Cryptocurrency

 

A cryptocurrency is a digital or virtual currency that is safeguarded by encryption, which makes it nearly impossible to counterfeit or double-spend.

A cryptocurrency is a type of payment that can be exchanged\sonline for products and services. Many companies have issued their own currencies, typically termed tokens, and these can be traded precisely for the good or service that the company provides. Think of them like you would arcade tokens or casino chips. You’ll need to exchange actual dollars for cryptocurrency to access the good or service.

 

Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a distant network of computers.

 

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A defining aspect of cryptocurrencies is that they are generally not issued by any central authority, making them potentially impervious to government meddling or manipulation.

 

Cryptocurrencies work via a technology called blockchain. A blockchain is a decentralized system spread across multiple computers that govern and record transactions. Part of the appeal of this technology is its security.

 

 

 

Key Takeaways

 

A cryptocurrency is a sort of digital asset based on a network that is dispersed among a large number of computers. This decentralized structure allows them to exist outside the power of governments and central agencies.

 

The phrase "cryptocurrency" is derived from the encryption techniques that are employed to safeguard the network.

 

Blockchains, which are organizational systems for preserving the integrity of transactional data, is a crucial component of several cryptocurrencies.

 

Numerous experts believe that blockchain and associated technology will disrupt many industries, including finance and law.

 

Cryptocurrencies draw criticism for a number of reasons, including their usage for unlawful operations, exchange rate volatility, and the vulnerabilities of the infrastructure behind them. However, they also have been hailed for their portability, divisibility, inflation resistance, and transparency.

 

 

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Advantages and disadvantages

 

Cryptocurrencies make it easier to move funds between two parties in a transaction; these transfers are facilitated by the use of public and private keys for security considerations. These fund transactions are done with minimum processing fees, allowing users to avoid the exorbitant fees paid by most banks and financial institutions for wire transfers.

 

Central to the genius of Bitcoin is the blockchain it uses to store an online ledger of all the transactions that have ever been conducted using bitcoins, providing a data structure for this ledger that is exposed to a limited threat from hackers and can be copied across all computers running Bitcoin software. Many experts regard this blockchain as having vital uses in technology, such as online voting and crowdfunding, and big financial firms such as JP Morgan Chase see potential in cryptocurrencies to cut transaction costs by making payment processing more efficient.

 

However, because cryptocurrencies are virtual and do not have a central repository, a digital coin balance can be wiped out by a computer crash if a backup copy of the assets does not exist. Since prices are based on supply and demand, the rate at which a cryptocurrency can be traded for another currency might fluctuate dramatically.

 

Cryptocurrencies are not fully immune to the threat of hacking. In Bitcoin's brief history, the corporation has been exposed to over 40 thefts, including a handful that exceeded $1 million in value. Still, many observers look at cryptocurrencies as hope that a currency may exist that protects value, enables interchange, is more transportable than hard metals, and is outside the authority of central banks and governments.

Cryptocurrency types

The first blockchain-based cryptocurrency was Bitcoin, which today remains the most popular and most valuable. Today, there are dozens of different cryptocurrencies with unique functions and features. Some of these are clones or forks of Bitcoin, while others are new currencies that were established from the start.

Bitcoin was launched in 2009 by an individual or group known by the pseudonym "Satoshi Nakamoto." As of November 2021, there were about 18.8 million bitcoins in circulation with a total market cap of around $1.2 trillion, with the amount updated periodically. Only 21 million bitcoins will ever exist, limiting both inflation and manipulation.

Some of the rival cryptocurrencies developed by Bitcoin’s popularity, dubbed "altcoins," are Solana, Litecoin, Ethereum, Cardano, and EOS. By November 2021, the aggregate value of all the cryptocurrencies in existence is over $2.4 trillion—Bitcoin currently comprises around 42% of the overall value.

Although cryptocurrency bills itself as a type of money, the Internal Review Service (IRS) considers it a financial asset or property. And, like with most other investments, if you enjoy capital gains in selling or trading it, the government wants a portion of the earnings. On May 20, 2021, the U.S. Department of the Treasury announced a proposal that would require taxpayers to notify the IRS of any bitcoin transaction of $10,000. How exactly the proceeds would be taxed—as capital gains or ordinary income—depends on how long the taxpayer kept the bitcoin.

 

Why are cryptocurrencies so popular?

Cryptocurrencies appeal to their followers for a variety of reasons. Here are some of the most popular:

Supporters consider cryptocurrencies such as bitcoin as the currency of the future and are racing to buy them now, presumably before they become more valuable.

