A cryptocurrency is a form of digital currency that trades on markets similar to the stock market. Just as you can invest in stocks or bonds, you can invest in cryptocurrencies and profit (or lose) when their value goes up or down.
Fiat currencies are backed by the government—for example, the United States Dollar is backed by the U.S. government, while the Euro is backed by the European Union. Cryptocurrencies aren’t backed by any government or fiat currency; they operate independently of a central bank and are not attached to conventional financial institutions like banks and ATMs.
Why Are There So Many Cryptocurrencies?
There are hundreds of different cryptocurrencies, and more are being developed each year. Many of these cryptocurrencies are forks of earlier versions, meaning that a cryptocurrency is built off of another cryptocurrency’s base code. These forks usually happen because the developers want to change something about the original cryptocurrency, or they’re testing ideas for new features or applications.
Sometimes a fork is created in order to “donate” some part of the network’s community to another project. Bitcoin Cash is an example of a hard fork that happened in August 2017 — this created a new form of Bitcoin, with its own blockchain, ledger, and token (Bitcoin Cash).
Each cryptocurrency has its own set of features and uses, like Ethereum supporting smart contracts or Litecoin having faster transaction speeds than the original Bitcoin. Cryptocurrencies are developed by communities of developers; therefore, they have different viewpoints on what features would make their particular coin better suited for certain uses.
Cryptocurrencies Operate Independently
Cryptocurrencies are often loosely referred to as “digital gold,” but the important thing to remember is that they are not backed by any asset or reserve. Bitcoin, the most popular cryptocurrency, operates independently of a central bank and is not backed by any government or fiat currency.
The value of Bitcoin and other cryptocurrencies is determined entirely by what users are willing to pay for it on online exchanges like Binance and Coinbase. With this lack of government intervention in mind, users have taken matters into their own hands when it comes to protecting their funds: anonymity is a key part of cryptocurrency transactions.
Bitcoin Was the First Cryptocurrency
Bitcoin was created by someone (or someone) using the pseudonym Satoshi Nakamoto in 2009.
Bitcoin is decentralized and independent of banks, which means there are lower transaction fees. It is important to understand that cryptocurrency relies on blockchain technology to provide secure transactions.
Because the blockchain is free and open to the public, it provides a permanent public record of each transaction. Blockchain uses cryptography to secure transactions and prevent double-spending. It also has a limited supply: Only 21 million coins will ever exist, with about 17 million already in circulation as of December 2017.
Like Fiat Currencies, Cryptocurrencies Are Subject to Inflation
It’s important to remember that, while they may not be as tangible as fiat currencies, cryptocurrencies are subject to the same economic forces. The supply of cryptocurrencies is limited, and hoarding leads to inflation. For example, let’s say that after the Bitcoin halving occurred in 2020, we see an influx of more people buying up Bitcoin.
This would cause the price of Bitcoin to rise quickly (due to the demand) because it is now a limited resource. In this case, if one Bitcoin was worth $10 before its halving in 2020 but was worth $100 after its halving in 2024, you could say that it has experienced 10x inflation over those four years; or put another way: each individual coin is now worth ten times what it used to be.
Blockchain Technology Provides a Permanent Public Record of Each Transaction
Cryptocurrency is a digital or virtual currency that uses cryptography for security, making it difficult to counterfeit.
As of March 2020, there are over 9,000 cryptocurrencies on the market with a combined market capitalization of over $250 billion.
So what makes cryptocurrency so special? The key is blockchain technology. Here’s what we mean: unlike traditional financial systems where transactions are recorded by a central authority like a bank, blockchain allows everyone in the system to see and securely record every transaction—for example, when you purchase something online using bitcoin.
This permanent public record of all transactions makes it more difficult for hackers to get away with meddling with your money and personal information (think credit card theft) because each transaction has to be verified by multiple computers on the network before it can be approved.
