What Is Cryptocurrency? Here’s What You Need to Know
Cryptocurrencies let you purchase products 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 products and services, but utilizes an online ledger with strong cryptography to protect online deals. Much of the interest in these unregulated currencies is to trade for profit, with speculators sometimes driving costs skyward.
Here are 7 things to ask about cryptocurrency, and what to look out for.
1. What is cryptocurrency?
Cryptocurrency is a type of payment that can be exchanged online for items and services. Many companies have issued their own currencies, often 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 need to exchange genuine currency for the cryptocurrency to access the great or service.
Cryptocurrencies work using an innovation called blockchain. Blockchain is a decentralized innovation spread across lots of computers that handles and records deals. Part of the appeal of this technology is its security.
2. The number of 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 preliminary 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 inspect the current cost to purchase Bitcoin here
3. Why are cryptocurrencies so popular?
Cryptocurrencies interest their supporters for a variety of reasons. Here are some of the most popular:
Fans 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 gets rid of central banks from handling the money supply, since gradually these banks tend to decrease the value of money through 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 traditional 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 approval as a method to move money
4. Are cryptocurrencies an excellent financial investment?
Cryptocurrencies may go up in worth, however numerous investors see them as simple speculations, not real investments. The factor? Much like genuine 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 financial investment. Contrast that to a well-managed company, which increases its worth in 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 must 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 advised prospective investors to avoid them. Of particular note, famous financier Warren Buffett compared Bitcoin to paper checks: “It’s a really efficient method of transmitting money and you can do it anonymously and all that. A check is a way of sending money too. Are checks worth a whole lot of cash? Just because they can send 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 identify what a fair price is for items. Bitcoin and other cryptocurrencies have been anything but stable through much of their history. For example, while Bitcoin traded at near 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 conundrum. If bitcoins might be worth a lot more in the future, individuals are less likely to invest and flow them today, making them less practical as a currency. Why spend a bitcoin when it could be worth 3 times the value next year?