What Is Cryptocurrency? Here’s What You Should Know
Cryptocurrencies let you buy products and services, or trade them for profit. Here’s more about what cryptocurrency is, how to buy it and how to secure yourself.
Lots of or all of the items included here are from our partners who compensate us. This may affect which items we blog about and where and how the product appears on a page. This does not affect our assessments. Our opinions are our own.
A cryptocurrency (or “crypto”) is a digital currency that can be utilized to buy items and services, but utilizes an online journal with strong cryptography to protect online deals. Much of the interest in these uncontrolled currencies is to trade for profit, with speculators sometimes driving rates skyward.
Here are 7 things to inquire about cryptocurrency, and what to keep an eye out for.
1. What is cryptocurrency?
Cryptocurrency is a type of payment that can be exchanged online for items and services. Many companies have issued their own currencies, typically called tokens, and these can be traded particularly for the good or service that the company provides. Think about them as you would arcade tokens or casino chips. You’ll need to exchange genuine currency for the cryptocurrency to access the good or service.
Cryptocurrencies work utilizing a technology called blockchain. Blockchain is a decentralized technology spread across numerous computer systems that handles and records transactions. Part of the appeal of this technology is its security.
2. How many cryptocurrencies are there? What are they worth?
More than 6,700 various cryptocurrencies are traded publicly, according to CoinMarketCap.com, a marketing research website. And cryptocurrencies continue to proliferate, raising money through initial coin offerings, or ICOs. The total worth of all cryptocurrencies on Dec. 18, 2020, was more than $645.7 billion, according to CoinMarketCap, and the overall value of all bitcoins, the most popular digital currency, was pegged at about $421.7 billion. (You can check the present rate to buy Bitcoin here
3. Why are cryptocurrencies so popular?
Cryptocurrencies attract their advocates for a variety of factors. Here are some of the most popular:
Fans see cryptocurrencies such as Bitcoin as the currency of the future and are racing to buy them now, most likely before they become better Some supporters like the fact that cryptocurrency eliminates central banks from managing the money supply, since with time these banks tend to reduce the value of cash via inflation Other fans like the technology behind cryptocurrencies, the blockchain, because it’s a decentralized processing and recording system and can be more safe than traditional payment systems Some speculators like cryptocurrencies since they’re increasing in worth and have no interest in the currencies’ long-term acceptance as a method to move cash
4. Are cryptocurrencies a good financial investment?
Cryptocurrencies might go up in worth, however many financiers see them as simple speculations, not real financial investments. The reason? Similar to real currencies, cryptocurrencies create no cash flow, so for you to profit, someone needs to pay more for the currency than you did.
That’s what’s called “the higher fool” theory of investment. Contrast that to a well-managed business, which increases its worth over time by growing the profitability and cash flow of the operation.
For those who see cryptocurrencies such as bitcoin as the currency of the future, it should be kept in mind that a currency requires stability.” As NerdWallet writers have kept in mind, cryptocurrencies such as Bitcoin might not be that safe, and some noteworthy voices in the investment community have actually encouraged potential investors to avoid them. Of particular note, famous investor Warren Buffett compared Bitcoin to paper checks: “It’s a really effective way of sending money and you can do it anonymously and all that. A check is a method of transmitting cash too. Are checks worth a great deal of money? Even if they can send cash?” For those who see cryptocurrencies such as Bitcoin as the currency of the future, it should be kept in mind that a currency needs stability so that merchants and customers can determine what a reasonable cost is for goods. Bitcoin and other cryptocurrencies have been anything however stable through much of their history. While Bitcoin traded at close to $20,000 in December 2017, its value then dropped to as low as about $3,200 a year later. By December 2020, it was trading at record levels again.
This cost volatility develops a problem. If bitcoins might be worth a lot more in the future, individuals are less likely to invest and circulate them today, making them less practical as a currency. Why spend a bitcoin when it could be worth three times the value next year?