Someone in your circle is talking about cryptocurrency, or you’ve seen it on the news. You might be curious about this new investment, but you’re not sure what it is or how it works. Or maybe you want to learn how to create your own, or just know what to ask before investing in it.
A cryptocurrency is a digital asset that uses computer code to operate somewhat independently of a central party. In other words, it’s like a stock or farmland, but without the need for a corporation or government to manage it. Instead, it relies on a complex technology called blockchain that records and verifies transactions.
Bitcoin is the most well-known example, but there are thousands of cryptocurrencies that have been developed for everything from sending money to friends and family to buying things online. Some are designed to function as currency, while others are intended as stores of value or means to participate in specific software programs. Some cryptocurrencies are stable, meaning their values are designed to stay the same, while others are volatile.
Unlike traditional currency in paper bills and coins that you can carry with you, most cryptocurrencies are digital and stored in a digital wallet on your phone or computer. When you buy something with cryptocurrency, the transaction is recorded in a public ledger called a blockchain. This ledger is very secure, making it difficult to hack and providing a proof of purchase that can be verified. It’s also very fast, typically much faster than a wire transfer.
Another appeal of cryptocurrencies is that they are often designed to be anonymous, which can make it harder for governments and businesses to regulate or punish users. In fact, ransomware attackers are increasingly demanding payments in cryptocurrency to unlock computers, and drug cartels use them as a way to hide their illegal activities. In addition, there is an active underground market in cryptocurrencies where criminals can buy and sell illicit goods and services.
Cryptocurrencies are not guaranteed to increase in value, and there is no guarantee that you will get back what you invest. That’s why it is important to diversify your investments and spread them across several different cryptocurrencies.
Aside from price, other factors to consider when choosing a cryptocurrency include its purpose, how it’s used and whether it’s regulated. It’s also helpful to look at a cryptocurrency’s website and read independent articles on it before you decide to invest in it.
One of the best ways to understand a cryptocurrency is to think about it as a token that enables you to do something, such as play a video game. If you have a lot of tokens, you can do more of that activity. Similarly, a lot of people invest in cryptocurrency with the hope that it will rise in value. But, before you do, you need to fully understand what makes it tick. Then you can determine if it’s right for you.