What is Cryptocurrency?
A cryptocurrency is a form of digital or virtual money that is used via the internet to buy goods and services. It can also be sued as a vehicle for speculation, which is not a desirable attribute for its function as a form of money or currency.
The cryptocurrencies we hear about are based on blockchain, which has been described as a “distributed ledger enforced by a disparate network of computers.” Cryptocurrencies are not issued by any central authority and are therefore said to be immune from government manipulation or interference.
They use cryptography (i.e., algorithms) to encrypt transactions to make them secure over the internet.
Cryptocurrencies are said to be difficult to counterfeit because of this encryption.
Bitcoin is considered to be the first blockchain cryptocurrency. There are many ?ƒlomore blockchain cryptocurrencies today. Cryptocurrencies make it easy to transfer funds directly between two parties in a transaction without the involvement of a bank or credit card companies. Cryptocurrencies use cryptographic “”keys”” to facilitate transactions. A user’s account address (or “wallet”), has the public key, and the private key is essentially used in place of a signature for transactions.
How do Cryptocurrencies Work?
Cryptocurrencies work using a technology called blockchain. Blockchain is decentralized, i.e., spread across many computers. Blockchain is used to store, manage, and record transactions an online ledger of all the transactions that have ever been conducted using the blockchain. Part of the appeal of this technology is its security, especially from the government.
Every new block or transaction to be added to the blockchain must be verified by a majority of the ledgers of each user on the market. Forgery is almost impossible. Also, there is no central authority, government, or corporation that has access to your funds or your personal information.
Blockchain also may be used for online voting and crowdfunding, as well as by banks to lower transaction costs by making payment processing more efficient. Because of the anonymity, blockchain can also be used for illicit activities such as money laundering.
Since prices are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely. However, plenty of research has been undertaken to identify the fundamental price drivers of cryptocurrencies. Bitcoin has indeed experienced some rapid surges and collapses in value, reaching as high as $19,000 per bitcoin in December of 2017 before returning to around $7,000 in the following months.
Cryptocurrencies are thus considered by some economists to be a short-lived fad or speculative bubble. There is a concern mainly that the currency units, such as bitcoins, are not rooted in any material goods. Some research has identified that the cost of producing a bitcoin, which takes an increasingly large amount of energy, is directly related to its market price.
Cryptocurrencies’ blockchains are secure, but other aspects of a cryptocurrency ecosystem are not immune to the threat of hacking. In Bitcoin’s 10-year history, several online exchanges have been the subject of hacking and theft, sometimes with millions of dollars worth of ‘coins’ stolen. Still, many observers look at cryptocurrencies as hope that a currency can exist that preserves value, facilitates exchange, is more transportable than hard metals, and is outside the influence of central banks and governments.
Different Types of Cryptocurrency
Bitcoin is the most widely used cryptocurrency, though there are many types of cryptocurrencies other than Bitcoin. They are sometimes called altcoins, with some cryptocurrencies are more private than others. Bitcoin is said to be less anonymous than more privacy-oriented altcoins, such as Dash, ZCash, or Monero, which are more difficult to trace.
How Do You Invest in Cryptocurrencies?
The most popular way to purchase a cryptocurrency is on a cryptocurrency exchange, such as Coinbase, GDAx, and Bitfinex. These exchanges allow you to buy cryptocurrencies with a debit card. There are also more than 4,000 cryptocurrency ATM locations in 76 countries today. Investors can use them to purchase Bitcoin and send it to their wallet.
What are the Rules and Regulations Governing Cryptocurrencies?
In the United States, as of June 2019, only fourteen states are either considering or have promulgated some cryptocurrency regulations. At the federal level, the commodities futures trading commission (“CFTC”) has control in place, as does the SEC. Also, regulations are having to do with tax and financial transparency and crimes.
Is Bitcoin a Good investment?
There is no SEC-registered exchange for Bitcoin. As we have seen, Bitcoin is a highly speculative and volatile investment. Investors and traders can reap huge gains as well as losses. As an investment, Bitcoin would be unsuitable for all but the most aggressive and risk-tolerant investors.
As a rule of thumb, as with any highly speculative and volatile investment, unless you are an expert capable of analyzing and understanding the potential risks and benefits of Bitcoin, and can afford to lose your entire investment or a substantial part of it, Bitcoin should not be considered as a good investment.