What Is Cryptocurrency? Here’s What You Should 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.
Lots of or all of the items featured here are from our partners who compensate us. This might affect which items we discuss and where and how the item appears on a page. This does not influence our examinations. Our opinions are our own.
A cryptocurrency (or “crypto”) is a digital currency that can be used to purchase products and services, however uses an online ledger with strong cryptography to secure online transactions. Much of the interest in these unregulated currencies is to trade for profit, with speculators at times driving costs skyward.
Here are 7 things to ask about cryptocurrency, and what to keep an eye out for.
1. What is cryptocurrency?
Cryptocurrency is a form of payment that can be exchanged online for products and services. Lots of companies have issued their own currencies, typically called tokens, and these can be traded specifically for the good or service that the company supplies. Think about them as you would arcade tokens or gambling establishment chips. You’ll need to exchange real currency for the cryptocurrency to access the good or service.
Cryptocurrencies work using an innovation called blockchain. Blockchain is a decentralized technology spread throughout lots of computer systems that manages and records deals. 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 proliferate, 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 worth of all bitcoins, the most popular digital currency, was pegged at about $421.7 billion. (You can check the current cost to purchase Bitcoin here
3. Why are cryptocurrencies so popular?
Cryptocurrencies appeal to 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, probably prior to they end up being more valuable Some supporters like the truth that cryptocurrency removes central banks from handling the cash supply, because gradually these banks tend to lower the worth of money via inflation Other fans like the innovation behind cryptocurrencies, the blockchain, because it’s a decentralized processing and recording system and can be more protected than conventional payment systems Some speculators like cryptocurrencies due to the fact that they’re going up in worth and have no interest in the currencies’ long-lasting approval as a way to move cash
4. Are cryptocurrencies a great financial investment?
Cryptocurrencies might go up in worth, but many investors see them as simple speculations, not real investments. The reason? Similar to genuine currencies, cryptocurrencies generate no capital, so for you to profit, 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 business, which increases its value over time by growing the profitability 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 requires stability.” As NerdWallet authors have actually noted, cryptocurrencies such as Bitcoin might not be that safe, and some notable voices in the investment community have actually encouraged would-be investors to steer clear of them. Of specific note, famous financier Warren Buffett compared Bitcoin to paper checks: “It’s a very reliable method of sending money and you can do it anonymously and all that. A check is a method of transferring money too. Are checks worth a great deal of cash? Just because they can transmit money?” For those who see cryptocurrencies such as Bitcoin as the currency of the future, it needs to be noted that a currency needs stability so that merchants and customers can determine what a fair price is for goods. Bitcoin and other cryptocurrencies have actually been anything however stable through much of their history. While Bitcoin traded at close to $20,000 in December 2017, its value then dropped to as low as about $3,200 a year later on. By December 2020, it was trading at record levels again.
This price volatility creates 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 feasible as a currency. Why spend a bitcoin when it could be worth 3 times the worth next year?