What Is Cryptocurrency?

A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers.

At its core, cryptocurrency is decentralized digital money designed to be used over the internet. Bitcoin, which launched in 2008, was the first cryptocurrency, and it remains by far the biggest, most influential, and best-known. In the decade since, Bitcoin and other cryptocurrencies like Ethereum have grown as digital alternatives to money issued by governments.

The Basics

• A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.
• The advantages of cryptocurrencies include cheaper and faster money transfers and decentralized systems that do not collapse at a single point of failure.
• The disadvantages of cryptocurrencies include their price volatility, high energy consumption for mining activities, and use in criminal activities.
• The most popular cryptocurrencies, by market capitalization, are Bitcoin, Ethereum, Bitcoin Cash and Litecoin. Other well-known cryptocurrencies include Tezos, EOS, and ZCash. Some are similar to Bitcoin. Others are based on different technologies, or have new features that allow them to do more than transfer value.
• Crypto makes it possible to transfer value online without the need for a middleman like a bank or payment processor, allowing value to transfer globally, near-instantly, 24/7, for low fees.
• Cryptocurrencies are usually not issued or controlled by any government or other central authority. They’re managed by peer-to-peer networks of computers running free, open-source software. Generally, anyone who wants to participate is able to.

Advantages to Cryptocurrency

Transferability

Crypto makes transactions with people on the other side of the planet as seamless as paying with cash at your local grocery store.

Privacy

When paying with cryptocurrency, you don’t need to provide unnecessary personal information to the merchant. Which means your financial information is protected from being shared with third parties like banks, payment services, advertisers, and credit-rating agencies. And because no sensitive information needs to be sent over the internet, there is very little risk of your financial information being compromised, or your identity being stolen.

Security

Almost all cryptocurrencies, including Bitcoin, Ethereum, Tezos, and Bitcoin Cash are secured using technology called a blockchain, which is constantly checked and verified by all other machines in the network that share that information.

Portability

Because your cryptocurrency holdings aren’t tied to a financial institution or government, they are available to you no matter where you are in the world or what happens to any of the global finance system’s major intermediaries.

Transparency

Every transaction on the Bitcoin, Ethereum, Tezos, and Bitcoin Cash networks is published publicly, without exception. This means there’s no room for manipulation of transactions, changing the money supply, or adjusting the rules mid-game.

Irreversibility

Unlike a credit card payment, cryptocurrency payments can’t be reversed. For merchants, this hugely reduces the likelihood of being defrauded. For customers, it has the potential to make commerce cheaper by eliminating one of the major arguments credit card companies make for their high processing fees.

Safety

The network powering Bitcoin has never been hacked. Basically the technology of interconnection and distribution of data insures that in order to snipe the system and steal Bitcoin you’d have to hack over 51% of the nodes on the network holding the same data. That’s nearly impossible given the scale – much more difficult than breaking into your Bank of America account.

How does cryptocurrency work?

Bitcoin is the first and most well-known, but there are thousands of types of cryptocurrencies. All, however, are based on an idea called the blockchain, which is key to understanding how cryptocurrency works.

• At its most basic, a blockchain is a list of transactions that anyone can view and verify. The Bitcoin blockchain, for example, is a record of every time someone sends or receives bitcoin. This list of transactions is fundamental for most cryptocurrencies because it enables secure payments to be made between people who don’t know each other without having to go through a third-party verifier like a bank.
• Blockchain technology is also revolutionary because it has many uses beyond cryptocurrency. Given the security, transparency, and now it’s widespread adoption blockchains are being used to improve sharing records of all types, and increased internet privacy, and added features for internet service among many others.
• The blockchain ledger is split across all the computers on the network, which are constantly verifying that the blockchain is accurate. This means there is no central vault, entity, or database that can be hacked, stolen, or manipulated.

What Is the Point of Cryptocurrency?

Cryptocurrencies are a new paradigm for money. Their promise is to streamline existing financial architecture to make it faster and cheaper. Their technology and architecture decentralize existing monetary systems and make it possible for transacting parties to exchange value and money independently of intermediary institutions such as banks.

Why invest in cryptocurrency?

Online exchanges like Coinbase make buying and selling cryptocurrencies super easy and secure.

• It only takes a few minutes to create an account, and you can buy cryptocurrency using your debit card.
• Your crypto investment can be as large or small as you’d like, since you can buy fractional coins.
• Many digital currencies, including USD Coin and Tezos, offer holders rewards just for having them.
• On Coinbase, you can earn 1% APY on— that’s much higher than most traditional savings accounts.
• You can also earn up to 5% APY when you stake Tezos on Coinbase. 
• Unlike stocks or bonds, you can easily transfer your cryptocurrency to anyone else or use it to pay for goods and services.
• Millions of people hold digital currencies as part of their investment portfolios as a method to diversify.

Takeaways

• Cryptocurrencies is a transformative technology that could revolutionize a number of industries.
• Because they cannot be printed or seized, cryptocurrencies may also provide a safe store of value.
• Cryptocurrencies remain highly speculative, and there is no guarantee that they will ever be widely accepted, trusted and used.
• There are several complex security protocols that should be followed carefully before buying cryptocurrency.

Although there are many reasons to be skeptical of cryptocurrency, many traditional investors are adding digital currencies to their portfolios. The blockchain has the potential to expand , and have wide adoption in the near future with early investors reaping the benefits – much like they did during the World Wide Web revolution.

However, supporters of digital currencies should be careful to understand the risks of cryptocurrency before they start investing. Be sure to thoroughly research these new investments, and to understand the common pitfalls that could befall novice investors.

Excerpts taken from Investopedia.com and Coinbase.com – two great websites to learn more about digital currency investing.