Cryptocurrency is a form of digital money that uses encryption to transfer value. It has no central authority and is built on peer-to-peer networks. It is designed to be secure and fast, enabling global value transfer nearly instantly and for low fees.
Many people hold cryptocurrencies as investments. They buy them hoping that their price will rise, much like stocks or other assets. Others use cryptocurrencies to make payments online, in stores that accept them or with DeFi (decentralized finance) enterprises. Still, others are concerned that cryptocurrencies could be used to finance terrorism or for sanctions evasion.
The rapid growth of cryptocurrencies and DeFi enterprises has led to billions of dollars in transactions taking place in a largely unregulated sector. This has raised concerns about fraud, tax evasion, cybersecurity and other traditional financial risks. It has also challenged regulators to craft rules that limit these risks without stifling innovation.
One major issue facing cryptocurrencies is that they are not widely accepted as means of payment, and surveys suggest that only a small fraction of holders use them for this purpose. Another is that large fluctuations in prices can weaken their purchasing power as a store of value.
Cryptocurrencies are based on blockchain technology, which records transactions in groups called blocks. Each block contains a timestamp and a link to the previous block. It’s impossible to change the contents of a block unless the entire network agrees to do so.
Blockchain technology is also used for other applications, such as a distributed ledger that is publicly accessible and can verify the authenticity of documents. This technology is often cited as the reason why some cryptocurrencies have high valuations.
In addition to providing a medium of exchange, cryptocurrencies may serve as a store of value, a form of investment or an asset that can be used as collateral for loans. While the underlying technology is valuable, cryptocurrencies have significant volatility and regulatory issues.
Most cryptocurrencies are created by miners, who solve complex math problems to create and verify new blocks on the blockchain. The miners are rewarded with cryptocurrency tokens for their work. These tokens can then be traded for other currencies or products. Some cryptocurrencies are also backed by fiat, which gives them additional stability.
Cryptocurrencies can be bought on exchanges, which are businesses that facilitate the purchase and sale of cryptocurrencies at current market prices. They can also be stored in digital wallets, which are software programs that record the ownership of cryptocurrency units and allow them to be transferred between users. The wallets are managed by keys, which must be securely protected. If you buy a coin on an exchange, the company that facilitates your transaction will hold and manage the relevant keys. However, if you move your coins to a third-party service, you will be responsible for managing these keys. Some services offer additional features, such as the ability to earn passive income through a process called staking.