Cryptocurrencies Can Be Used as Traditional Currencies in Many Instances
You can purchase gift cards with cryptocurrencies, allowing you to shop at Amazon and other online retailers. You can also use them to buy stocks and bonds, travel, gamble online, and donate money to charities.
If you’re interested in using cryptocurrency, consider Coinbase or Gemini first. Because they’re regulated by the government, they have to follow strict rules designed to help protect your money. The downside is that their products are relatively limited compared with some of their more complex competitors, which means you may not be able to access all the functionality you want.
How Do You Keep Your Cryptocurrencies Safe?
To keep your Cryptocurrencies safe, you need to understand how the cryptocurrency system works. Cryptocurrency transactions are irreversible. You don’t want someone to take your money from you by stealing it! There are several ways to keep yourself and your money safe:
Don’t use an exchange as a wallet. If you’re holding Cryptocurrency, always withdraw it from the exchange into a private wallet (see below). If you don’t do this, and the exchange goes out of business or gets hacked, you lose all your money.
Protect your password. Encrypt your wallet and make backups of it so that if anything ever happens to it, you can restore it on another device with a backup copy of the file containing all transaction history.
Be careful when sharing information online. Phishing scams have become common lately where hackers will try to trick people into giving up their login credentials or account numbers by pretending they work for a legitimate company like PayPal or Amazon. Always be vigilant about who is asking for what personal details!
Secure your computers/phones against malware attacks such as keyloggers and remote access Trojans (RATs). Use antivirus software like McAfee AntiVirus or Kaspersky Internet Security Suite which can detect these kinds of threats before they infect devices with viruses that could steal sensitive information such as passwords stored in web browsers (or full wallets stored on hard drives!).
Use hardware wallets such as Ledger Nano X if possible, unlike third-party programs installed locally on laptops/desktops. These protect against malware attacks since there is no way for hackers to steal funds through internet connections.
Cryptocurrency Is Not Immune to the Economic Effects
The value of cryptocurrencies is determined by the demand. Like any other currency, cryptocurrency is used to buy products and services. If you have a lot of people willing to pay for a service, the price will go up because there are more buyers than sellers. If there is less demand for a product or service, the price will drop as people sell their crypto to get “fiat” (the government-issued currency).
What Will Happen to Bitcoin and Other Cryptocurrencies
If you have heard of Bitcoin, Ethereum, Ripple, and other cryptocurrency markets that are “too good to be true”, you’re not alone. No one can blame you; it’s hard to wrap your head around the thought that a currency that doesn’t even exist yet is worth more than gold or other hard assets. Cryptocurrency is seemingly a non-stop roller coaster ride of highs and lows: its value can go from $700 to $0 in just days.
The fact is, crypto-currencies are still in their infancy stage. Although some investors believe the price will continue its upward trajectory for decades to come (like how the Internet once predicted), others believe it’s too early for speculation and think these prices will eventually fall to earth over time (like how AOL feels about email).
However, if you want to buy into a cryptocurrency before it reaches its inflection point where it becomes “too good to be true” or falls completely out of favor with the general public like AOL did with email, here’s what you need to know:
Cryptocurrency trading is subject to its own rules and regulations, but that doesn’t make it invulnerable. Just as with traditional currencies, the value of cryptocurrencies is subject to the same forces: other currencies, supply and demand, and so on. Cryptocurrencies are also capable of being used for many of the same things as traditional currencies (buying goods/services and investment).
However, there are key differences between cryptocurrencies and traditional currencies that you should be aware of. Chief among these is volatility due to limited supply. Whereas most fiat currencies have a virtually limitless supply (central banks can issue new money whenever they feel like it), most cryptocurrencies have a limited supply that cannot be increased.
This makes them more attractive investments in some ways (especially to speculators) because the potential for growth from a small base is enormous if demand rises rapidly enough. However, this also means that prices are inherently more volatile than those of fiat currencies; in other words, it’s much easier for smaller shocks to cause large changes in price.
