What is cryptocurrency, exactly?

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A cryptocurrency (or “crypto”) is a digital currency that may be used to purchase goods and services, but it is secured by an online ledger and powerful cryptography. The majority of interest in these unregulated currencies is for-profit trading, with speculators driving values high at times.

Bitcoin, the most popular cryptocurrency, has had its price fluctuate a lot this year, reaching nearly $65,000 in April before dropping nearly half of its value in May. By the fall, the price had climbed fast once more, reaching an all-time high of over $66,000 before plummeting. (You can find the current bitcoin price here.)

Here are seven questions to ask about cryptocurrencies, as well as some things to avoid.

1. What is the definition of cryptocurrency?

Cryptocurrency is a type of online payment that may be used to buy and sell products and services. Many businesses have created their own currencies, known as tokens, that can be exchanged for the goods or services that the business offers. Consider them to be arcade tokens or casino chips. To use the good or service, you’ll need to convert actual money for cryptocurrency.

Blockchain is the technology that enables cryptocurrency to function. Blockchain is a decentralized technology that handles and records transactions across numerous computers. The security of this technology is part of its attractiveness.

2. What is the total number of cryptocurrencies? So, how much are they worth?

According to CoinMarketCap.com, a market research website, more than 15,000 different cryptocurrencies are publicly traded. Cryptocurrencies are still on the rise. On December 17th, 2021, the total worth of all cryptocurrencies was over $2.1 trillion, down from an all-time high of around $2.9 trillion just weeks before. The overall market value of bitcoins, the most widely used digital currency, was estimated to be around $868.7 billion.

3. What is the appeal of cryptocurrencies?

For a number of reasons, cryptocurrency advocates are drawn to it. Here are a few of the most well-known:

Supporters see cryptocurrencies like bitcoin as the currency of the future, and they’re rushing to buy them before they grow more valuable.

Some proponents prefer the idea that bitcoin frees central banks from controlling the money supply because central banks tend to devalue money over time through inflation.

Other advocates favor the blockchain technology that underpins cryptocurrencies because it is a decentralized processing and recording system that is potentially more secure than traditional payment systems.

Some speculators are interested in cryptocurrencies because they are increasing in value, but they are unconcerned about the currencies’ long-term acceptance as a means of money transfer.

4. Is it wise to invest in cryptocurrencies?

Cryptocurrencies may appreciate in value, but many investors regard them as speculative investments rather than long-term investments. What is the explanation for this? Cryptocurrencies, like actual currencies, have no cash flow, thus in order for you to profit, someone else must pay more for the currency than you did.

This is known as the “greater fool” investment theory. In contrast, a well-managed business grows in value over time by increasing profitability and cash flow.

“Those who believe that cryptocurrencies like bitcoin will be the currency of the future should keep in mind that a currency requires stability.”

Some prominent members of the investment world have warned potential investors to avoid them. Warren Buffett, the famed investor, likened bitcoin to paper checks, saying, “It’s a pretty effective way of moving money and you can do it anonymously and all that.” A check can also be used to send money. Is it true that cheques are worth a lot of money? Just because they have the ability to send money?”

Is Bitcoin Safe? 

For those who believe that cryptocurrencies like bitcoin will be the currency of the future, it’s important to remember that a currency needs to be stable in order for merchants and customers to know what a fair price for goods is. Throughout much of their history, Bitcoin and other cryptocurrencies have been everything but stable. For example, after trading near $20,000 in December 2017, bitcoin’s value plummeted to around $3,200 a year later. It was trading at record levels again by December 2020.

This price fluctuation is a problem. People are less inclined to spend and circulate bitcoins now if they are worth a lot more in the future, making them less viable as a currency. Why spend a bitcoin when it could be worth three times its current value the following year?

5. How do I go about purchasing cryptocurrency?

While some cryptocurrencies, such as bitcoin, can be purchased with US dollars, others require bitcoins or another cryptocurrency to be paid for.

To purchase cryptocurrencies, you’ll need a “wallet,” which is an internet application that stores your funds. In general, you open an account on a cryptocurrency exchange and then use real money to purchase cryptocurrencies like bitcoin or Ethereum. More information on how to invest in bitcoin may be found here.

Coinbase is a well-known cryptocurrency exchange where you can open a wallet and buy and sell bitcoin and other cryptocurrencies. Cryptocurrencies are also available from an increasing number of online brokers, including eToro, Tradestation, and Sofi Active Investing. Free cryptocurrency transactions are accessible through Robinhood (Robinhood Crypto is available in most, but not all, U.S. states).

6. Is it legal to use cryptocurrencies?

They are without a doubt lawful in the United States, while China has effectively outlawed their usage, and whether they are legal in other countries is ultimately a matter of national sovereignty. Also, think about how to protect yourself from scammers that see cryptocurrency as a way to defraud investors. Buyer beware, as always.

7. How do I safeguard myself?

If you’re interested in purchasing a cryptocurrency through an ICO, examine the fine print in the company’s prospectus for the following details:

  • Who is the company’s owner? A well-known and recognized owner is a good sign.
  • Is it being pursued by any other significant investors? If other well-known investors want a piece of the currency, it’s a good indicator.
  • Will you have a share in the company or will you only have access to cash or tokens? This is a crucial distinction to make. Owning a stake entitles you to a share of the company’s profits (you’re an owner), whilst purchasing tokens entitles you to utilize them like chips in a casino.
  • Is the currency already built, or is the company seeking funding to do so? The less dangerous a thing is, the further along it is.

Examining a prospectus can be time-consuming; the more information it has, the higher your chances of finding anything legitimate. However, even legitimacy does not guarantee that the currency will be successful. That’s a whole other subject that necessitates a great deal of market knowledge.

Beyond those worries, simply owning bitcoin puts you in danger of theft as hackers attempt to break into the computer networks that keep your money safe. In 2014, a well-known exchange went bankrupt after hackers stole hundreds of millions of dollars in bitcoins. Those aren’t usual hazards associated with stock and mutual fund investments on major U.S. markets.

Should you invest in cryptocurrencies?

Cryptocurrency is a highly speculative and volatile investment. Investing in known firms’ stocks is often safer than investing in cryptocurrencies like bitcoin.