What Is Cryptocurrency? Here’s What You Need to Know
Cryptocurrencies let you purchase items and services, or trade them for profit. Here’s more about what cryptocurrency is, how to buy it and how to protect yourself.
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A cryptocurrency (or “crypto”) is a digital currency that can be used to purchase 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 costs skyward.
Here are seven things to inquire about cryptocurrency, and what to look out for.
1. What is cryptocurrency?
Cryptocurrency is a kind of payment that can be exchanged online for goods and services. Lots of business have released their own currencies, typically called tokens, and these can be traded specifically for the good or service that the business 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 excellent or service.
Cryptocurrencies work using an innovation called blockchain. Blockchain is a decentralized innovation spread throughout lots of computers that manages and tape-records 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 market research website. 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 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 appeal to their advocates for a range 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, presumably before they become better Some fans like the truth that cryptocurrency eliminates central banks from managing the cash supply, since with time these banks tend to minimize the value of money by means of inflation Other fans like the technology behind cryptocurrencies, the blockchain, because it’s a decentralized processing and recording system and can be more protected than traditional payment systems Some speculators like cryptocurrencies since they’re increasing in worth and have no interest in the currencies’ long-lasting acceptance as a way to move money
4. Are cryptocurrencies a good investment?
Cryptocurrencies may increase in worth, but lots of investors see them as simple speculations, not real investments. The reason? Similar to genuine currencies, cryptocurrencies produce no capital, so for you to benefit, somebody needs 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 service, which increases its value with 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 should be noted that a currency requires stability.” As NerdWallet authors have kept in mind, cryptocurrencies such as Bitcoin might not be that safe, and some notable voices in the investment community have recommended potential financiers to steer clear of them. Of specific note, famous financier Warren Buffett compared Bitcoin to paper checks: “It’s a very efficient way of sending money and you can do it anonymously and all that. A check is a method of transmitting money too. Are checks worth a great deal of cash? Even if they can transmit cash?” For those who see cryptocurrencies such as Bitcoin as the currency of the future, it must be noted that a currency requires stability so that merchants and consumers can determine what a fair cost is for items. Bitcoin and other cryptocurrencies have been anything however stable through much of their history. 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 rate volatility produces a dilemma. If bitcoins might be worth a lot more in the future, individuals are less most likely to spend and flow them today, making them less practical as a currency. Why spend a bitcoin when it could be worth three times the value next year?