Cryptocurrency is digital money that eliminates the need for middlemen like banks. It uses cryptography to secure transactions and operate on a transparent, distributed ledger called blockchain, which is open to anyone to join. Unlike traditional assets, cryptocurrencies can be bought and sold instantly online for low fees.
The most famous example of cryptocurrency is Bitcoin, which rose to prominence in 2017 and now has a market capitalization of over $70 billion. But there are thousands of other cryptocurrencies, many of which are similar to Bitcoin but with new features or based on different technology.
Most people are aware that cryptocurrencies are volatile, and their prices often rise and fall significantly. Some have even lost money invested in them. However, fewer understand the underlying technology that makes it possible for transacting parties to exchange value and money without intermediaries.
Unlike fiat currencies, such as the US dollar and the Euro, cryptocurrencies are not issued by central banks or governments and are instead managed by networks of computers running free, open-source software. Typically, these computers are known as nodes and each one hosts a copy of the cryptocurrency’s blockchain ledger. Nodes validate and relay transactions, and are rewarded with newly minted coins in return for their services. The nodes also verify that a transaction is authentic by solving cryptography puzzles.
This process is called mining and is how most cryptocurrencies are created. Miners use computer power to solve complex mathematical problems, which are broadcast across the network. The first to solve the problem earns a reward of new coins. These coins can then be traded on exchanges, or used to buy goods and services. In addition to mining, some cryptocurrencies are created through a process known as mining pools. These pools combine the computing power of multiple computers to solve difficult cryptography puzzles and earn rewards.
While some people are buying and selling cryptocurrencies as investments, others are using them to send money to loved ones around the world. This is made possible by the fact that cryptocurrency transfers are fast and cheap, especially when compared to other methods such as wire transfers, which can take three to five days or more and require identification verification.
In addition to volatility, there are other risks involved with cryptocurrencies. Regulatory risk is a concern, as some countries have banned their use and others are looking to do so. Counterparty risk is also a factor, as many investors and merchants rely on third-party exchanges or custodians to store and safeguard their cryptocurrency. If these entities are hacked, they can lose or steal cryptocurrency, which could impact prices.
If you’re thinking of investing in cryptocurrencies, it’s important to diversify your portfolio. This means spreading your investment across different cryptocurrencies rather than just putting all of your money into the most well-known coin, such as Bitcoin. Diversification can help to minimise the impact of price fluctuations. Finally, remember that cryptocurrency payments are usually not reversible, so you should only use them with trusted parties.