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 protect yourself.
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A cryptocurrency (or “crypto”) is a digital currency that can be used to purchase items and services, however uses 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 prices skyward.
Here are 7 things to ask about cryptocurrency, and what to watch out for.
1. What is cryptocurrency?
Cryptocurrency is a kind of payment that can be exchanged online for goods and services. Many companies have actually provided their own currencies, often called tokens, and these can be traded particularly for the excellent or service that the company offers. Think of 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 using an innovation called blockchain. Blockchain is a decentralized innovation spread throughout many computers that manages and 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 publicly, according to CoinMarketCap.com, a marketing research site. And cryptocurrencies continue to multiply, raising money through preliminary coin offerings, or ICOs. The overall 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 check the present rate to purchase Bitcoin here
3. Why are cryptocurrencies so popular?
Cryptocurrencies appeal to their supporters for a variety 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, most likely before they become more valuable Some advocates like the fact that cryptocurrency gets rid of central banks from managing the money supply, because in time these banks tend to minimize the worth 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 safe 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 method to move cash
4. Are cryptocurrencies a good investment?
Cryptocurrencies may increase in value, however numerous investors see them as mere speculations, not real investments. The reason? Similar to real currencies, cryptocurrencies create no cash flow, so for you to benefit, someone needs 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 service, which increases its worth gradually by growing the success and capital of the operation.
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.” As NerdWallet authors have actually kept in mind, cryptocurrencies such as Bitcoin may not be that safe, and some significant voices in the financial investment neighborhood have actually recommended would-be investors to stay away from them. Of particular note, legendary investor Warren Buffett compared Bitcoin to paper checks: “It’s an extremely effective way of transferring cash and you can do it anonymously and all that. A check is a method of transferring cash too. Are checks worth a great deal of money? Just because they can send cash?” For those who see cryptocurrencies such as Bitcoin as the currency of the future, it should be noted that a currency requires stability so that merchants and customers can identify what a reasonable cost is for items. Bitcoin and other cryptocurrencies have actually been anything but 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 once again.
This cost volatility produces a quandary. If bitcoins might be worth a lot more in the future, people are less likely to invest 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?