Just like paper money or a check, cryptocurrencies allow consumers to buy services and goods, or trade them for profit.
Cryptocurrencies have been called everything from the money of the future to an extremely risky asset. Thoughts and strategies about cryptocurrencies spread fast, primarily because cryptocurrencies are a complicated and unique technology that is also accessible.
This may leave people wondering if they should be investing in cryptocurrencies, if they are safe, or how they even work.
Cryptocurrency is decentralized digital money that is used on the internet. Cryptocurrency adheres to a decentralized form of governance and control, as opposed to a central banking authority. Cryptocurrency operates through distributed ledger technology, known as blockchain. Bitcoin was the first cryptocurrency, and it rose to attention beginning in 2008. Today, there are many other cryptocurrencies, including Ethereum, Tether, Solana, and Cardano.
How many cryptocurrencies are there and what are they worth?
According to CoinMarketCap, there are now more than 16,000 cryptocurrencies. They vary in value. The market capitalization of Bitcoin is almost $900 billion, as it is by far the largest cryptocurrency. The market capitalization of the second largest cryptocurrency, Ethereum, is less than $500 billion. It is difficult to estimate the total market size of all cryptocurrencies, since, unlike the public equities markets, there is no official data source. Some estimates of the total size of the cryptocurrency markets place it around $3 trillion. In addition to facilitating the transfer of value, each cryptocurrency may have different technical features.
Why are cryptocurrencies so popular?
Cryptocurrencies allow parties to transfer value online without the use of a central counterparty, such as a bank. Cryptocurrencies also facilitate the quick global transfer of value, 24 hours a day, seven days a week. Some argue that cryptocurrency is a superior form of value transfer because it offers a level of privacy, security, and immutability (irreversibility) that traditional money does not offer.
Are cryptocurrencies a good investment?
Cryptocurrencies can be thought of in several different ways. For example, some consider cryptocurrency to have money-like qualities, particularly Bitcoin. For something to be considered money, it is typically thought of to possess three basic traits: (1) it is a store of value, (2) it is a medium of exchange, and (3) it is a unit of account. On the other hand, cryptocurrency may also be considered to be an asset class for investment, similar to a stock. As with stocks, cryptocurrency may offer the potential for a high level of returns, but also the possibility of significant price volatility as well as losses. For these reasons, whether cryptocurrency is a good investment may depend on the profile of the particular investor. For example, a retiree seeking to draw on a stable pool of income may not find highly volatile cryptocurrency appropriate for their portfolio. On the other hand, a younger investor able to tolerate a high level of volatility may consider cryptocurrency to be an important and/or diversifying component of their portfolio.
How do I buy cryptocurrency?
Cryptocurrency can be purchased through a broker or exchange, such as Coinbase. To purchase cryptocurrency, the individual must open an account, deposit cash, and place a trade order (buy). If an individual is seeking exposure to cryptocurrency, they can also purchase an ETF [exchange traded fund], buy a cryptocurrency focused mutual fund, or own the stock of a company that focuses on cryptocurrency, such as Square.
Are cryptocurrencies legal?
Regulations surrounding cryptocurrency are still evolving. A great deal of attention is paid to whether particular cryptocurrencies fall within the legal definition of ‘security’ and therefore would be subject to the disclosure and registration requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934. In addition, policymakers are focused on regulation of stablecoins, or cryptocurrencies that are pegged to a stable asset such as the U.S. dollar or gold, as well as the regulation of exchanges that trade cryptocurrencies. Other evolving legal issues surrounding cryptocurrencies and blockchain include the regulation of Decentralized Autonomous Organizations (DAOs), tax treatment, and anti-money laundering requirements.
How do I protect myself?
To be sure, this information is not intended to serve as investment advice, and individuals should consult with their personal financial advisors with specific questions. Generally, individuals should follow basic principles of good investing, read information carefully, and avoid investments that claim to offer unreasonable returns.
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