6 Things You Should Know About Cryptocurrencies
Unless you have been living under a rock for the last few years, you have at least heard of cryptocurrency. This new form of currency has been gaining in popularity but a lot about it is still a mystery to most. Whether you know a decent amount, just a bit, or very little about cryptocurrency, there is always more to learn about this new financial instrument. To help give you a better knowledge base about what cryptocurrency is, how it works, and some of the other most important facts about it, here are six things you should know about cryptocurrencies.
1. What is cryptocurrency?
The number one thing you need to know is what cryptocurrency is. To help if you are starting at square one, cryptocurrency is a secure digital currency that is decentralized. This means that it is not issued or controlled by any one body (like a central bank). Cryptocurrency is created using blockchain technology. Blockchain is a technology that creates and maintains a public ledger of each transaction that each coin or token is involved in. The record of this chain of transactions is kept on a decentralized network of computers.
One thing that confuses many people learning about cryptocurrency is the difference between cryptocurrency and Bitcoin. Cryptocurrency is the overarching term for this new form of digital currency. Bitcoin is the most valuable and well-known brand name in cryptocurrency, but it is just one of many.
2. How many cryptocurrencies are there?
Yes, there are many more cryptocurrencies outside of Bitcoin with more coming all the time. In 2020, there are around 5,000 cryptocurrencies on the market today. That number is always fluctuating as new cryptocurrencies hit the market and established cryptocurrencies fail. Some of the most popular cryptocurrencies outside of Bitcoin include Ethereum, Tether, Ripple, Litecoin, and Monero among others.
There are several general buckets that these cryptocurrencies will fall into. Many of the most popular cryptos (including Bitcoin) are mining-based coins that are created by computers “mining” for new coins using complex algorithms. There are also stablecoins, which are asset-backed coins that behave more like traditional currency and are more “stable.” There are also security tokens that are linked directly to businesses and utility tokens which are used to fund the development of future cryptocurrencies.
3. Is cryptocurrency safe?
It depends on what you mean by safe. As far as security goes, cryptocurrency is very safe. This currency is encrypted and the blockchain technology makes it so it cannot be counterfeited or double-spent. Most cryptocurrencies are anonymous too, so when you do spend or trade it, it is not associated with your bank account or personal information that can be traced back to you. While there have been some high profile hacks of cryptocurrency exchanges, overall using cryptocurrency is generally safer than using traditional fiat currency.
If you are evaluating cryptocurrency as a safe investment, that’s another story. While there are plenty of stories out there about overnight millionaires who invested in cryptocurrencies, there are just as many stories, if not more, about people who lost it all investing in the crypto market. Cryptocurrency is not a safe investment, per se, but if you have a high risk tolerance, it can be a lucrative one.
4. Why does the price of cryptocurrency fluctuate?
What accounts for this volatility in cryptocurrency? There are a few reasons for the fluctuation, including normal economic factors such as supply and demand. A lot of it, though, comes down to one major thing: perceived value. Unlike fiat currencies that are highly managed and manipulated by central banks to be as stable as possible and maintain a certain value, cryptocurrency doesn’t have that. As a decentralized currency, it is beholden to what the market believes it is worth. This is why it is prone to wild swings.
Looking at the historical value of Bitcoin, you can see how volatile this type of currency is. The value of a single bitcoin went from around $13 to over $700 in a year and back down to just over $300 a few months later. The price has skyrocketed to almost $20,000 and within a year after that, was down to $3,000. This volatility has made crypto investing a risky bet but one that can also pay off big in a short period of time. That is one of the big reasons why, according to this guide from Cove Markets, the volatility in the crypto market has made it an attractive area for day trading.
5. Can you buy things with cryptocurrency?
Currently, cryptocurrency is seen mostly as an investment but the answer is yes, you can absolutely buy things with cryptocurrency. Right now, like in most categories in the crypto world, Bitcoin is leading the way. There are several major corporations and many smaller ones that are accepting Bitcoin as a form of payment. Some of the most familiar names on this list include Microsoft, Overstock.com, and BMW.
The problem with using cryptocurrency to make purchases now is its volatility. Both consumers and businesses have a hard time assigning a specific value to this currency. For example, the first-ever purchase using bitcoin was in 2010 when an early adopter bought two Papa John’s pizzas for 10,000 bitcoins. Then, that was worth about $30. Today, those pizzas cost that buyer about $100 million. There are some forms of currency, such as stablecoin, that are more conducive, long term, to working like traditional currency.
6. Is cryptocurrency the future of money?
While there is no definitive answer to this question, you should know your answer before you get involved in cryptocurrency. If you feel like it is a passing fad, don’t get involved in the market. If you believe it truly is the future of money and either Bitcoin or some other, up and coming crypto is going to fundamentally change the way the financial world works, the time to get in on that is now.
These six things make up the basics of what you should know about cryptocurrency. If you have a passing interest, that should be enough to make you sound smart at cocktail parties. If you want to invest or day trade though, there is a lot more to learn, and now that you have a solid base of knowledge, you can find out all there is to know.