Cryptocurrency, such as Bitcoin and Ethereum, have exploded in popularity over the past ten years and are set to become even bigger business as we move towards a world that is both cashless and completely digital.
However, for those unfamiliar with cryptocurrency – which is a great many of us – the concept is completely alien, as is the terminology around it. What, for example, is a blockchain? What are non fungible tokens (NFT’s)?
Here, we will briefly cover the very basics of what cryptocurrency is.
What you will read in this article:
What Is Cryptocurrency?
Cryptocurrencies are virtual or digital currencies that may be used for transactions just like any other currency.
They may be exchanged for products and services and have grown in popularity in recent years. Cryptocurrencies are, in essence, restricted entries in a database that is both unique and immutable.
When it comes to digital currency, one of the main problems that need addressing is double-spending. When the same sum is spent twice, it is considered fraud. Initial attempts to solve this issue required a third-party server to monitor all transactions, which works in practice but means that the funds need to be controlled by a central organization.
When it comes to cryptocurrencies like Bitcoin, everything is decentralized, and instead of relying on a third-party server, the Blockchain is used. Anyone can look at this public record of transactions. When a transaction occurs, a file containing the recipient’s wallet address or public key as well as the transaction amount is created.
The sender then confirms this with their private key, encrypting the transaction. The transaction is confirmed in this paradigm by a ‘miner,’ who marks the transaction as legitimate by solving a cryptographic challenge and adding it to the network. Each transaction is one-of-a-kind, which means it cannot be reproduced.
Why Are There So Many Different Types of Cryptocurrency?
A cryptocurrency can theoretically be created by anyone; at their core, they are just software, therefore anyone can create one. There is no formal body that determines what constitutes a cryptocurrency.
As a result, a slew of new altcoins has emerged. Some of them have evolved into important players, prompting speculation that they could overturn bitcoin and become the most valuable cryptocurrency.
They sometimes move in lockstep, with the entire cryptocurrency market fluctuating in response to certain pieces of news. However, traders occasionally switch between currencies, as when the price of dogecoin soared thanks to the support of individuals such as Elon Musk.
What Can Be Bought with Cryptocurrency?
If you posed this question a few years ago, the answer would have been limited, but with the rise of Bitcoin, you can now buy plenty of things. You’ll see that, in addition to Visa, Mastercard, and PayPal, there’s also a cryptocurrency option available in many places.
Should You Invest in Cryptocurrency?
Many individuals witnessed Bitcoin’s incredible surge in value over the last two years, from $800 in 2016 to $7,000 in 2017.
This may make Bitcoin or other cryptocurrencies appear to be a great investment, and they very well may be, but be cautious: they’re extremely volatile and fluctuate more than virtually any other investment. This is what makes it all rather exciting, though!
How Do You Buy Cryptocurrency?
Cryptocurrencies can be purchased for currency, such as dollars or pounds, just like any other asset. There are a plethora of exchanges that make this feasible, and users can keep their cryptocurrencies on those exchanges or in their own wallets.
They can, of course, be sold after that. As a result, there is a thriving and frequently unpredictable market for purchasing and selling them.
What Makes It Such an Unpredictable Market?
Unlike traditional financial assets such as stocks or commodities, cryptocurrencies are not valued in terms of what they can be used for; in theory, they are a bet on a company’s future profits or the usefulness of a given material, but in practice, cryptocurrencies are primarily a bet on how interested people are in them. Cryptocurrencies, unlike regular fiat currencies, lack a central bank. This means there are no rules and regulations governing any swings in its value.
As a result, the value of cryptocurrencies varies dramatically, frequently and without warning, and without always being linked to evident world affairs.
Over the last year, those fluctuations have mainly been upwards: in 2021, the price is up 65 percent following both its crash and significant rises in recent years. However, as with anything involving money, there is no guarantee that the rising trend will continue. It has the potential to go down as well as up.