What Is Cryptocurrency? Here’s What You Must Know
Cryptocurrencies let you buy items and services, or trade them for profit. Here’s more about what cryptocurrency is, how to buy it and how to secure yourself.
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A cryptocurrency (or “crypto”) is a digital currency that can be used to purchase products and services, but 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 seven things to ask about cryptocurrency, and what to keep an eye out for.
1. What is cryptocurrency?
Cryptocurrency is a kind of payment that can be exchanged online for items and services. Lots of companies have actually released their own currencies, frequently called tokens, and these can be traded particularly for the great or service that the business supplies. Think about them as you would arcade tokens or casino chips. You’ll require to exchange real currency for the cryptocurrency to access the good or service.
Cryptocurrencies work utilizing a technology called blockchain. Blockchain is a decentralized technology spread throughout many 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 marketing research website. And cryptocurrencies continue to proliferate, raising money through initial 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 examine the present cost to buy Bitcoin here
3. Why are cryptocurrencies so popular?
Cryptocurrencies appeal to their advocates for a variety of reasons. Here are a few of the most popular:
Advocates see cryptocurrencies such as Bitcoin as the currency of the future and are racing to purchase them now, most likely before they become better Some fans like the truth that cryptocurrency gets rid of central banks from managing the money supply, since in time these banks tend to lower the worth of cash 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 since they’re increasing in value and have no interest in the currencies’ long-term approval as a way to move money
4. Are cryptocurrencies a great investment?
Cryptocurrencies might increase in value, but many investors see them as mere speculations, not real investments. The reason? Just like genuine currencies, cryptocurrencies create no cash flow, so for you to profit, somebody has 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 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 noted, cryptocurrencies such as Bitcoin might not be that safe, and some significant voices in the investment community have actually encouraged prospective financiers to avoid them. Of particular note, legendary financier Warren Buffett compared Bitcoin to paper checks: “It’s a really reliable method of transmitting money and you can do it anonymously and all that. A check is a method of sending 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 must be noted that a currency requires stability so that merchants and customers can identify what a fair price is for products. Bitcoin and other cryptocurrencies have actually been anything however stable through much of their history. For example, while Bitcoin traded at near $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 price volatility creates a problem. If bitcoins might be worth a lot more in the future, people are less most likely to spend and circulate them today, making them less practical as a currency. Why invest a bitcoin when it could be worth 3 times the value next year?