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 secure yourself.
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A cryptocurrency (or “crypto”) is a digital currency that can be utilized to buy goods and services, but utilizes 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 prices 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 goods and services. Lots of companies have actually provided their own currencies, typically called tokens, and these can be traded specifically for the good or service that the company offers. 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 an innovation called blockchain. Blockchain is a decentralized technology spread throughout many computers that manages and tapes transactions. Part of the appeal of this innovation is its security.
2. The number of cryptocurrencies exist? What are they worth?
More than 6,700 different cryptocurrencies are traded openly, according to CoinMarketCap.com, a market research website. And cryptocurrencies continue to proliferate, 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 overall worth of all bitcoins, the most popular digital currency, was pegged at about $421.7 billion. (You can examine the existing rate to buy Bitcoin here
3. Why are cryptocurrencies so popular?
Cryptocurrencies appeal to their supporters for a variety of factors. Here are some of the most popular:
Advocates see cryptocurrencies such as Bitcoin as the currency of the future and are racing to purchase them now, probably prior to they end up being more valuable Some supporters like the fact that cryptocurrency eliminates central banks from managing the cash supply, considering that with time these banks tend to minimize the worth of money through inflation Other supporters like the technology behind cryptocurrencies, the blockchain, since it’s a decentralized processing and recording system and can be more secure than traditional payment systems Some speculators like cryptocurrencies because they’re increasing in value and have no interest in the currencies’ long-term acceptance as a method to move money
4. Are cryptocurrencies a good financial investment?
Cryptocurrencies may increase in value, but many investors see them as mere speculations, not real investments. The factor? Similar to real currencies, cryptocurrencies produce no capital, so for you to benefit, someone has 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 business, which increases its worth over time 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 kept in mind 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 financial investment neighborhood have recommended prospective financiers to stay away from them. Of specific note, legendary financier Warren Buffett compared Bitcoin to paper checks: “It’s an extremely efficient method of transferring money and you can do it anonymously and all that. A check is a way of transferring money too. Are checks worth a lot of money? Just because they can transfer 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 customers can identify what a fair rate is for goods. Bitcoin and other cryptocurrencies have actually 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 once again.
This cost volatility produces a dilemma. 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 invest a bitcoin when it could be worth three times the value next year?