What Is Cryptocurrency? Here’s What You Should 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 safeguard yourself.
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A cryptocurrency (or “crypto”) is a digital currency that can be used to purchase goods and services, but 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 sometimes driving costs skyward.
Here are 7 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. Numerous companies have actually issued their own currencies, frequently called tokens, and these can be traded particularly for the good or service that the company offers. Think of them as you would arcade tokens or gambling establishment 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 throughout many computer systems that manages and tape-records transactions. Part of the appeal of this innovation is its security.
2. The number of cryptocurrencies are there? What are they worth?
More than 6,700 different cryptocurrencies are traded openly, according to CoinMarketCap.com, a marketing research website. And cryptocurrencies continue to proliferate, raising money through preliminary 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 total value of all bitcoins, the most popular digital currency, was pegged at about $421.7 billion. (You can examine the current price to buy Bitcoin here
3. Why are cryptocurrencies so popular?
Cryptocurrencies interest their supporters for a range of factors. Here are a few of the most popular:
Fans see cryptocurrencies such as Bitcoin as the currency of the future and are racing to buy them now, presumably prior to they become better Some fans like the fact that cryptocurrency eliminates reserve banks from managing the cash supply, given that gradually these banks tend to minimize the value of cash via inflation Other advocates like the innovation behind cryptocurrencies, the blockchain, because it’s a decentralized processing and recording system and can be more protected than conventional payment systems Some speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-lasting acceptance as a method to move money
4. Are cryptocurrencies a great financial investment?
Cryptocurrencies may go up in value, but lots of investors see them as simple speculations, not real financial investments. The reason? Just like genuine currencies, cryptocurrencies produce 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 greater fool” theory of investment. Contrast that to a well-managed company, which increases its worth over time 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 noted that a currency requires stability.” As NerdWallet authors have noted, cryptocurrencies such as Bitcoin might not be that safe, and some notable voices in the investment community have actually encouraged would-be financiers to stay away from them. Of particular note, famous financier Warren Buffett compared Bitcoin to paper checks: “It’s a very effective method of sending money and you can do it anonymously and all that. A check is a method of transferring money too. Are checks worth a lot of cash? Even if they can transmit 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 determine what a fair price is for goods. Bitcoin and other cryptocurrencies have been anything but stable through much of their history. 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 price volatility creates a dilemma. If bitcoins might be worth a lot more in the future, people are less likely to invest and circulate them today, making them less viable as a currency. Why spend a bitcoin when it could be worth three times the worth next year?