Cryptocurrencies are a hot investment topic. Despite the recent volatility, many believe in their potential to change how we transfer money online. But before you buy or sell, understand what cryptocurrencies are and how they work.
Unlike traditional currencies, cryptocurrencies are not backed by governments or central banks. Instead, their value comes from supply and demand. They use technologies derived from computing and cryptography to create ledgers, known as blockchains, that are maintained across a decentralized network of computers. These ledgers make it nearly impossible to spend the same cryptocurrency twice, and are immutable. Cryptocurrencies are often created through a process called mining, in which computer rigs compete to solve complex math problems that verify and update the blockchain. Miners are rewarded with new cryptocurrency in exchange for their services. Different cryptocurrencies may use different methods for minting and creating their tokens, but the overall purpose is the same: to provide a mechanism for transacting without the need for an intermediary.
The most well-known cryptocurrency is Bitcoin, which has a market capitalization of more than $1 trillion. But there are thousands of others, including Ethereum, Litecoin and Tezos. Some use the same technology as Bitcoin, while others add unique features that enable them to do more than just transfer value.
Some of these unique features include:
Portability
Cryptocurrencies aren’t tied to any particular financial institution or government, meaning that your holdings are portable, regardless of what happens to the global finance system’s major intermediaries. This portability makes it easy to transfer money globally, near-instantly and for a low fee.
Irreversibility
Transactions on the Bitcoin, Ethereum and Tezos networks are published publicly on their respective blockchains, making it nearly impossible for hackers to manipulate them. Moreover, the lack of a central authority means that your funds aren’t vulnerable to censorship, which has become an issue in certain areas of the world.
Digital Currency and Transparency
Because cryptocurrencies are built on transparency, there’s a lot of data on the industry available on websites like CoinMarketCap. Knowing a protocol’s market capitalization, the number of active users and whether or not it’s been adopted by businesses can help you decide if it’s worth your time.
Other Use Cases
As the popularity of cryptocurrencies grows, more and more uses are being found for this alternative form of money. One of the most promising applications is remittance, where the speed and low costs of crypto transactions could lead to a paradigm shift in the way that people send money around the world. In addition, the ability to transfer value between countries anonymously and with little friction has helped to empower dissidents in authoritarian states.