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What Is Cryptocurrency?

Cryptocurrency is digital money that uses encryption and blockchain technology to offer secure transactions. Unlike traditional fiat currencies like dollars, which derive their value from a country’s central bank and are backstopped by government monetary authorities, cryptocurrency networks are decentralized and don’t require any involvement from the global financial system. Instead, they’re governed by a set of software codes that make them resistant to fraud and hacking.

A cryptocurrency’s value is determined by its supply and demand. Supply is how many coins are available to purchase at a given time, such as the number of bitcoins in circulation. Demand is the societal desire to own those coins and use them in transactional activities, such as buying products or services. When these two factors are in balance, the value of a cryptocurrency is stable.

There are thousands of different cryptocurrencies on the market, but only a handful are truly successful and popular enough to have a real impact on the economy. The most famous is Bitcoin, which was the first digital currency. It was created in 2009 by an anonymous creator known only by the pseudonym Satoshi Nakamoto. In the years that followed, other developers built upon the Bitcoin foundation to create more advanced cryptos with new innovations such as faster payments and processes to allow for more transactions.

To maintain the integrity of a cryptocurrency network, blockchain technology verifies each transaction that occurs. It does this by rewarding participants with a small amount of the cryptocurrency for validating those transactions. This process is called mining, and it is how Bitcoin and other cryptocurrencies gain their value. In recent years, more blockchains have moved away from mining and toward a new process called “staking.” This rewards network participants who help verify transactions without needing to compete for limited resources like computer power.

Because a cryptocurrency’s value is not tied to a country or financial institution, it can be used around the world at any time of day or night, with very low or no transaction fees. This makes it a convenient way to send money overseas, for example, cutting out the cost of wire transfer fees. Some people enjoy traveling with crypto because it gives them a sense of pride to support an exciting new form of money that’s not tied to any specific country, and there is a growing community of “crypto nomads.”

Investing in cryptocurrency comes with unique risks, similar to investing in stocks or mutual funds. The regulatory environment is constantly changing, and a sudden crackdown by a government agency could damage the value of some cryptocurrencies or make it difficult to sell them. In addition, most investors rely on third parties such as exchanges and custodians to store their assets, which means they’re susceptible to theft or loss by these companies.

There are also risks related to the underlying technology, such as blockchain, which can be vulnerable to cyberattacks and other security threats. While most cryptocurrencies are secure, it’s important to learn as much as you can about any crypto you’re considering purchasing or holding.