank.
Where Should I Store My Crypto?
You have a few options: a crypto exchange, a digital wallet, or a physical wallet. We recommend a digital or physical wallet for security reasons. But if you're dipping your toes in the crypto world and don't have a large balance, then there's nothing wrong with leaving crypto on the exchange.
For more information on this, see How To Make a Crypto Wallet.
How To Make A Cryptocurrency Transaction
Finally! We've covered almost everything there is to know about cryptocurrencies. Now, we can get to the crux of the issue. How do you use these freaking things!?
Let's say you've got some crypto on an exchange or stored in a wallet. Now what?
The most straightforward transaction is simply exchanging one cryptocurrency for another. You can do this from the comfort of the crypto exchange or notify your broker.
When you’re looking to cash out, you can use an online kiosk designed for converting cryptos into your local currency.
But say you want to buy something with crypto?
You can transfer between digital wallets. All you need to make the transaction is to have the blockchain address for the wallet you're sending the money to.
If using bitcoin, the address will look something like this: 1FtjAzGKSyAavUkbw5QsyzzNDKdtPXk95D
Each address links to a particular user or the location of a specific wallet. Every crypto address is unique as it represents the location of a wallet on the blockchain.
Crypto addresses are public, but the person or wallet behind the address remains anonymous.
Individuals send cryptocurrency to a crypto address, like how you can send regular currency to email addresses. But first, you need the address of the wallet you're sending money to. Or, vice-versa, the person trying to send you crypto needs your wallet address (or address on the exchange).
Because crypto addresses are long and randomized, people have adopted QR codes for easy transactions and communication. These QR codes representing crypto addresses are safe to advertise since they are protected from theft.
A crypto address is a "public key." A public key is one of two keys used in cryptography. The key used for decryption is different from the one used for encryption. Or in other words, I can send you money to your blockchain address, but I cannot use that address to steal from your digital wallet.
In Summary: How To Make a Cryptocurrency Transaction
If you know how to download an app on your phone, you can get started with cryptocurrency and make a transaction. That's how easy it is.
The difficulty with crypto comes from understanding what it is and why it has value. We hope you've learned something today. And if you'd like more information on getting a cryptocurrency wallet and transacting with it instead of relying on brokerages or coin exchanges, please check out How To Make a Crypto Wallet. It should answer any other questions you may have.