Cryptocurrency, sometimes known as crypto, is a type of digital currency that can be used as a store of value or for electronic payments made over the internet. The concept of “digital cash” is not new; simple, traceable electronic transactions were already made possible by credit cards, PayPal, Venmo, and other payment mechanisms. However, there are significant distinctions.
One significant factor is that traditional “fiat” currencies were used to settle transactions utilizing these older techniques. The U.S. dollar and the euro are examples of fiat currencies, which are issued by governments and whose supply is controlled by central banks.
On the other hand, because they operate independently of any government or central bank and employ special algorithms to record transactions and calculate supply, cryptocurrencies are regarded as a “non-fiat” medium of exchange.
Unlike fiat currencies (whose value is derived from their status as government-approved legal tender) or previous commodity-based currencies (such those linked to gold or silver), cryptocurrencies have no inherent worth.
Rather, the quality of the underlying technology, supply and demand dynamics, investor attitude, and technology that restricts the production of new units all influence the price of a cryptocurrency. Scarcity can affect value, just like it does for any traded item (think baseball cards), with fewer units available translating into a higher price that potential buyers are ready to pay.
Why is it called “crypto” currency?
“Crypto” refers to cryptography—that is, the unique software code underlying a virtual currency.
How does cryptocurrency work?
The foundation of cryptocurrencies is blockchain technology. Distributed over a decentralized computer network (in this example, the internet), a blockchain is an open-source database that serves as a permanent record of transactions between parties. It is essentially a public ledger. Every transaction includes the hash (unique identity) of the preceding block as well as a “block” of information about who owns what at a specific moment. A “chain” made up of these blocks is unchangeable and unforgerable.
Since every new transaction is logged throughout the network, a public ledger eliminates the need for a central authority to verify the database’s accuracy or to clear transactions.
Therefore, a cryptocurrency transaction can be thought of as a sequence of electronic messages that document the participants, time, and exchange of cash. Be aware that owning Bitcoin or other cryptocurrencies does not require an investment in blockchain technology, its applications, now or in the future.
Although cryptocurrencies are the most well-known use of this technology, blockchains offer a wide range of potential applications beyond payments. They contain “smart” contracts, which automatically execute upon the fulfillment of predefined terms and conditions.
What is bitcoin?
The first and most well-known cryptocurrency is Bitcoin. A founder who goes by the pseudonym Satoshi Nakamoto is credited with creating it. Instead, as previously mentioned, Bitcoin is managed by its encryption and a decentralized computer network that logs and validates blockchain transactions.
Most countries do not accept Bitcoin as legal tender. Similar to actual gold, the price of Bitcoin is influenced by supply and demand as well as the notion that it can be used as a hedge against inflation, a store of value, or an anonymous payment method, albeit none of these characteristics have yet to show a consistent pattern over time.
How do you buy cryptocurrencies?
You must go to a cryptocurrency exchange to buy & sell cryptocurrencies. There, you can convert dollars into cryptocurrency. After that, you will require a unique “digital wallet” to hold your cryptocurrency units.
Crypto-related financial products are also available for purchase. Early 2024 was significant for Bitcoin in especially on that front. The Securities and Exchange Commission (SEC) authorized trading in exchange-traded products (ETPs) holding spot Bitcoin on January 10, 2024. (Spot markets, sometimes referred to as cash markets, are venues where buyers and sellers can rapidly exchange securities and other assets.) For the first time, a cryptocurrency was permitted to serve as the underlying asset in an investment product that is so extensively held and actively traded.
What are some common risks and drawbacks of cryptocurrency?
As you might expect with highly speculative investments, cryptocurrencies carry significant risks, including:
Volatility: The price of cryptocurrencies has always fluctuated a lot, and changes might lead to large losses.
Fraud and scams: “Many consumers have reported being misled to websites that claim to provide chances to invest in or mine cryptocurrencies, but they are false,” the Federal Trade Commission said.
Absence of recovery: To access bitcoin exchanges, you must have your login credentials, which might be lost or stolen. In the event that you lose or forget your login information, there is typically a recovery procedure for traditional financial accounts. However, you will not be able to get your cryptocurrency back if you misplace your “key.” In a similar vein, you essentially forfeit your bitcoin if you are unable to reach the place where you keep your key. Lastly, your cryptocurrency may be lost or damaged if you keep it in cold storage (an offline wallet).
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