Some supporters prefer the idea that cryptocurrency removes central banks from managing the money supply since, over time, these institutions tend to erode the value of money via inflation.

Other backers enjoy the technology underpinning cryptocurrencies, the blockchain because it’s a decentralized processing and recording system and can be more secure than traditional payment systems.

Some speculators enjoy cryptocurrencies because they’re going up in value and have little interest in the currencies’ long-term adoption as a mechanism to move money.

 

Are cryptocurrencies a good investment?

Cryptocurrencies may go up in value, but many investors consider them as simple guesses, not actual investments. The reason? Just like conventional currencies, cryptocurrencies have no cash flow, so for you to earn, someone has to pay more for the currency than you did.

That’s what’s called "the larger fool" idea of investment. Contrast that to a well-managed firm, which increases its value over time by growing the profitability and cash flow of the organization.

"For those who consider cryptocurrencies such as bitcoin as the currency of the future, it should be recognized that a currency needs stability."

Some famous voices in the investment community have cautioned would-be investors to steer clear of them. Of special relevance, famed investor Warren Buffett compared bitcoin to paper checks: "It's a highly effective way of moving money and you can do it anonymously and all that." A check is a method of transmitting money too. Are checks worth a whole lot of money? Just because they can transport money? "

For those who envision cryptocurrencies such as bitcoin as the money of the future, it should be remembered that a currency needs stability so that merchants and customers can establish what a fair price is for things. Bitcoin and other cryptocurrencies have been anything but stable throughout their history. For example, while Bitcoin traded at close to $25,000 in December 2017, its value suddenly plunged to as low as roughly $3,200 a year later. By December 2020, it was trading at record levels again.

This price volatility poses a conundrum. If bitcoins might be worth a lot more in the future, people are less inclined to spend and circulate them today, making them less sustainable as a currency. Why spend a bitcoin when it could be worth three times its current value in a year's time?

Tips for Beginners 

         1.         Learn the Basics: Where to buy cryptocurrency, where to store it, how to transfer it, etc.

         2.         Find a Secure Wallet: Keep your cryptocurrency secure. Cold storage, Exodus wallet, etc.

         3.          Research: Most important part of the investment process. Do your homework.

         4.         Diversify: You’ve heard don’t put all your eggs in one basket. That applies here. Diversify your portfolio into many cryptocurrencies.

         5.         Money Management: Learn to manage your investments correctly, and find a subscription to keep you up to date on everything cryptocurrency

How do I buy cryptocurrency?

While certain cryptocurrencies, like bitcoin, are available for purchase with U.S. dollars, others require that you pay with bitcoins or another cryptocurrency.

To acquire cryptocurrencies, you’ll need a "wallet," an online app that can retain your currency. Generally, you register an account on an exchange, and then you may transfer real money to acquire cryptocurrencies such as bitcoin or Ethereum.

Coinbase and Paxful are major cryptocurrency trading exchanges and swaps like Localcoinswap where you can establish both a wallet and buy and sell bitcoin and other cryptocurrencies. Also, a rising number of online brokers provide cryptocurrencies, such as eToro, Tradestation, and Sofi Active Investing. Robinhood offers free cryptocurrency trading (Robinhood Crypto is available in most, but not all, U.S. states). (Robinhood Crypto is available in most, but not all, U.S. states).

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How do I defend myself?

If you’re planning to acquire a cryptocurrency in an ICO, check the fine print in the company’s prospectus for this information:

Who owns the company? An identified and well-known owner is a great sign.

Are there other large investors that are investing in it? It’s a good sign if other well-known investors want a piece of the currency.

Will you possess a stake in the company or merely currency or tokens? This distinction is essential. Owning a stake means you get to partake in its earnings (you’re an owner), while buying tokens just means you're entitled to use them, like chips in a casino.

Is the currency already developed, or is the company looking to raise money to build it? The further along with the product, the less risky it is.

It might take a lot of work to comb through a prospectus; the more details it includes, the better your chances that it’s authentic. But even legitimacy doesn’t imply that the currency will succeed. That’s a whole different subject, and that demands a lot of market acumen.

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But beyond those worries, merely owning Bitcoin exposes you to the risk of theft as hackers try to infiltrate the computer networks that protect your assets. One high-profile exchange declared bankruptcy in 2014 after hackers stole hundreds of millions of dollars in bitcoins. Those aren’t normal dangers for investing in stocks and funds on major U.S. exchanges.

Disclosure: The author held no positions in the aforementioned securities at the original time of publication.