What Is Cryptocurrency? Here’s What You Must Know
Cryptocurrencies let you buy products 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 items 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 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 products and services. Many companies have provided their own currencies, often called tokens, and these can be traded particularly for the excellent or service that the company provides. Consider them as you would arcade tokens or gambling establishment chips. You’ll need to exchange real currency for the cryptocurrency to access the great or service.
Cryptocurrencies work utilizing a technology called blockchain. Blockchain is a decentralized innovation spread across lots of computers that manages and tape-records transactions. Part of the appeal of this technology is its security.
2. How many cryptocurrencies exist? What are they worth?
More than 6,700 different cryptocurrencies are traded publicly, according to CoinMarketCap.com, a market research site. 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 overall worth of all bitcoins, the most popular digital currency, was pegged at about $421.7 billion. (You can examine the current cost to buy Bitcoin here
3. Why are cryptocurrencies so popular?
Cryptocurrencies attract their fans for a range of reasons. Here are some of the most popular:
Supporters see cryptocurrencies such as Bitcoin as the currency of the future and are racing to buy them now, presumably before they become better Some fans like the truth that cryptocurrency gets rid of central banks from managing the money supply, considering that with time these banks tend to reduce the worth of money through inflation Other fans like the technology behind cryptocurrencies, the blockchain, since it’s a decentralized processing and recording system and can be more protected than standard 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 cash
4. Are cryptocurrencies a good investment?
Cryptocurrencies may go up in worth, but lots of investors see them as mere speculations, not real investments. The reason? Much like real currencies, cryptocurrencies produce no cash flow, so for you to benefit, somebody has to pay more for the currency than you did.
That’s what’s called “the higher fool” theory of investment. Contrast that to a well-managed service, which increases its worth in 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 should be kept in mind that a currency needs stability.” As NerdWallet authors have actually kept in mind, cryptocurrencies such as Bitcoin might not be that safe, and some noteworthy voices in the investment community have encouraged prospective investors to avoid them. Of particular note, legendary financier Warren Buffett compared Bitcoin to paper checks: “It’s a really efficient way of transmitting money and you can do it anonymously and all that. A check is a method of transferring money too. Are checks worth a whole lot of money? Just because they can send money?” For those who see cryptocurrencies such as Bitcoin as the currency of the future, it needs to be noted that a currency requires stability so that merchants and consumers can determine what a reasonable cost is for items. Bitcoin and other cryptocurrencies have been anything however stable through much of their history. For instance, 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 rate volatility creates 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 practical as a currency. Why spend a bitcoin when it could be worth three times the value next year?