If you keep up with finance news at all, especially with regards to the online world and emerging technologies, then you may have heard of cryptocurrencies. Many people are becoming more and more interested in investing in cryptocurrencies, but others are unsure of what the currencies are or if they are genuinely valuable in any way.
What is a Cryptocurrency?
In very short terms, a cryptocurrency is a currency that is digital and that is not backed by any brokers. They are simply traded between consenting parties, and the trades are kept track of on a ledger. There are several different forms of cryptocurrencies, but they have the same major features in common, for the most part. These are:
- Global: There aren’t geographical borders for restrictions, in the sense that they are tied to a particular area or region. Cryptocurrencies are the same for different countries, and they can be traded freely within and between countries.
- Peer-to-peer: The currencies are traded digitally, from one person to another online.
- Digital: This is perhaps the feature of cryptocurrencies that makes them both so controversial and unique. The currencies exist solely online, and there is no physical form of them whatsoever. Some say this makes them useless and that they have no intrinsic value or security attached to them.
- Encrypted: When cryptocurrencies are traded, the parties are given nicknames or usernames instead of using their real name. This is where the ‘crypto’ part of the name comes from.
- Trustless: This basically means that there is no need for you to place your trust in anybody for the system for it to work. It is designed in such a way that this is simply not necessary.
- Decentralized: There are no banks or physical places to use cryptocurrencies, nor is there a central server where they are kept. All users of cryptocurrencies are responsible for the crypto that they have.
What is a Currency?
This concept can seem quite odd at first glance, so it is worthwhile delving deeper into the concepts of money and finance in general, in order to give them some context. Think about what money itself is. Currencies are different around the world, but money is essentially something physical, be it a coin or a note, that we have unanimously agreed is worth something, and we operate on that basis. For example, a $100 dollar note is ultimately a piece of paper, but it has value to all of us because we agree that it does.
If we put money in the bank, we cannot see that money, but we trust that it is in the bank and that the bank takes care of it for us. A bank is an example of what cryptocurrency users often refer to as a “trusted third-party system.” This is because it is a third party, whom we place our trust in, in this case largely due to their authority.
How is Cryptocurrency Different?
Cryptocurrency is different because it offers people the possibility to avoid relying on governments or banks for currency. In fact, such institutions offer no support in this instance, so it is actually a fundamental element of cryptocurrencies, in that sense. Two consenting users of cryptocurrencies simply send an agreed amount to each other via the internet, without the need for regulation or supervision from a third party. This of course has called into question the legality of the practice because it leaves people potentially vulnerable to being duped out of their money, in some cases.
However, cryptocurrencies have some inbuilt features which are designed to keep the system itself safer for users. They make use of a blockchain, which is a database that is shared by users. The blockchain makes record of all the transactions that happen using cryptocurrencies. It basically validates the transaction and keeps note of it in case the information is needed later. While it is not possible to see the information of the users who took part in the transaction, all transactions that take place using cryptocurrency can be seen via the blockchain.
Some people prefer cryptocurrency because they believe it is the best way for us to preserve our privacy when using money online. The only information that you need to give when you make an account to use a cryptocurrency is a public key and a private key, and the private key is like a password that only you have access to. While the system may have its flaws, it isn’t difficult to see how this is more private than providing an institution with your address and date of birth.
The Origins of Cryptocurrency
People have been trying to make digital currencies since the 1990s, but the first successful one was arguably Bitcoin, which many people have heard of and associate the concept of cryptocurrency in general with. The creator of Bitcoin launched the blockchain in 2009, and he made the first trade with a coder, who he sent ten coins to.
Silk Road was an online black market, and many people began to use Bitcoin to shop on the Silk Road, as it offered them far greater protection from authorities because it made it so much easier to hide their information when using the service. After only two years, Silk Road was shut down in 2013 because there were many illegal services and products that were offered on the site. The FBI seized the Bitcoins held by the site, which arguably led to the wide publicization that Bitcoin received and is perhaps the reason the name is so well-known to this day.
Bitcoin has become steadily more valuable since its launch, as more and more people have begun to use the currency. This has caused its value to increase steadily, in a similar sense to physical currency – more people agree that Bitcoin has value, and each individual Bitcoin is therefore worth more than it would be if nobody agreed that Bitcoins are valuable. On launch, one Bitcoin (BTC) was worth $1. The value of the BTC fluctuates, but on its best day, 1 BTC was worth $20,052.
The popularity of cryptocurrencies has led to others using the concept to develop similar, and arguably superior, technologies. One example of this is Ethereum, which utilizes the blockchain idea but builds upon it by making it more substantial. Ethereum actually allows its users to develop contracts that they can agree to between the two of them, which is an promising concept, especially as it should mitigate much of the concern people have regarding the safety of using Bitcoin.
How Can I Buy and Invest in Cryptocurrencies?
You may be wondering whether or not it is good idea to invest in cryptocurrencies, given their growing relevance in the world. The primary argument for investing in cryptocurrencies is that physical currency is likely to eventually lose its value due to our increasing reliance on digital technologies. You may or may not buy into this, but it is regardless a potentially good way to diversify your portfolio. It may not be wise to invest solely in cryptocurrencies at this stage though, given that many of them can be somewhat unstable in terms of value.
Many of the earliest investors in Bitcoin and Ethereum made considerable profits, as the value of the currencies skyrocketed as they grew from year to year. However, cryptocurrencies should be seen as somewhat different from the other asset classes, as they are so much more volatile. If you intend to invest in cryptocurrencies you need to understand that it is riskier to invest in them than perhaps any other class of assets. With that being said, it is possible to mitigate the risks associated with investing in Bitcoins in many cases, as long as you take care to invest wisely.
It is also worth mentioning that Bitcoin is not the only cryptocurrency out there. While it is still the dominant force in cryptocurrencies in many respects, as of 2018, it represented 50% of the cryptocurrency market. As such, if there are other cryptocurrencies that have your attention and you are interested in investing in them, it might be the right thing for you to do, instead of turning to Bitcoin because of the value of its name.
If you want to purchase a cryptocurrency, the easiest way to do so is to go to the website of the relevant cryptocurrency and decide on the quantity that you want to buy. For example, the Bitcoin website lists various trusted exchanges that you can go to in order to buy Bitcoin. If you want to branch out into other cryptocurrencies but are unsure which would be best for you, CoinMarketCap.com is a website that provides a list of cryptocurrencies in order of their value. This is a good way to get a fairly comprehensive understanding of the market as it stands.
On the other hand, you can invest in cryptocurrencies without storing them by simply investing in them the same way that you would any other stock. There are several products which can be used to invest in Bitcoin, for example, and these are supported for several different markets and exchanges. The XBT tracker can be used for investing in Bitcoin, and as of 2018, it was supported for the German and Swedish stock exchanges. This can be a great way to reap the benefits of the rise of cryptocurrencies without having to go through the headache or potential hassle of storing them, especially if you don’t intend to use them for anything.
There is often a good and bad time to invest in a particular asset class. This is also true of cryptocurrencies, but there are not necessarily any rules with regards to when is a good time to buy a cryptocurrency and when is not. You should keep an eye on the trends in the market and the performance of the currency and then avoid buying either at a peak or a crash in terms of its value, but this is not unique to cryptocurrencies. A good rule of thumb regarding cryptocurrencies is perhaps that, given how unusual they are, it is simply best to avoid comparing them to other currencies at all.