What Is Cryptocurrency? Here’s What You Need to Know
Cryptocurrencies let you purchase goods 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 uses an online journal with strong cryptography to secure online transactions. Much of the interest in these unregulated currencies is to trade for profit, with speculators at times driving costs skyward.
Here are seven things to ask about cryptocurrency, and what to keep an eye out for.
1. What is cryptocurrency?
Cryptocurrency is a form of payment that can be exchanged online for items and services. Lots of business have issued their own currencies, often called tokens, and these can be traded specifically for the excellent or service that the business supplies. Consider them as you would arcade tokens or casino chips. You’ll need to exchange genuine currency for the cryptocurrency to access the good or service.
Cryptocurrencies work using an innovation called blockchain. Blockchain is a decentralized technology spread throughout lots of computers that manages and tapes 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 proliferate, 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 overall worth of all bitcoins, the most popular digital currency, was pegged at about $421.7 billion. (You can examine the current rate to buy Bitcoin here
3. Why are cryptocurrencies so popular?
Cryptocurrencies attract their supporters for a variety of reasons. Here are some of the most popular:
Fans see cryptocurrencies such as Bitcoin as the currency of the future and are racing to purchase them now, probably prior to they become more valuable Some supporters like the reality that cryptocurrency eliminates reserve banks from handling the cash supply, given that with time these banks tend to decrease the worth of money via inflation Other fans like the innovation behind cryptocurrencies, the blockchain, since it’s a decentralized processing and recording system and can be more safe than conventional payment systems Some speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-lasting approval as a way to move cash
4. Are cryptocurrencies a good financial investment?
Cryptocurrencies might increase in worth, however lots of financiers see them as mere speculations, not real investments. The factor? Just 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 worth with 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 must be kept in mind that a currency needs stability.” As NerdWallet authors have kept in mind, cryptocurrencies such as Bitcoin might not be that safe, and some noteworthy voices in the investment community have recommended prospective investors to stay away from them. Of particular note, legendary financier Warren Buffett compared Bitcoin to paper checks: “It’s an extremely effective method of transferring cash and you can do it anonymously and all that. A check is a way of transmitting cash too. Are checks worth a great deal of cash? Even if they can transmit cash?” 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 determine what a fair cost is for items. Bitcoin and other cryptocurrencies have actually been anything however stable through much of their history. For instance, 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 conundrum. If bitcoins might be worth a lot more in the future, individuals are less most likely to spend and distribute them today, making them less viable as a currency. Why spend a bitcoin when it could be worth 3 times the value next year?