What Is Cryptocurrency? Here’s What You Must Know
Cryptocurrencies let you purchase products and services, or trade them for profit. Here’s more about what cryptocurrency is, how to buy it and how to secure yourself.
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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 protect online transactions. Much of the interest in these uncontrolled currencies is to trade for profit, with speculators sometimes driving costs skyward.
Here are seven things to ask about cryptocurrency, and what to watch out for.
1. What is cryptocurrency?
Cryptocurrency is a type of payment that can be exchanged online for products and services. Many business have actually provided their own currencies, typically called tokens, and these can be traded specifically for the good or service that the company offers. Consider them as you would arcade tokens or gambling establishment chips. You’ll need to exchange genuine currency for the cryptocurrency to access the good or service.
Cryptocurrencies work utilizing an innovation called blockchain. Blockchain is a decentralized technology spread throughout many computer systems that manages and tapes transactions. Part of the appeal of this innovation is its security.
2. How many cryptocurrencies exist? What are they worth?
More than 6,700 different cryptocurrencies are traded publicly, according to CoinMarketCap.com, a marketing research website. And cryptocurrencies continue to multiply, raising money through preliminary coin offerings, or ICOs. The total value of all cryptocurrencies on Dec. 18, 2020, was more than $645.7 billion, according to CoinMarketCap, and the total value of all bitcoins, the most popular digital currency, was pegged at about $421.7 billion. (You can examine the current cost to buy Bitcoin here
3. Why are cryptocurrencies so popular?
Cryptocurrencies appeal to their advocates for a variety of reasons. Here are some of the most popular:
Supporters see cryptocurrencies such as Bitcoin as the currency of the future and are racing to purchase them now, most likely before they become better Some advocates like the reality that cryptocurrency eliminates central banks from managing the money supply, because with time these banks tend to lower the worth of money by means of inflation Other supporters like the technology behind cryptocurrencies, the blockchain, since it’s a decentralized processing and recording system and can be more protected than traditional payment systems Some speculators like cryptocurrencies since they’re going up in worth and have no interest in the currencies’ long-term acceptance as a method to move money
4. Are cryptocurrencies a great financial investment?
Cryptocurrencies may go up in value, but lots of financiers see them as mere speculations, not real investments. The reason? Similar to real currencies, cryptocurrencies create no cash flow, so for you to benefit, 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 service, which increases its worth gradually 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 needs to be noted that a currency needs stability.” As NerdWallet writers have noted, cryptocurrencies such as Bitcoin may not be that safe, and some notable voices in the investment neighborhood have recommended prospective investors to avoid them. Of particular note, famous investor Warren Buffett compared Bitcoin to paper checks: “It’s an extremely efficient method of sending money and you can do it anonymously and all that. A check is a method of transferring cash too. Are checks worth a whole lot of cash? Even if they can send cash?” For those who see cryptocurrencies such as Bitcoin as the currency of the future, it must be kept in mind that a currency needs stability so that merchants and consumers can identify what a reasonable rate is for goods. Bitcoin and other cryptocurrencies have been anything but stable through much of their history. For example, 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 on. By December 2020, it was trading at record levels once again.
This rate volatility produces a dilemma. If bitcoins might be worth a lot more in the future, people are less likely to spend and distribute them today, making them less viable as a currency. Why spend a bitcoin when it could be worth three times the value next year?