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.
Many or all of the items featured here are from our partners who compensate us. This might affect which items we discuss and where and how the item appears on a page. This does not affect our evaluations. Our opinions are our own.
A cryptocurrency (or “crypto”) is a digital currency that can be utilized to purchase products and services, however utilizes an online journal with strong cryptography to secure online deals. Much of the interest in these uncontrolled currencies is to trade for profit, with speculators at times driving prices 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 goods and services. Numerous business have issued their own currencies, typically called tokens, and these can be traded specifically for the great or service that the company offers. Think of them as you would arcade tokens or casino chips. You’ll need to exchange real currency for the cryptocurrency to access the great or service.
Cryptocurrencies work using an innovation called blockchain. Blockchain is a decentralized technology spread across numerous computer systems that handles and tapes transactions. Part of the appeal of this technology is its security.
2. How many cryptocurrencies exist? What are they worth?
More than 6,700 various cryptocurrencies are traded publicly, according to CoinMarketCap.com, a market research website. And cryptocurrencies continue to proliferate, raising money through initial 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 rate to buy Bitcoin here
3. Why are cryptocurrencies so popular?
Cryptocurrencies interest their advocates for a variety of reasons. Here are a few of the most popular:
Fans see cryptocurrencies such as Bitcoin as the currency of the future and are racing to purchase them now, probably before they end up being more valuable Some supporters like the truth that cryptocurrency removes reserve banks from handling the money supply, because with time these banks tend to lower the worth of money via inflation Other supporters like the technology behind cryptocurrencies, the blockchain, due to the fact that it’s a decentralized processing and recording system and can be more safe than standard 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 way to move money
4. Are cryptocurrencies an excellent investment?
Cryptocurrencies might increase in worth, but numerous financiers see them as simple speculations, not real investments. The factor? Just like real currencies, cryptocurrencies produce no capital, 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 financial investment. Contrast that to a well-managed service, which increases its value in 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 noted that a currency needs stability.” As NerdWallet authors have kept in mind, cryptocurrencies such as Bitcoin might not be that safe, and some notable voices in the financial investment community have actually encouraged prospective financiers to avoid them. Of specific note, famous investor Warren Buffett compared Bitcoin to paper checks: “It’s a really effective method of transferring 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 cash? Even if they can send cash?” For those who see cryptocurrencies such as Bitcoin as the currency of the future, it must be noted that a currency needs stability so that merchants and consumers can identify what a fair rate is for products. Bitcoin and other cryptocurrencies have been anything but stable through much of their history. For instance, while Bitcoin traded at near $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 again.
This rate volatility produces 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 practical as a currency. Why spend a bitcoin when it could be worth 3 times the worth next year?