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 products featured here are from our partners who compensate us. This may influence which items we discuss and where and how the item appears on a page. This does not influence our evaluations. Our opinions are our own.
A cryptocurrency (or “crypto”) is a digital currency that can be used to buy products and services, however utilizes an online ledger with strong cryptography to secure online deals. Much of the interest in these uncontrolled currencies is to trade for profit, with speculators sometimes driving rates skyward.
Here are 7 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. Lots of companies have actually issued their own currencies, typically called tokens, and these can be traded specifically for the good or service that the company provides. Think of them as you would arcade tokens or casino chips. You’ll require to exchange genuine currency for the cryptocurrency to access the good or service.
Cryptocurrencies work using an innovation called blockchain. Blockchain is a decentralized innovation spread throughout numerous computer systems that manages and tape-records transactions. Part of the appeal of this technology is its security.
2. How many cryptocurrencies are there? 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 multiply, 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 total value of all bitcoins, the most popular digital currency, was pegged at about $421.7 billion. (You can examine the current cost to purchase Bitcoin here
3. Why are cryptocurrencies so popular?
Cryptocurrencies interest their advocates for a range of reasons. Here are a few 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 become more valuable Some advocates like the reality that cryptocurrency gets rid of central banks from handling the money supply, because in time these banks tend to reduce the value of cash via inflation Other supporters 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 due to the fact that they’re increasing in worth and have no interest in the currencies’ long-lasting acceptance as a method to move cash
4. Are cryptocurrencies a great investment?
Cryptocurrencies might increase in value, however numerous financiers see them as mere speculations, not real investments. The reason? Much like genuine currencies, cryptocurrencies produce no cash flow, 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 organization, which increases its worth with time by growing the success 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 writers have actually noted, cryptocurrencies such as Bitcoin might not be that safe, and some notable voices in the financial investment neighborhood have actually encouraged would-be investors to stay away from them. Of particular note, legendary financier Warren Buffett compared Bitcoin to paper checks: “It’s an extremely reliable method of transferring cash and you can do it anonymously and all that. A check is a way of sending cash too. Are checks worth a lot of cash? Just because they can transfer 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 reasonable cost is for products. 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 worth 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 problem. 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 three times the value next year?