Cryptocurrency
What is cryptocurrency
Cryptocurrency (or “crypto”) is a digital currency, such as Bitcoin, that is used as an alternative payment method or speculative investment. Cryptocurrencies get their name from the cryptographic techniques that let people spend them securely without the need for a central government or bank. Cryptocurrency is also a type of digital currency that generally exists only electronically. You usually use your phone, computer, or a cryptocurrency ATM to buy cryptocurrency. Bitcoin and Ether are well-known cryptocurrencies, but there are many different cryptocurrencies, and new ones keep being created.
A Brief History of Cryptocurrency
In the caveman era, people used the barter system, in which goods and services are exchanged among two or more people. For instance, someone might exchange seven apples for seven oranges. The barter system fell out of popular use because it had some glaring flaws:
- People’s requirements have to coincide if you have something to trade, someone else has to want it, and you have to want what the other person is offering.
- There’s no common measure of value you have to decide how many of your items you are willing to trade for other items, and not all items can be divided. For example, you cannot divide a live animal into smaller units.
- The goods cannot be transported easily, unlike our modern currency, which fits in a wallet or is stored on a mobile phone.
After people realized the barter system didn’t work very well, the currency went through a few iterations: In 110 B.C., an official currency was minted; in A.D. 1250, gold-plated florins were introduced and used across Europe; and from 1600 to 1900, the paper currency gained widespread popularity and ended up being used around the world. This is how modern currency as we know it came into existence.
Modern currency includes paper currency, coins, credit cards, and digital wallets for example, Apple Pay, Amazon Pay, Paytm, PayPal, and so on. All of it is controlled by banks and governments, meaning that there is a centralized regulatory authority that limits how paper currency and credit cards work.
How do cryptocurrency markets work
Cryptocurrency markets are decentralised, which means they are not issued or backed by a central authority such as a government. Instead, they run across a network of computers. However, cryptocurrencies can be bought and sold via exchanges and stored in ‘wallets’ .
Unlike traditional currencies, cryptocurrencies exist only as a shared digital record of ownership, stored on a blockchain. When a user wants to send cryptocurrency units to another user, they send it to that user’s digital wallet. The transaction isn’t considered final until it has been verified and added to the blockchain through a process called mining. This is also how new cryptocurrency tokens are usually created.
Facts About Investing with Cryptocurrency
- Cryptocurrencies aren’t backed by a government or central bank. Unlike most traditional currencies, such as the U.S. dollar, the value of a cryptocurrency is not tied to promises by a government or a central bank.
- If you store your cryptocurrency online, you don’t have the same protections as a bank account. Holdings in online “wallets” are not insured by the government like U.S. bank deposits are.
- A cryptocurrency’s value can change constantly and dramatically. An investment that may be worth thousands of dollars today could be worth only hundreds tomorrow. If the value goes down, there’s no guarantee that it will rise again.
- Nothing about cryptocurrencies makes them a foolproof investment. Just like with any investment opportunity, there are no guarantees.
- No one can guarantee you’ll make money off your investment. Anyone who promises you a guaranteed return or profit is likely scamming you. Just because the cryptocurrency is well-known or has celebrities endorsing it doesn’t mean it’s a good investment.
- Not all cryptocurrencies or the companies behind them are the same. Before you decide to invest in a cryptocurrency, look into the claims the company is making. Do an internet search with the name of the company and the cryptocurrency with words like review, scam, or complaint. Look through several pages of search results.
How to Buy Cryptocurrency?
Cryptocurrencies are digital or virtual tokens that use cryptography to secure their transactions and control the creation of new units. And cryptocurrencies are often bought with "fiat" or traditional currency like US dollars or euros. However, they can also be bought with cryptocurrencies like Bitcoin or Ethereum. First, you must set up a digital wallet to store your coins to buy cryptocurrency. You can then buy coins on a cryptocurrency exchange using your fiat currency or another cryptocurrency.
There are a few different ways to buy cryptocurrency.
- You can use an online cryptocurrency exchange such as Coinbase, Bitstamp, or Kraken to purchase cryptocurrency with a credit/debit card, bank transfer, or other payment methods.
