Cryptocurrency is a new way to store and exchange value that uses advanced coding techniques. It works on a decentralized public ledger technology called a blockchain.
One significant benefit is that it removes the requirement for intermediaries like banks and financial institutions. This makes it possible to send money across borders quickly and cheaply.
What is it?
Cryptocurrency is a digital currency allowing transactions and investments without involving a bank or other financial institution. It operates on a decentralized network using blockchain technology, which verifies and records transactions on an unchangeable ledger.
The value of a cryptocurrency is determined by market forces, which can lead to volatile price swings. Some cryptocurrencies are also designed to be stable and pegged to a particular asset, such as the U.S. dollar, making them more durable.
Cryptocurrency uses cryptography — advanced coding that protects transactions and account balances from hackers. The blockchain, a database that stores data in blocks, verifies cryptocurrency transactions by matching them with the previous block’s information. This way, if someone tries to change the blockchain’s data, other users can quickly identify the change and stop it from taking effect. This makes the blockchain a secure, decentralized network.
How does it work?
Cryptocurrency is a form of digital money that lives on the internet and is backed by computer codes. No central authority controls and issues it, unlike the Dollar, Euro, or British Pounds. Instead, cryptocurrencies get their value from the market.
Crypto transactions are recorded on a blockchain, an unchangeable ledger. Whenever a transaction is made, it is recorded on the blockchain along with its corresponding date and time. Then, everyone with a blockchain copy instantly updates their record to reflect the new transaction. This prevents double-spending.
Before adding them to the blockchain, miners check and verify cryptocurrency transactions using a verification method called proof of work or proof of stake. These verifiers are rewarded with cryptocurrency for their efforts.
How do I get started?
With the increasing popularity of cryptocurrency, numerous investors are interested in discovering how it operates as an investment asset class. But, as crypto’s value has skyrocketed, the concept can seem intimidating and confusing.
Cryptocurrency works by leveraging blockchain technology, which are public ledgers that can’t be altered once information has been added. This technology differentiates cryptocurrencies from other forms of money because no central authority controls them.
Instead, a group of individuals called verifiers verify transactions before adding them to a blockchain. These verifiers are rewarded with cryptocurrency for their efforts.
As a result, cryptocurrency’s value can be driven up or down by the actions of individual investors, similar to penny stocks. Because of this, investors should limit their cryptocurrency investments to a small percentage of their portfolios. This ensures that the investment won’t derail a client’s long-term financial plan should the value of cryptocurrencies plunge.
What are the risks?
Cryptocurrencies have risen from digital novelties to trillion-dollar technologies, yet they’re still in their infancy and prone to several risks. From regulatory concerns to technology shortfalls, there are a variety of factors that could hinder their growth and potentially undermine their value.
For example, the crypto mining process is energy intensive. This impacts the environment and can cause hardware failures and render investments useless. Additionally, cryptocurrencies can be hacked and stolen, with cyberattacks increasing in frequency and severity.
The distinctive nature of cryptocurrencies also makes them vulnerable to price volatility. It’s not uncommon for the value of a cryptocurrency to change dramatically in an hour, which can be intimidating for investors or expose them to loss. Moreover, because the asset class is so new, legal clarity does not exist regarding requirements, including taxation.
Resources:
https://www.bankrate.com/investing/how-to-invest-in-cryptocurrency-beginners-guide/
https://www.investopedia.com/investing-in-cryptocurrency-5215269
