Cryptocurrency is a medium of exchange that operates independently of traditional banking systems. It uses blockchain technology to create a decentralized, global network that allows people to exchange digital tokens representing value.
While some people see cryptocurrencies as investments, others use them to buy goods and services. Cryptocurrency is not backed by any central bank or monetary authority, and its value can fluctuate widely. This volatility can make it risky for investors, and some governments have banned or restricted its use.
A cryptocurrency’s price is determined largely by supply and demand. The number of coins that can be mined is limited by a computer algorithm, which drives up the price as more miners compete to solve the computational puzzles involved in mining them. Other factors driving price include the amount of computing power required to verify transactions, and the amount of energy used by miners. The speed at which transactions can be verified and added to the blockchain is also important.
Bitcoin is the first cryptocurrency to gain widespread popularity, but it’s not the only one. Many other “altcoins” are built on the Ethereum blockchain, including Ether (ETH), Litecoin (LTC), and many more. They may be designed to improve upon Bitcoin or serve a different purpose, such as being used in smart contracts.
In addition to the market-driven factors that influence a cryptocurrency’s price, its value can be influenced by illegal activity. Ransomware hackers, for example, often demand payment in cryptocurrency to restore compromised computer systems. Similarly, drug cartels are increasingly using cryptocurrencies to buy and sell illicit drugs and other goods. Governments are working to curb these activities by targeting the exchanges where cryptocurrencies can be sold for national currencies. These exchanges typically adhere to “know your customer” and other anti-money laundering requirements.
Another risk associated with cryptocurrencies is their unregulated nature. The rapid rise of cryptocurrencies and DeFi enterprises has created billions of dollars in transactions that occur in an unregulated sector, raising concerns about fraud, tax evasion, cybersecurity, and financial stability. The unregulated status of cryptocurrencies could limit the ability of central banks to set monetary policy by controlling the money supply.
Investing in cryptocurrency involves significant risks, and it’s important to research any investment opportunity thoroughly before investing. Always look for independent articles and reviews before making a purchase, and never click on a link sent to you in an unexpected text or email. Legitimate businesses and governments will not contact you to ask for payments in cryptocurrency. If you’re contacted by someone who claims to be from a business or government, search for their name online with words like “review,” “scam,” or “complaint.” It’s also a good idea to choose reputable training providers when learning about blockchain and cryptocurrency. Simplilearn’s course, Blockchain Explained, is a great place to start.