- You can use a peer-to-peer exchange such as LocalBitcoins or Bisq to purchase cryptocurrency directly from other users.
- You can trade cryptocurrency for other types of assets, such as stocks, through cryptocurrency trading platforms.
Some investors are attracted to the volatile price swings as a potential for profit.
Some investors believe that if the lack of correlation with other asset classes continues, cryptocurrency could add diversification to a portfolio.
- Research and Understand the Market: Before investing in cryptocurrency, it is crucial to research and understand the market. Understanding the technology, benefits, and risks associated with investing in cryptocurrency.
- Use Reputable Exchange Platforms: Investors should only use reputable exchanges to buy and sell cryptocurrency. Reputable exchange platforms have built-in security measures that protect investors from theft and fraud.
- Store Cryptocurrency Securely: It is vital to store cryptocurrency securely after purchasing cryptocurrency. Investing in a secure wallet is one of the best ways to protect cryptocurrencies from theft and fraud.
- Diversify Investments: Diversifying investments can help to manage the risks associated with investing in cryptocurrency. For example, buy different types of cryptocurrency to spread out the threat.
Pros and cons of cryptocurrency
Cryptocurrency inspires passionate opinions across the spectrum of investors. Here are a few reasons that some people believe it is a transformational technology, while others worry it's a fad.
Pros and Cons of Cryptocurrency
Peter Palion, a certified financial planner (CFP) in East Norwich, New York, thinks it’s safer to stick to a currency backed by a government, like the U.S. dollar.
“If you have the U.S. dollar in your cash reserves, you know you can pay your mortgage, you can pay your electricity bill,” Palion says. “When you look at the last 12 months, Bitcoin looks basically like my last EKG, and the U.S. dollar index is more or less a flat line. Something that drops by 50% is not suitable for anything but speculation.”
That said, for clients who are specifically interested in cryptocurrency, Ian Harvey, a New York-based wealth advisor, helps them put some money into it. “The weight in a client’s portfolio should be large enough to feel meaningful while not derailing their long-term plan should the investment go to zero,” says Harvey.
As for how much to invest, Harvey talks to investors about what percentage of their portfolio they’re willing to lose if the investment goes south. “It could be 1% to 5%, it could be 10%,” he says. “It depends on how much they have now, and what’s really at stake for them, from a loss perspective.”
Cryptocurrency pros
Some supporters like the fact that cryptocurrency removes central banks from managing the money supply since over time these banks tend to reduce the value of money via inflation.
In communities that have been underserved by the traditional financial system, some people see cryptocurrencies as a promising foothold. Pew Research Center data from 2021 found that Asian, Black and Hispanic people "are more likely than White adults to say they have ever invested in, traded or used a cryptocurrency
."
Other advocates like the blockchain technology behind cryptocurrencies, because it’s a decentralized processing and recording system and can be more secure than traditional payment systems.
Some cryptocurrencies offer their owners the opportunity to earn passive income through a process called staking. Crypto staking involves using your cryptocurrencies to help verify transactions on a blockchain protocol. Though staking has its risks, it can allow you to grow your crypto holdings without buying more.
Cryptocurrency cons
Many cryptocurrency projects are untested, and blockchain technology in general has yet to gain wide adoption. If the underlying idea behind cryptocurrency does not reach its potential, long-term investors may never see the returns they hoped for.
For shorter-term crypto investors, there are other risks. Its prices tend to change rapidly, and while that means that many people have made money quickly by buying in at the right time, many others have lost money by doing so just before a crypto crash.
Those wild shifts in value may also cut against the basic ideas behind the projects that cryptocurrencies were created to support. For example, people may be less likely to use Bitcoin as a payment system if they are not sure what it will be worth the next day.
The environmental impact of Bitcoin and other projects that use similar mining protocols is significant. A comparison by the University of Cambridge, for instance, said worldwide Bitcoin mining consumes more than twice as much power as all U.S. residential lighting
. Some cryptocurrencies use different technology that demands less energy.
Governments around the world have not yet fully reckoned with how to handle cryptocurrency, so regulatory changes and crackdowns have the potential to affect the market in unpredictable ways.