Cryptocurrency is one of those buzzwords that everyone is talking about, but very few people understand. The explosion of the digital capital market over the last few years has undoubtedly only been exacerbated by the coronavirus pandemic, and as a byproduct, we have seen a major surge in cryptocurrency trading, investments, and transactions.
As with most things, crypto gets more complicated the deeper you get into it. But on the surface, it functions in principally the same way as other assets. Let’s take a closer look at what, exactly, crypto is, and how it works.
What is Cryptocurrency?
In the most basic terms, cryptocurrency is a digital asset that can be bought and sold. In some cases, crypto can be used to purchase items in a retail setting — such as using Bitcoin as your payment method when you shop online — but this isn’t common, at least not yet. As of December 2021, El Salvador is the only nation to allow Bitcoin, a type of cryptocurrency, to be used as legal tender for monetary transactions.
While crypto’s surge in popularity is fairly recent, it has actually been around since 2008, and has been available to the public since 2009. The cryptocurrency industry began with Bitcoin, but rivals (sometimes referred to as “altcoins”) began emerging around 2011. The market had a few players, but remained fairly small and was the butt of many jokes. However, things took quite a turn around 2018, when the price of Bitcoin exploded:
Those are the kind of spikes that have people eating their words.
How Does Cryptocurrency Work?
Cryptocurrency’s appeal lies in its security. It is secured by cryptography, which makes it nearly impossible to counterfeit, and isn’t subject to things like bank failures because it isn’t centralized. Another benefit of this decentralization is that it’s much harder for the government to have any authority over it. The downside is that, unlike the U.S. dollar or the euro, which both remain fairly stable in value, cryptocurrency is highly volatile, making it a high-risk, potentially-high-reward investment.
Most people who are interested in learning about cryptocurrency, are primarily interested in how you make money with it. That’s where the subject gets complicated, because there’s no one-size-fits-all formula for that. However, there are a few main functions of cryptocurrency to get familiar with in order to better understand how it works:
- Investing: The buying and holding of crypto assets. Like any other asset, crypto investing is all about identifying the assets that have the highest chance of long-term growth. This is why Bitcoin remains one of the most coveted investments, because it is one of the safest.
- Trading: Trading allows investors to take advantage of short-term opportunities. You need to be quick, analytical, and really stay on top of the market — or have a good advisor.
- Mining: Crypto mining is “digging” for crypto coins, or essentially creating new ones using specialized computer hardware. That said, crypto mining is time-consuming, difficult, and not particularly lucrative, so this is best left to those with significant technical know-how.
There are a number of other ways that investors can get involved with crypto, including staking, lending, and airdrops. Cryptocurrency is also becoming more accessible to diverse ages and ethnic groups by way of projects like crypto games and social media. This means that the world of cryptocurrency is no longer just for the very rich, the very smart, or the very privileged.
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