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Chances are good that you have heard about cryptocurrency in the last few years. If you follow finance, business, or tech news at all, it is almost impossible not to have heard about it. However, there is a big difference between hearing about something and understanding what it is, how it works, and if it makes sense for you to get involved with it.
If you don’t know much about cryptocurrency, don’t worry, you are definitely not alone. Most people who have heard of cryptocurrency but haven’t dived into it in a big way have plenty of questions. Here, we’ve gathered 5 of the most common cryptocurrency questions the average person asks about this new financial product and answered them to help get you up to speed.
The first question most people have (but are sometimes afraid to ask) is, what exactly is cryptocurrency? Cryptocurrency is a decentralized, secure, digital currency based on blockchain technology. That is a mouthful, but is easier to understand when you break down each element. The currency gets its name and its security level from the fact that it is secured with cryptography so it cannot be duplicated.
Decentralized means that the currency isn’t controlled or backed by a single entity like a central bank or government as is the case with traditional, fiat currency. Instead, a record of the transactions for each coin or token is kept on a network of computers around the world. That network uses blockchain technology to create and maintain a public ledger of each unit involved in each transaction. This record, or “block”, is connected by a “chain” showing the entire history of that unit’s transaction.
You have probably heard about cryptocurrency and bitcoin talked about in the same breath. What is the difference? Cryptocurrency is the overarching term for the entire category of digital currency. Bitcoin is the first, and still the most popular, form of cryptocurrency. Like leading brands in other industries (think Coke or Kleenex), bitcoin has become a term that is sometimes incorrectly used to refer to all cryptocurrency.
In addition to bitcoin, there are thousands of other cryptocurrencies on the market today. As of late 2020, there are north of 5,000 different types of these cryptocurrencies, referred to as “altcoins”. These coins get their name because they are an ALTernative to bitCOIN. These types of coins come in several different forms. Mining-based coins are similar to bitcoin and stablecoin are backed by a tangible asset like fiat currency to create less volatility. Other types of crypto currency include security tokens and utility tokens that function more like traditional stocks.
The real answer to this all-important question is that it depends on the individual investor, their risk tolerance, and how much they believe in cryptocurrency’s future. This answer is certainly not meant to constitute financial advice but many investors do see cryptocurrency as a good investment, even though they may disagree on what type of good investment it is.
Investors who think cryptocurrency is the future of money and financial transactions believe that investing in cryptocurrency is a good long-term investing strategy. The idea is that if an investor can pick the coin or coins that will eventually become widely adopted around the world, it will be incredibly lucrative.
On the other hand, other investors who think cryptocurrency is a good investment love it as a day trading asset where highly volatile trading markets can lead to big, quick, short-term profits. This also carries high risk, though, so it is definitely not for every investor. Ultimately, each investor must do their research and decide if cryptocurrency is a good investment for them. If you are interested in more on cryptocurrency day trading, Cove Markets' guide provides an overview of some common tools and strategies.
You can’t put cryptocurrency in your pocket because it is a digital currency and, although the currency itself is very secure, it is not immune from criminals trying to steal it. This is why the best way to store cryptocurrency is with a secure cryptocurrency wallet. This digital wallet is either a physical or online place where you keep the secure information (or private key) about your cryptocurrency stored. Several types of cryptocurrency wallets are available.
A hardware cryptocurrency wallet is a physical data storage unit, much like a USB stick, that you plug into your computer to store your cryptocurrency. These are by far the most secure type of wallets but they are also the most expensive. Software wallets include desktop wallets that can only be accessed from a specific computer, mobile wallets that can only be accessed from a specific mobile device, and web wallets that can be accessed from any web browser.
Each of these software wallets has its own plusses and minuses. Desktop, mobile, and software wallets are, respectively, most secure to least secure but also least portable and convenient to most portable and convenient.
Yes… sort of. Cryptocurrencies are currencies and, as such, are meant to be spent on things. You just need to find a vendor that accepts cryptocurrency. AT&T, Microsoft, Overstock.com, Cheapair.com, Virgin, and Wikipedia all accept cryptocurrency (mostly bitcoin) in some way. Although the trend for companies to consider accepting cryptocurrency is rising somewhat, other companies, such as Expedia, accepted it in the past but no longer do.
The other issue with spending cryptocurrency is volatility. Companies are squeamish about accepting it because they could see a huge drop in value. Consumers may be nervous about spending it because it could go the other way. An example of this was shared by the Winklevoss twins (of The Social Network fame) who bought a ticket to space through Richard Branson’s Virgin Galactic space travel company when bitcoin was worth around $800 a coin. However, due to volatility, the amount they paid for the $250,000 ticket in cryptocurrency is now worth roughly $3 million.
Hopefully, the answers to some, or all, of these cryptocurrency questions helped you gain a better understanding of what cryptocurrency is and how it works. Cryptocurrency is a very interesting form of currency and technology. It seems that it will be around for a long time. This learning more about it is worthwhile.
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