What Is Cryptocurrency? Here’s What You Need to 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 protect yourself.
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A cryptocurrency (or “crypto”) is a digital currency that can be used to purchase goods and services, but utilizes an online ledger with strong cryptography to secure online deals. Much of the interest in these uncontrolled currencies is to trade for profit, with speculators sometimes driving costs 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. Numerous business have released their own currencies, often called tokens, and these can be traded specifically for the excellent or service that the company supplies. Think about them as you would arcade tokens or casino chips. You’ll need to exchange genuine currency for the cryptocurrency to access the great or service.
Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized technology spread across numerous computer systems that handles 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 various cryptocurrencies are traded openly, according to CoinMarketCap.com, a market research site. And cryptocurrencies continue to multiply, raising money through initial coin offerings, or ICOs. The overall value of all cryptocurrencies on Dec. 18, 2020, was more than $645.7 billion, according to CoinMarketCap, and the total worth of all bitcoins, the most popular digital currency, was pegged at about $421.7 billion. (You can examine the existing cost to buy Bitcoin here
3. Why are cryptocurrencies so popular?
Cryptocurrencies interest their advocates for a range of factors. Here are a few of the most popular:
Supporters see cryptocurrencies such as Bitcoin as the currency of the future and are racing to purchase them now, presumably before they become more valuable Some supporters like the reality that cryptocurrency eliminates central banks from managing the money supply, since gradually these banks tend to minimize the worth of money via inflation Other supporters like the technology behind cryptocurrencies, the blockchain, since it’s a decentralized processing and recording system and can be more safe than traditional payment systems Some speculators like cryptocurrencies due to the fact that they’re going up in value and have no interest in the currencies’ long-term acceptance as a way to move cash
4. Are cryptocurrencies a good financial investment?
Cryptocurrencies might go up in worth, however numerous investors see them as mere speculations, not real financial investments. The reason? Much like real currencies, cryptocurrencies produce no cash flow, so for you to profit, someone has 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 service, which increases its value gradually by growing the success and capital of the operation.
For those who see cryptocurrencies such as bitcoin as the currency of the future, it needs to be kept in mind that a currency needs stability.” As NerdWallet writers have actually kept in mind, cryptocurrencies such as Bitcoin may not be that safe, and some notable voices in the investment neighborhood have actually encouraged potential financiers to avoid them. Of particular note, famous financier Warren Buffett compared Bitcoin to paper checks: “It’s a really efficient method of transmitting money and you can do it anonymously and all that. A check is a way of transferring money too. Are checks worth a whole lot of money? Just because 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 needs stability so that merchants and customers can identify what a fair price is for items. Bitcoin and other cryptocurrencies have been anything but stable through much of their history. For example, 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 rate volatility produces a conundrum. If bitcoins might be worth a lot more in the future, individuals are less likely to spend and circulate them today, making them less viable as a currency. Why spend a bitcoin when it could be worth 3 times the value next year?