Today, there is a growing list of digital currencies that are changing the world. These digital currencies are commonly known as “cryptocurrencies.” If you have not yet heard about these digital currencies, don’t worry — you’re not alone. In fact, most people haven’t even heard of them yet. But that could very quickly change in the coming months and years. Many experts predict that cryptocurrency will soon be one of the most important topics in financial markets and beyond. A cryptocurrency is a digital currency that functions as a medium of exchange and has a limited supply. To understand this, think about how traditional paper currencies operate: Governments print more money when they need to increase the circulating supply; this is why inflation is typically measured by how much a dollar buys today compared to 20 or 100 years ago. But with cryptocurrencies like Bitcoin, there is no central authority or mint that can release more tokens whenever they want — the market dictates the quantity of tokens released through mining and new tokens cannot be created ad hoc.
What Is New About Cryptocurrencies?
Cryptocurrencies are digital assets that have no physical representation. While many traditional currencies can be held in physical coins or paper bills, cryptocurrencies exist solely online. The security of cryptocurrencies is based on cryptography, a method of storing and transferring data in a particular format that is difficult to hack. A list of the most important features of cryptocurrencies that are new or unique compared to traditional currencies: Cryptocurrencies are decentralized, meaning there is no central bank or government that controls them. Anyone with an internet connection can participate in the economy and transact with others. New coins are created through a process called mining, which is completely different from how central banks print money. Cryptocurrencies have a limited supply, which means that an increase in demand would lead to higher prices. If one cryptocurrency were to become a widely-accepted medium of exchange, it could alter financial markets in significant ways.
How Are Cryptocurrencies Different From Traditional Currencies?
The top 10 cryptocurrencies have a combined market cap of over $200 billion, making this a highly liquid investment space.
- Underlying Technology: The technology behind traditional currencies has remained largely unchanged for decades, with central banks printing paper and minting coins. Cryptocurrencies, on the other hand, have proven to be highly disruptive. A lot of people believe that blockchain (the technology behind most cryptocurrencies) will have implications far beyond digital currencies, and be used in a wide range of industries and applications.
- Supply: The supply of traditional currencies is determined by central banks, which control the minting of coins. The supply of cryptocurrencies is determined by the market, with new coins being “minted” by miners who solve complex mathematical problems.
- Verifiability: Traditional currencies are fully verifiable, with third-party organizations like the Federal Reserve publishing detailed reports of their balance sheets and transactions. Cryptocurrencies are a bit different, as the blockchain tracks all transactions made using the currency, including the amount and the wallet address of the sender and the receiver.
Top 10 Cryptocurrencies
- Bitcoin is the original cryptocurrency, which was invented as a peer-to-peer electronic cash system. It was the first blockchain-based decentralized and open-source digital cash system, and it has the largest market cap and daily trading volume of all cryptocurrencies.
- Ethereum is a decentralized computing platform that allows companies and individuals to create decentralized applications on top of it. It has been used to launch a variety of new cryptocurrencies, including the wildly successful EOS token.
- Ripple is a centralized network designed to connect banks, payment providers and other financial institutions. The goal of Ripple is to help reduce the use of cash as well as make cross-border payments faster and cheaper.
- Litecoin is similar to Bitcoin, but its underlying technology is more advanced and it has a higher daily trading volume.
- Dash is a blockchain-based decentralized payment system that aims to be a better alternative to Bitcoin.
- NEM is a peer-to-peer blockchain platform that has been used to launch a variety of cryptocurrencies. – IOTA’s underlying technology is similar to blockchain, but it has no blocks and no scalability issues.
- NEO is a Chinese blockchain network that can host decentralized applications and smart contracts.
- EOS is a blockchain-based decentralized computing platform designed to host decentralized applications.
- Stellar is a decentralized network designed to make cross-border payments faster and cheaper.
How Are Cryptocurrency Transactions Tracked?
When people use traditional currencies, central banks track every transaction automatically. This creates a centralized record of all transactions, which can be used for many different things, like auditing, fraud detection and government investigations. After a transaction is completed, a record of it is broadcasted to a ledger that is maintained by a central bank. The bank collects all this information and posts it on a massive public ledger — a record of all transactions made in the country and across the world. The blockchain, the technology that underpins cryptocurrencies, is a decentralized ledger. It means that the ledger is not controlled by one central authority, but rather a network of computers.
What Are The Advantages of Using a Cryptocurrency?
- The total supply of cryptocurrencies is fixed (not like fiat money where central banks can print more money). This means that if demand goes up, supply goes down, and vice versa. What this means is that cryptocurrencies are inherently deflationary — they can appreciate in value over the long term.
- Cryptocurrencies allow you to transact money quickly and securely (no more waiting several days for a bank transfer). All you need is an internet connection and a wallet to put your digital assets. – Since there is no central authority controlling cryptocurrencies, you also don’t have to worry about your privacy being compromised or the government taxing your assets.
- Cryptocurrencies can be a great way to diversify your investment portfolio. – Trading in cryptocurrencies is accessible to anyone with an internet connection. Unlike traditional investing, you don’t need a lot of money to get started or meet minimum investment requirements.
- Cryptocurrencies are not correlated with other asset classes, meaning that their price change does not depend on that of other assets. This means that you can diversify your portfolio and hedge against any potential losses in stocks or bonds.
What Are the Risks of Using a Cryptoccoin?
- Cryptocurrencies are highly speculative investments that have high risk and volatility associated with them. It means that the price of cryptocurrencies can go up or down dramatically, and they can lose all their value.
- Cryptocurrencies are highly regulated in many countries and can be shut down by governments at any time.
- If a large number of people decide to sell their cryptocurrencies at once, the market will become flooded with supply, and prices will go down.
- If a large number of people decide to buy cryptocurrencies at once, the supply will be constrained, and prices will go up.
- Given that cryptocurrencies are unregulated, there are a lot of scams and bad actors in the space. It is very important to do your due diligence and only invest in reputable projects.
- Cryptocurrencies are not liquid assets. It means that it can take a long time to sell them because you need to find a buyer at the right price.
Should You Invest in a Cryptocurrency?
Before investing in a cryptocurrency, you need to ask yourself some questions:
- What are your investment objectives? – How much risk are you willing to take? – Are you well-informed about this asset class?
- Have you done your due diligence? Given the high risk and volatility associated with cryptocurrencies, you should only invest an amount of money that you can afford to lose.
You should also keep in mind that most people who have made money from this space have been technologically savvy early adopters who have significantly higher risk tolerance than the average investor. If you’re interested in investing in cryptocurrencies, remember that this is a new and emerging asset class. There are many risks involved, and you should only invest money that you are willing to lose.