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What are cryptocurrencies and why is the world paying attention?

Cryptocurrencies are digital assets that rely on an encrypted network to execute, verify, and record transactions, independent of a centralized authority such as a government or bank.

Key Points

  • Cryptocurrency was developed as an alternative to the dollar, and its functions can make it an attractive investment.
  • Blockchain, the underlying technology that powers crypto, is seen as a tech disruptor.
  • Much like dot-com investing in the 1990s, crypto may hold promise, but there will likely be winners and losers.

This is a complicated concept, so let’s break it down:

  • Cryptocurrencies (or “crypto” for short) are decentralized currencies, meaning they’re neither issued nor governed by a central bank. Some cryptocurrencies are issued by their developers, while others are generated by their respective network algorithms.
  • Crypto are digital assets—they have no tangible form.
  • Cryptocurrencies exist and operate on a public ledger called a blockchain, which records all crypto transactions.
  • Blockchain encryption is designed to make all transactions immutable and secure from tampering, counterfeit, and other forms of fraudulent transactions.

Is cryptocurrency a type of money?

Although cryptocurrency is defined as a form of “digital currency”—implying it’s a kind of money—most businesses and consumers have not adopted it as a common medium of exchange. In other words, most stores will not accept crypto as a form of payment.

Bitcoin may be an exception, as some businesses have accepted it as payment for goods and services. So, if crypto isn’t a common form of money, why do people buy it?

3D Coins stacks on weighing scales, financial management, financial analysis, money-saving and money exchange concept. 3d illustration

  • It’s an alternative asset class. Although some crypto investors are hopeful that cryptocurrencies might someday be adopted as a form of money, most see crypto as an alternative asset that can appreciate in value.
  • It’s a way to invest in blockchain technology. Some people purchase cryptocurrency as a way of indirectly investing in its underlying blockchain.

What is blockchain?

Blockchain is an encrypted public ledger through which digital assets can be transferred, recorded, and stored.

It’s essentially a decentralized network, also called a distributed-ledger technology (DLT). This means there is no single authority serving as a gatekeeper or facilitator for the transactions taking place within the network.

Instead, the computers participating in the network are tasked with verifying and facilitating each “block” (i.e., entry or transaction) within the chain. In some cases, all the computers work together to verify and facilitate each block action. In other cases, a group of computers is selected at random.

This is what makes blockchain transactions secure and nearly impossible to alter. Tens of thousands of computers must verify a single transaction or entry. If there’s a disagreement among computers, the transaction will be voided.

This verification procedure is also what can make blockchain transactions slow and energy inefficient. There are lots of computers across the globe working to verify every single transaction.

What is blockchain technology and how does it work?
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Learn more about blockchain technology.
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Why is blockchain encrypted?

Blockchain uses encryption to protect sensitive data from those who are not privy to receiving it.

For instance, the public can see that a transaction has taken place or a piece of information has been recorded. But they may not be able to see the identities of those involved in the transaction or, in certain cases, the contents of the transaction.

Why is blockchain considered a tech disruptor?

Blockchain’s capacity to permanently record and store transaction records and information in a highly secure manner makes it an attractive technology for many businesses and governments. Here’s a limited list of potential use cases for blockchain:

  • Domestic and international payments
  • Contracts
  • Health care records
  • Real estate transactions
  • Energy transactions
  • Supply chain management
  • Digital art transactions (see non-fungible tokens or NFTs)
  • Voting

Furthermore, blockchain is an open source network. This means developers can work autonomously to improve or innovate its functions.

The more efficient a blockchain ecosystem becomes, the easier it is for corporations and governments to adopt it as part of their regular operations.

What are the largest cryptocurrencies?

Among the 18,000-plus cryptocurrencies in existence, Bitcoin and Ethereum are the two largest cryptocurrencies by market capitalization. Bitcoin, the original and largest cryptocurrency, was developed in 2009 as an alternative monetary asset. It was meant to be an alternative to the U.S. dollar and other fiat currencies. Although some vendors may accept Bitcoin as payment, most investors view it as a speculative investment.

Ethereum is the second-largest cryptocurrency by market cap. Unlike Bitcoin, Ethereum was not designed to function solely as an alternative monetary asset. Instead, it was designed as an innovative ledger technology to help companies securely transport data, store data, and build new programs and applications.

In short, Ethereum is a massive digital ecosystem through which digital information and computer applications can be transported, stored, and even created.

What does crypto aim to achieve?

Some cryptocurrencies, like Bitcoin and Tether, were developed to serve a monetary function. Others, such as Dogecoin and Shiba Inu coin, were developed as novelty items whose values rely on popularity and trading.

Many, if not most, cryptocurrencies were developed to solve challenges within the blockchain ecosystem, such as transmission speed, scalability, security, energy efficiency, and cost efficiency.

How can I invest in crypto?

You can purchase crypto through a cryptocurrency exchange or any financial institution that can broker a cryptocurrency transaction.

Once you purchase cryptocurrency, you can secure your crypto coins in a digital wallet, online wallet, or hardware wallet.

What are the risks of investing in crypto?

Here are a few of the more common risks in cryptocurrency investment:

  • Volatility risk. Crypto prices frequently exhibit extreme swings during certain economic or market conditions.
  • Liquidity risk. Some cryptocurrencies trade with light volume, and thus can be easily manipulated by buyers with large capital resources or sellers who have a large stake in a given currency.
  • Cybersecurity risk. Your crypto can be stolen if a bad actor has access to your crypto wallet’s private key.
  • Overnight risk. Because crypto trades 24/7, your holdings are subject to adverse fluctuations overnight.
  • Vanishing risk. There are factors that have caused certain crypto coins to vanish; these instances are rare and unique to particular coins.

The bottom line

Although the original idea behind cryptocurrency was to create an alternative monetary asset, many investors purchase cryptocurrency not as money, but as an alternative asset or a way to invest in its underlying blockchain technology. Crypto is an emerging field, not unlike the technology sector in the 1990s. There are plenty of brilliant ideas in the crypto world, but not every blockchain innovation will find its way to mainstream use. So, if you’re planning on investing in cryptocurrencies, proceed with a healthy dose of caution.

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