What Is Cryptocurrency? Here’s What You Need 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 safeguard yourself.
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A cryptocurrency (or “crypto”) is a digital currency that can be used to buy products and services, however uses an online ledger with strong cryptography to secure online transactions. Much of the interest in these unregulated currencies is to trade for profit, with speculators sometimes driving prices skyward.
Here are seven things to ask about cryptocurrency, and what to watch out for.
1. What is cryptocurrency?
Cryptocurrency is a type of payment that can be exchanged online for goods and services. Numerous companies have actually issued their own currencies, typically called tokens, and these can be traded particularly for the good or service that the company supplies. 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 good or service.
Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized innovation spread throughout numerous computers that handles 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 total worth of all cryptocurrencies on Dec. 18, 2020, was more than $645.7 billion, according to CoinMarketCap, and the total worth of all bitcoins, the most popular digital currency, was pegged at about $421.7 billion. (You can check 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 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, presumably prior to they become more valuable Some advocates like the truth that cryptocurrency eliminates central banks from handling the cash supply, given that in time these banks tend to minimize the value of cash through inflation Other fans like the innovation behind cryptocurrencies, the blockchain, due to the fact that it’s a decentralized processing and recording system and can be more safe and secure than standard payment systems Some speculators like cryptocurrencies since they’re increasing in worth and have no interest in the currencies’ long-lasting approval as a way to move cash
4. Are cryptocurrencies a great investment?
Cryptocurrencies might increase in value, however many investors see them as mere speculations, not real investments. The factor? Much like genuine currencies, cryptocurrencies create no cash flow, so for you to profit, somebody needs to pay more for the currency than you did.
That’s what’s called “the higher fool” theory of financial investment. Contrast that to a well-managed service, which increases its value gradually by growing the profitability and capital of the operation.
For those who see cryptocurrencies such as bitcoin as the currency of the future, it ought to be noted that a currency requires stability.” As NerdWallet writers have noted, cryptocurrencies such as Bitcoin may not be that safe, and some noteworthy voices in the investment community have actually encouraged would-be investors to stay away from them. Of particular note, legendary investor Warren Buffett compared Bitcoin to paper checks: “It’s a really reliable way of transmitting cash and you can do it anonymously and all that. A check is a way of transferring cash too. Are checks worth a great deal of money? Just because they can transmit money?” For those who see cryptocurrencies such as Bitcoin as the currency of the future, it should be kept in mind that a currency needs stability so that merchants and customers can determine what a fair cost is for goods. Bitcoin and other cryptocurrencies have been anything but stable through much of their history. For example, 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 produces a problem. If bitcoins might be worth a lot more in the future, individuals are less likely to spend and flow them today, making them less practical as a currency. Why invest a bitcoin when it could be worth 3 times the worth next year?