What Is Cryptocurrency? Here’s What You Must Know
Cryptocurrencies let you buy items 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 products included here are from our partners who compensate us. This may influence which products we blog about and where and how the product appears on a page. However, this does not influence our examinations. Our opinions are our own.
A cryptocurrency (or “crypto”) is a digital currency that can be used to buy products and services, but uses an online ledger with strong cryptography to secure online deals. Much of the interest in these unregulated currencies is to trade for profit, with speculators at times driving rates skyward.
Here are seven things to ask about cryptocurrency, and what to watch out for.
1. What is cryptocurrency?
Cryptocurrency is a form of payment that can be exchanged online for items and services. Lots of companies have actually issued their own currencies, often called tokens, and these can be traded specifically for the excellent or service that the business offers. Think of them as you would arcade tokens or gambling establishment chips. You’ll need to exchange real currency for the cryptocurrency to access the great or service.
Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized innovation spread throughout many computers that handles and records transactions. Part of the appeal of this innovation 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 site. And cryptocurrencies continue to proliferate, raising money through initial coin offerings, or ICOs. The overall worth of all cryptocurrencies on Dec. 18, 2020, was more than $645.7 billion, according to CoinMarketCap, and the overall worth of all bitcoins, the most popular digital currency, was pegged at about $421.7 billion. (You can check the current price to buy Bitcoin here
3. Why are cryptocurrencies so popular?
Cryptocurrencies appeal to their supporters for a range of reasons. Here are a few of the most popular:
Advocates see cryptocurrencies such as Bitcoin as the currency of the future and are racing to purchase them now, probably before they become better Some fans like the fact that cryptocurrency gets rid of central banks from managing the cash supply, since over time these banks tend to reduce the value of money by means of inflation Other advocates like the innovation behind cryptocurrencies, the blockchain, because it’s a decentralized processing and recording system and can be more safe and secure than traditional payment systems Some speculators like cryptocurrencies due to the fact that they’re going up in worth and have no interest in the currencies’ long-lasting acceptance as a method to move cash
4. Are cryptocurrencies an excellent financial investment?
Cryptocurrencies might increase in worth, but lots of investors see them as simple speculations, not real financial investments. The reason? Similar to real currencies, cryptocurrencies generate no capital, so for you to profit, somebody needs to pay more for the currency than you did.
That’s what’s called “the higher fool” theory of financial investment. Contrast that to a well-managed company, which increases its worth gradually by growing the success and cash flow of the operation.
For those who see cryptocurrencies such as bitcoin as the currency of the future, it should be noted that a currency needs stability.” As NerdWallet writers have kept in mind, cryptocurrencies such as Bitcoin may not be that safe, and some noteworthy voices in the investment community have recommended would-be financiers to stay away from them. Of specific note, famous investor Warren Buffett compared Bitcoin to paper checks: “It’s a very reliable method of transferring cash and you can do it anonymously and all that. A check is a way of sending money too. Are checks worth a whole lot of cash? Even if they can transmit money?” For those who see cryptocurrencies such as Bitcoin as the currency of the future, it needs to be kept in mind that a currency requires stability so that merchants and customers can identify what a reasonable rate is for items. Bitcoin and other cryptocurrencies have actually been anything however stable through much of their history. For instance, while Bitcoin traded at near to $20,000 in December 2017, its worth then dropped to as low as about $3,200 a year later. By December 2020, it was trading at record levels once again.
This rate volatility produces a quandary. If bitcoins might be worth a lot more in the future, people are less most likely to spend and distribute them today, making them less practical as a currency. Why spend a bitcoin when it could be worth 3 times the worth next year?