A cryptocurrency’s price can rise and fall dramatically, depending on demand, supply, news events, and other factors. As a result, it is risky to invest in, trade, or spend. It is important to research the technology behind a particular crypto before making an investment decision. Investors should always consider the associated legal and regulatory environment.
Cryptocurrency is a medium of exchange that uses blockchain and cryptography to transfer value without the need for a central authority. The most well-known cryptocurrencies are Bitcoin, Ethereum, and Bitcoin Cash, but there are many others. Cryptocurrency transactions are recorded on a public ledger, called a blockchain, which is protected by advanced encryption technologies. The Blockchain is constantly checked and validated by a network of computers, called miners, who are rewarded with new crypto for their work. This process prevents duplicate transactions and fraud.
The price of a cryptocurrency is determined by supply and demand, as well as the perceived utility of the coin. For example, some cryptocurrencies are backed by assets (like gold or fiat currencies), while others get their value from being used to purchase goods and services. Stablecoins are a type of crypto that attempts to limit volatility by pegging their value to an existing currency, such as the US dollar.
In the case of cryptocurrencies, it’s often difficult to determine what’s causing their price movements, as they’re not backed by any assets and aren’t issued or controlled by a government or financial authority. While the rapid ascent of cryptocurrencies and the emergence of DeFi have spurred regulators to begin crafting rules for this emerging sector, it’s still challenging for them to balance traditional financial risks with allowing for innovation.
Privacy
While credit cards require you to share your personal information with the merchants you buy from, most cryptocurrencies don’t. Instead, they’re secured with encryption technologies, which makes it nearly impossible for hackers to steal your funds or identity.
Portability
Since cryptocurrencies aren’t tied to a bank account or the global finance system’s major intermediaries, they can be transferred from one computer to another almost instantly. This eliminates the need for merchants to deal with expensive international fees and allows them to offer lower prices to their customers.
Security
The biggest benefit of cryptocurrencies is their high level of security. The blockchains that power them are backed by millions of computers around the world that validate and check each transaction. Because these networks are decentralized, it’s very difficult to tamper with the data on the blockchains.
The crypto market is largely unregulated, and even when regulations do exist, they vary widely by jurisdiction. While some governments have taken a hands-off approach, their rapid ascent and the emergence of DeFi have forced them to begin crafting rules for the sector. The challenge is to ensure that these regulations balance traditional financial risks with encouraging innovation. The SEC recently approved the first set of ETFs that include cryptocurrencies, which will help bring greater oversight to this emerging sector.