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What is Cryptocurrency

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Last editedSept 20212 min read

Cryptocurrency is a regular headline grabber, usually when the value of one of the more popular types of cryptocurrency – such as bitcoin – reaches a new high. Despite this publicity, many people still struggle to understand what cryptocurrencies are, how they can be purchased and whether they represent a good investment. This is our attempt to answer a few of those questions.

How does cryptocurrency work?

Cryptocurrency is a form of digital payment that can be used to purchase goods and services online. It is underpinned by a technology called blockchain, which is a form of database that stores information across multiple computers in a manner that makes it accessible but completely secure. 

Once a transaction has been recorded as part of a blockchain it is extremely difficult for the details and date of that transaction to be altered. It is this inbuilt security that helps to explain the appeal of cryptocurrencies to many people. 

How many cryptocurrencies are available?

Currently, more than 6,700 cryptocurrencies are being publicly traded, although the number is going up all the time, as new cryptocurrencies are launched using initial coin offerings (ICOs). Although the price of a cryptocurrency such as bitcoin tends to fluctuate wildly, the website CoinMarketCap currently puts the total value of all bitcoins in circulation at $892 billion.   

Popular cryptocurrencies currently available include the following: 

  • Bitcoin

  • Ethereum

  • Tether

  • Binance Coin

  • Cardano

  • Polkadot

  • XRP

  • Litecoin

  • Chainlink

  • Bitcoin Cash

Factors that drive the popularity of cryptocurrencies

There are a number of reasons why cryptocurrencies are currently growing in popularity. One of these is simply that investors view them as representing the currency of the future and want to invest in them before they become more widespread and hence much more valuable. Another factor is the technology which underpins them. 

Most appealing of all for many people is the fact that cryptocurrency payments are made directly from peer to peer without the intervention of any banking platform. When no central banks control the supply of cryptocurrencies, it means that the value of a currency can’t be reduced via inflation or macroeconomic measures such as quantitative easing. 

Another plus-point for many users of cryptocurrencies is the fact that the decentralised nature of the blockchain technology underpinning the currencies means that it is more secure than many traditional payment systems.   

Should I invest in cryptocurrencies?

Cryptocurrencies represent speculative tools rather than genuine investments. The reason for this distinction is that a company that you’ve invested in may increase in value over time because it operates in a manner that increases cash flow and profitability. A cryptocurrency, on the other hand, will only increase in value if the investor can ultimately find someone willing to pay more for it than they did initially. 

One factor that militates against regarding cryptocurrencies as a safe investment is the lack of stability they offer. At the time of writing (March 2021), for example, bitcoins are trading at a price of more than $47,000, but a previous high of $20,000 in December 2017 was followed by the price dropping down to $3,200 by December 2018. Anyone opting to invest in cryptocurrencies has to be willing to cope with the risk of this kind of violent instability.    

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