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What is cryptocurrency?

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Last editedApr 20233 min read

From Dogecoin to Ethereum, cryptocurrencies are constantly in the news. So, what is cryptocurrency exactly, and does it make a good investment? We’ll go beyond Bitcoin in this cryptocurrency guide to outline a few of the other contenders and their potential value.

Cryptocurrency explained

A cryptocurrency is any digital currency you can use online to purchase goods or services. Sometimes referred to as “altcoins” or alternative coins, these currencies work using a technology called blockchain. Blockchain manages and records the online transactions in a decentralised system. Because it’s decentralised, it offers a higher level of security and near-instantaneous transaction verification.

It’s estimated that the total cryptocurrency values are currently over $2.2 trillion, with Bitcoin making up $1.2 billion of this figure alone. Like traditional fiat money, cryptocurrency creates a store of value based on its widespread acceptance. This value can be used not only to pay for goods and services, but also to pay for additional currencies. Yet unlike traditional currency, there’s no central authority involved to back cryptocurrency, and crypto assets have the same value from country to country which makes them easier for international transactions.

Another feature of cryptocurrency that sets it apart from fiat money is that digital currency is infinitely divisible. While you can only divide the U.S. dollar into 100 parts, or cents, you could purchase 0.0000001 Bitcoin.

Comparing all cryptocurrencies

It would be impossible to name all cryptocurrencies in this guide, as there are over 6,700 and counting. New companies are added to the list every day. Here are a few of the most frequently used companies which you might see listed:

  • Bitcoin

  • Ethereum

  • Ripple

  • Cardano

  • Litecoin

  • Uniswap

  • Polkadot

  • Dogecoin

Some are more established than others, so it’s a good idea to compare prices and sales histories before investing.

Understanding cryptocurrency benefits

Cryptocurrencies like those mentioned above offer potential benefits to businesses, consumers, and investors alike. One key benefit is that cryptocurrency offers an alternative to central banking systems. While central banks can fall prey to inflation that reduce monetary value, cryptocurrencies stand on their own.

Another major benefit is related to the use of blockchain technology. Because this system is decentralised across multiple computers, it’s more secure than traditional systems that rely on a central platform.

Understanding cryptocurrency and investing

Cryptocurrency values can vary widely, and many are untested. Like traditional currencies, they don’t generate any cash flow on their own. They need to increase in value before you sell if you’re going to make any profit.

When you invest in cryptocurrency, you’re banking on perceived value over time which could rise or fall; there’s no guarantee to future value. Yet many entrepreneurs expect cryptocurrency to be the future, in which case the speculation might be worth it. If you’re interested in investing, here’s how to get started.

1. Acquire a cryptocurrency wallet.

To buy and sell your currency of choice you’ll need a designated blockchain-driven wallet that records and verifies each transaction. These take the form of online apps or accounts on a cryptocurrency exchange. Each wallet comes with its own addresses that let the wider network know where to send the altcoins. One example is Coinbase, but you can also use a number of online exchanges including eToro and TradeStation. An indication that cryptocurrency has hit the mainstream is the fact that you can now even use your PayPal account as a wallet to buy, hold, or sell altcoins.

2. Make your purchase.

You can purchase Bitcoin using U.S. dollars, but others will only be available for purchase with other established cryptocurrencies. In other words, you might need to buy some Bitcoin to get started. Each altcoin comes with its own set of standards.

3. Read the fine print.

Before you make your purchase, be sure to read up on the company’s details. Find out who owns the company, and if there are any other major investors involved. Some cryptocurrency companies offer shares, while others simply sell tokens. If you purchase a stake in the company, you’ll get to reap the benefits if value rises.

The bottom line

Purchasing cryptocurrency comes with a high level of risk in comparison to other investments and should be looked at as a speculative activity. There are less risky ways to diversify your portfolio, including purchasing shares in established companies. At the same time, cryptocurrency has grown as a technology for over a decade now and could point the way to a decentralised future.

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