What Is Cryptocurrency? Here’s What You Ought to Know
Cryptocurrencies let you buy goods and services, or trade them for profit. Here’s more about what cryptocurrency is, how to buy it and how to protect yourself.
Lots of or all of the products featured here are from our partners who compensate us. This may affect which items we discuss and where and how the product appears on a page. Nevertheless, this does not influence our assessments. Our opinions are our own.
A cryptocurrency (or “crypto”) is a digital currency that can be utilized to buy goods and services, but uses an online ledger with strong cryptography to secure 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 type of payment that can be exchanged online for products and services. Many companies have actually provided their own currencies, often called tokens, and these can be traded particularly for the excellent or service that the business 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 excellent or service.
Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized technology spread across lots of computer systems that manages and records deals. Part of the appeal of this technology is its security.
2. How many cryptocurrencies exist? 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 total value of all cryptocurrencies on Dec. 18, 2020, was more than $645.7 billion, according to CoinMarketCap, and the overall 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 advocates 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 end up being more valuable Some fans like the fact that cryptocurrency eliminates central banks from managing the money supply, given that in time these banks tend to lower the value of money via inflation Other supporters like the technology behind cryptocurrencies, the blockchain, because it’s a decentralized processing and recording system and can be more safe and secure than conventional 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-lasting approval as a method to move money
4. Are cryptocurrencies a great investment?
Cryptocurrencies may go up in value, however lots of investors see them as simple speculations, not real investments. The factor? Much like real currencies, cryptocurrencies create 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 greater fool” theory of investment. Contrast that to a well-managed business, which increases its value over time by growing the success and cash flow 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 requires stability.” As NerdWallet authors have actually noted, cryptocurrencies such as Bitcoin may not be that safe, and some notable voices in the investment community have advised prospective financiers to avoid them. Of specific note, famous financier Warren Buffett compared Bitcoin to paper checks: “It’s an extremely reliable way of sending money and you can do it anonymously and all that. A check is a way of transferring cash too. Are checks worth a whole lot of money? Even if they can transfer money?” For those who see cryptocurrencies such as Bitcoin as the currency of the future, it needs to be noted that a currency needs stability so that merchants and consumers can identify what a fair cost is for products. 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 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 develops a quandary. If bitcoins might be worth a lot more in the future, individuals are less 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?