The return of social gatherings has spurred a resurgence in small talk and the topic at the heart of many discussions? Cryptocurrency. If you want to be in on the conversation but need a basic understanding of what everyone is talking about, this article is for you.
What is Cryptocurrency?
The words crypto (data encryption) and currency (medium of exchange) are merged to describe a form of payment that can be exchanged online for goods and services. It serves as ordinary money, like dollars and euros, but only exists in electronic form. In other words, you can’t stuff your vegan wallet with cryptocurrency.
How it Works
Cryptocurrency works a lot like bank credit on a debit card. Both are supported by complex systems that allow you to send and receive currency electronically. The main difference is that instead of banks and governments issuing the currency and tracking its movement, cryptocurrencies use a technology called blockchain, a digital ledger of transactions that are then linked to form a chain of information.
How do you store and manage your digital assets? With a “cryptocurrency wallet.” Basically, there are apps you can run on a smartphone or computer. But if you’re the kind of person who really enjoys having stuff of value in your wallet, you can buy a physical device that will run the app and serve as your “digital” purse.
It’s estimated that there are more than 10,000 different types of cryptocurrency falling into one of two categories: coins, such as Bitcoin and altcoins, and tokens.
Let’s start with coins. Bitcoin is by far the most popular of the bunch and its price movements significantly impact the rest of the crypto market. Bitcoins are created by a process known as “mining.” A Bitcoin miner receives Bitcoins as a reward for completing blocks of verified transactions which are added to the blockchain. All other coins are called altcoins; these include Dogecoin and Peercoin.
Tokens, on the other hand, are created and given out through an initial coin offering, very much like issuing a new stock. According to Liquid, a builder of cryptocurrency ecosystems, “tokens enable the transfer of value. However, in most cases, a digital token does have some additional powers than being a medium of payment. Anyone can create digital tokens to fulfill specific functionalities. For instance, a privacy-focused Brave browser uses the Basic Attention Token (BAT) to reward its users for browsing the web. Customers get paid in BAT when they view advertisements from publishers who have partnered with the Brave browser.”
Range of Purposes
So far, this doesn’t really sound like the makings of a riveting happy hour conversation. Yes, you can own and use cryptocurrency for a wide range of purposes, but the real conversation is about who is making money trading crypto. Maybe you’ve heard people brag about the outrageous profits they’ve made in the crypto market. Very few of these people fess up to the amounts they’ve lost.
If you’ve stayed on the sidelines watching all the action but are now interested in entering the crypto fray, here are some things to consider:
- According to The Motley Fool, “cryptocurrencies are far riskier than most stocks because they’re a relatively new type of investment. We’re in uncharted territory right now, so it’s uncertain whether cryptocurrencies will find a place in society or whether they’ll fall by the wayside in a few years. This uncertainty makes crypto a high-risk investment.”
- They are volatile, so you need to be prepared for major shifts in market sentiment that could lead to sudden, sharp moves. Values have increased and decreased by over thousands of dollars in a single day.
- Cryptocurrencies are currently unregulated by both governments and central banks.
- Digital wallets are not immune to hackers, and if you forget your password, you may have no way of accessing your account.
- Cryptocurrencies were not designed to be investments. They don’t pay interest or dividends, and hundreds of them have come and gone already.
If you do decide to be an active participant in the crypto chat, consider only committing a very small part of your portfolio. Make sure to use an established crypto exchange that offers strong security standards, low costs, educational resources, and great customer service. If you opt to use crypto online, consider doing so through a virtual private network to make sure your online transactions are secured and encrypted. And lastly, keep this article handy as you begin to navigate the world of crypto.