A type of cryptocurrency that is digital and decentralized, cryptocurrency. Many investors are interested in cryptocurrencies because they can be used to purchase and sell items, as well as their potential to store and grow wealth.
There are many cryptocurrencies today. Bitcoin is the most well-known and original cryptocurrency. It was first created in 2009. The most popular cryptocurrencies are Bitcoin Cash, XRP and Ethereum. Each one of these currencies has a unique purpose. Some are designed to replace cash while others can be used for private, direct transactions.
The cryptocurrency you have is digitally based. There’s no physical bill or coin to go with it. Instead, cryptocurrency owners store their coins in a digital wallet and then sell or buy them through an online exchange. Your wallet can be online (many popular exchanges, such as Coinbase, offer an in-app wallet), or offline on a device similar to a USB stick.
The primary principle of cryptocurrency is decentralization. While most currencies are backed with a central bank, such as the U.S. Dollar, which is backed by the U.S. government’s “full faith, credit,” cryptocurrencies can be maintained and valued by their users.
Decentralized ledgers are used to record cryptocurrency transactions. This ledger is known as a blockchain. Each time crypto is purchased or sold, it is added to the Blockchain — a public database that contains all transactions. This data is accessible to all crypto holders. Participation in the blockchain is open to anyone. However, data about individual transactions and those involved are protected using cryptography (the foundation of cryptocurrency). Each transaction that is added to the blockchain has to be digitally validated to prevent fraud.
What can you do with cryptocurrency?
Although it has many characteristics that are similar to both investments and currency, experts still disagree on whether cryptocurrency is one or the other.
You can buy cryptocurrency, as the name implies. However, your purchasing power is limited as crypto is not yet widely accepted by retailers and other businesses.
Roger Aliaga-Diaz is principal economist at Vanguard Investment Strategy Group and says that crypto’s lack of widespread adoption and volatility limit its use as currency.
Crypto is an alternative investment option for many. You can also buy stock and trade it in public companies. Cryptocurrency can be bought with the expectation that its value will rise over time. This will allow you to cash out later for a profit. Some people invest less in crypto because they believe it will become a popular cryptocurrency and more to bet on its blockchain technology.
It is not easy to classify crypto as an investment. It is not a traditional bond or stock. Cryptocurrencies aren’t as easy to classify as an investment. While they share the characteristics of commodities such gold, they cannot be purchased or sold for cash. They can also be used as derivatives based upon future value. However, they don’t have any intrinsic physical value.
Without a track record that can help determine long-term value, cryptocurrency fluctuates based on a volatile demand cycle. Aliaga-Diaz states that individual investors face a challenge because they don’t know the future.
Forex — foreign exchange trading — there are significant risks associated with unregulated markets. It is important to be informed and not lose any money. Regulators are still working out how to classify cryptocurrency for trading, payments, taxation, antifraud and other purposes. Although clear regulation is important to understand cryptocurrency and its future, we don’t have it yet.
Jay Clayton, former Chairman of SEC, stated recently to CNBC that “where digital assets land, at end of the day…will be driven in part by regulation both domestically and internationally.”
What are the Terms of Cryptocurrency?
Blockchain: A type of database where cryptocurrencies’ digital transaction records are stored in blocks or groups is called a blockchain. As an extension of the block that was created, new blocks are continuously added to form a chain. These blockchains are able to build upon each other within the database and store an ever-increasing number of transactions for a particular cryptocurrency.
Decentralized: The term “decentralized” refers to cryptocurrency that is not backed by any central bank or financial institution.
Distributed ledger technology (DLT): A decentralized digital record. Contrary to traditional databases, there is no central authority. The record is kept in multiple places simultaneously. Once a transaction has been recorded, it is permanent. Although blockchain is a form of DLT, the technology can be used for many other purposes than cryptocurrency trade.
Bitcoin: Bitcoin was the first cryptocurrency and is still the most widely used today.
Altcoins are any cryptocurrency other than Bitcoin. Altcoins include Ethereum, Dogecoin and Litcoin. Each altcoin has its own features and purpose.
Exchange: This is a marketplace where you can sell and buy cryptocurrency.
Wallet: This is where you can store your crypto currency assets. Many exchanges offer digital wallets.
Crypto is Safe?
Blockchain technology that backs cryptocurrency is intrinsically secure due to the decentralized and public nature of distributed ledger tech and the encryption process each transaction goes through.
However, it doesn’t make cryptocurrency completely secure. Most people regard the U.S. Dollar or other established currencies as secure. Because cryptocurrency isn’t backed by any government authority, it doesn’t have the same protections that standard currencies around the world.
Contrary to the money you have saved in a Federal Deposit Insurance Corporation (FDIC) bank, “If a virtual cryptocurrency company fails – which many have – then the government will not cover it,” the Consumer Financial Protection Bureau stated in a 2014 notice regarding cryptocurrency.
The CFPB identifies additional risks consumers should be aware of, such as volatile exchange rates, high fees on exchange platforms and fraud risk. Due to the decentralized nature and absence of any government oversight, it can be difficult to recover your funds if they are stolen or lost.
Importantly, cryptocurrency is not secure. Although cryptocurrency has gained popularity due to investors’ faith in its value, this value is still based on speculation. Cryptocurrency will be one of the most risky investments that you can make.
Focus Financial Planning in Asheville, North Carolina. Every investment should be balanced against your portfolio and the market. It’s not wise to invest all of your money in crypto, just as you wouldn’t put all of your money into one company.
