What Is Cryptocurrency? Here’s What You Must Know
Cryptocurrencies let you purchase 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 buy products and services, however uses an online ledger with strong cryptography to protect online transactions. Much of the interest in these unregulated currencies is to trade for profit, with speculators at times driving costs skyward.
Here are 7 things to ask about cryptocurrency, and what to look out for.
1. What is cryptocurrency?
Cryptocurrency is a form of payment that can be exchanged online for goods and services. Lots of companies have actually released their own currencies, typically called tokens, and these can be traded specifically for the good or service that the business supplies. Think of them as you would arcade tokens or gambling establishment chips. You’ll require to exchange real currency for the cryptocurrency to access the good or service.
Cryptocurrencies work using an innovation called blockchain. Blockchain is a decentralized innovation spread throughout numerous computer systems that handles and tape-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 different cryptocurrencies are traded openly, according to CoinMarketCap.com, a marketing research site. And cryptocurrencies continue to multiply, raising money through preliminary 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 value of all bitcoins, the most popular digital currency, was pegged at about $421.7 billion. (You can check the current cost to purchase Bitcoin here
3. Why are cryptocurrencies so popular?
Cryptocurrencies interest their supporters for a range 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, presumably before they become more valuable Some advocates like the fact that cryptocurrency removes reserve banks from managing the cash supply, since in time these banks tend to decrease the value of cash via inflation Other advocates like the innovation behind cryptocurrencies, the blockchain, since it’s a decentralized processing and recording system and can be more safe and secure than standard payment systems Some speculators like cryptocurrencies since they’re going up in worth and have no interest in the currencies’ long-term approval as a way to move money
4. Are cryptocurrencies a great investment?
Cryptocurrencies might increase in worth, but numerous financiers see them as simple speculations, not real financial investments. The reason? Much like real currencies, cryptocurrencies generate no capital, 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 organization, which increases its worth over time by growing the profitability and capital of the operation.
For those who see cryptocurrencies such as bitcoin as the currency of the future, it ought to be kept in mind that a currency needs stability.” As NerdWallet authors have kept in mind, cryptocurrencies such as Bitcoin may not be that safe, and some notable voices in the investment community have actually encouraged potential investors to avoid them. Of particular note, legendary investor Warren Buffett compared Bitcoin to paper checks: “It’s a really effective method of transmitting money and you can do it anonymously and all that. A check is a method of sending cash too. Are checks worth a whole lot of money? Just because they can transfer cash?” For those who see cryptocurrencies such as Bitcoin as the currency of the future, it ought to be noted that a currency needs stability so that merchants and consumers can identify what a fair cost 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 worth 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 creates a quandary. If bitcoins might be worth a lot more in the future, individuals are less most likely to invest and flow them today, making them less practical as a currency. Why invest a bitcoin when it could be worth 3 times the value next year?