Cryptocurrencies are digital bits of code that promise to revolutionize financial infrastructure. They streamline existing monetary architecture by decentralizing the way money moves between transacting parties and allow people to exchange value independently of intermediary institutions, such as banks.
These digital assets are built on blockchain technology, a distributed ledger enforced by a disparate network of computers that make it nearly impossible to counterfeit or double spend. Many experts believe blockchain and cryptocurrencies could eventually replace traditional currencies, securities, and other financial instruments.
A cryptocurrency’s price is determined by market demand and speculation. Its underlying technology can also be volatile, which makes it hard to predict its long-term value. For this reason, a prudent investment strategy should include diversification to mitigate risk.
Despite their rapid rise, cryptocurrencies face a number of challenges, including security and scalability. Cybercriminals have targeted the industry, and some cryptocurrencies have lost value due to hacking and regulatory concerns. Still, the promise of a global marketplace free of central authority holds appeal for some investors.
The first cryptocurrency to catch on, bitcoin, is an example of how a cryptocurrency works. It uses a peer-to-peer network to verify and validate transactions using technologies derived from computer science and cryptography. The network identifies a currency holder with two keys: one public, such as an account number; the other, private, which is required to complete a transaction. For example, if Mehrnaz wants to buy goods from Mary, she sends her Bitcoin to Mary’s address, and a decentralized consensus is achieved by network members that the funds are in the right hands before they’re added to the blockchain.
Some cryptocurrencies also use mining, which requires computers to solve complicated cryptography puzzles in order to mine and reward the currency’s holders. The process can consume massive amounts of energy, which critics point to as a potential contributor to climate change. Bitcoin, the most popular of these digital assets, has a capped limit of 21 million coins. Newly minted Bitcoins are created every 10 minutes, and as the number of available coins decreases, their price is expected to increase.
Another challenge is that cryptocurrencies do not come with the same legal protections as credit cards, so users must exercise caution when purchasing or trading them. If you make a purchase with cryptocurrency, you have no legal recourse if it turns out to be defective or scammed, and you may not be able to get your money back.
Always research a cryptocurrency before buying, and consider using a service that provides secure cold storage for your holdings. Avoid storing your cryptocurrency on an exchange, which is vulnerable to hackers and other threats. Finally, never respond to unsolicited messages that ask for payment in cryptocurrency. No legitimate business or government will ever solicit you to pay with cryptocurrency. If someone tries to contact you by text, email, or social media and promises you big returns on your investment, it’s probably a scam. Legitimate investment opportunities will be transparent and easy to verify, so look for information like ratings, reviews, and price predictions before making a decision.