The truth about Crypto-Currency. What to Know About Cryptocurrency. Let’s start by definition. What is cryptocurrency? Cryptocurrency is a type of digital currency that generally only exists electronically. There is no physical coin or bill unless you use a service that allows you to cash in cryptocurrency for a physical token. You usually exchange cryptocurrency with someone online, with your phone or computer, without using an intermediary like a bank.
Bitcoin and Ether are well-known cryptocurrencies, but there are many different cryptocurrency brands, and new ones are continuously being created. People use cryptocurrency for quick payments, to avoid transaction fees that regular banks charge, or because it offers some anonymity. Others hold cryptocurrency as an investment, hoping the value goes up. Historically, no asset has been a greater creator of long-term wealth than the stock market. Over time, stocks have generated a 7% annualized return, inclusive of dividend reinvestment and adjusted for inflation.
This suggests an investor could double their money about once every decade, which is pretty impressive. However, cryptocurrencies — digital currencies that utilize encryption to generate money and verify transactions — have left the stock market in the dust since the year began. Virtual currency investors have, in many instances, seen a lifetime’s worth of gains over the course of 11 months.
But before you consider diving into the cryptocurrency craze, here are ten facts you should know. 1. Cryptocurrencies have no fundamental backing. Unlike the U.S. dollars in your wallet or any other currency around the world, digital currencies aren’t backed by a central bank or a government.
They also have no tangible fundamental factors with which to help derive an appropriate valuation. Whereas you can look at the earnings history of a publicly trading stock to estimate its worth, or the economic performance of a country with regard to GDP growth to value a currency like a dollar, digital currencies have no direct fundamental ties.
This makes valuing cryptocurrency in a traditional sense especially difficult, if not impossible. 2. There are more than 1,300cryptocurrencies (but bitcoin is king)If you’ve been following the appreciation of virtual currencies, you’ve probably heard an awful lot about bitcoin — and with good reason. It was the first tradable cryptocurrency that was brought to market, and it currently makes up 54% of the aggregate$589 billion market cap of all cryptocurrencies.
However, it’s far from alone. There are more than1,300 other virtual currencies that investors can buy, of which over two dozen have a market cap that’s in excess of $1 billion. 3. Blockchain is where the real value liesDespite the emphasis on trading virtual currencies, it’s actually what underlies cryptocurrencies that could be particularly valuable. Blockchain technology is the infrastructure that cryptocurrencies like bitcoin are founded on.
It’s a digital and decentralized ledger that records payment and transfers transactions in a safe and efficient manner. It’s also the big reason why big businesses are so excited.4. Blockchain has numerous other advantages but there’s more to like about blockchain technology than just its decentralization.
Because miners are working 24 hours a day and seven days a week to verify transactions, they can be settled much quicker than through traditional banking, which sticks to normal businesses hours, closes for the weekends, and often holds funds for a few days. Plus, without a middleman, transaction costs can actually go down with blockchain.
Additionally, blockchain offers user control and transparency. Rather than letting a third party control the future of a cryptocurrencies’ blockchain, members of a cryptocurrencies’ community are who call the shots with regard to future development.5. “Miners” play a critical role However, cryptocurrency transactions need to be verified, and the blockchain regularly enlarged, to account for new transactions and payments.
This job falls to a group of folks known as cryptocurrency miners. Crypto-mining involves using high-powered computers to solve complex mathematical equations on a competitive basis in order to verify and log transactions. Being the first to do so often entitles the miner to a reward, which is given in the form of cryptocurrency coins and/or transaction fees associated with a block. Though the hardware and electricity costs can be enormous, mining can also be extremely rewarding.
The graphics-card hardware needs of miners have been a big reason why NVIDIA and Advanced Micro Devices have seen a double-digit percentage surge in sales recently. 6. The barrier to entry is relatively low It’s also worth pointing out that while blockchain technology could change the landscape for the financial services industry, virtually no barrier to entry exists.
If you have time, money, and a team that understands how to code, you can potentially write blockchain and bring a cryptocurrency to market. How worrisome is this for kingpins like bitcoin and Ethereum? Back in July, there were fewer than1,000 cryptocurrencies on the market. As of Dec. 18, there were 1,364. Anywhere from 50 to 100 new virtual currencies, likely complemented by blockchain technology, are being introduced each and every month.
Each of these is another potential threat to existing virtual currencies and their block chains.7. Cryptocurrencies are banned in a number of countries sure, cryptocurrencies might be the hottest thing since sliced bread, but they’re not accepted everywhere.
Because of their unregulated and decentralized nature, some countries have chosen to outright ban the use of, and/or trading of, digital currencies. Trading in cryptocurrencies, making payments in virtual currencies, or buying goods and services in digital currencies, are illegal in a half-dozen countries: Bolivia, Bangladesh, Nepal, Morocco, Kyrgyzstan, and Ecuador.
And there’s the genuine possibility that this list may grow. For example, Russia has been considering banning payments made in cryptocurrencies for some time.8. Most people still have limited knowledge of what cryptocurrencies are, or if they’re legal truth be told, most folks don’t have the slightest clue of what makes cryptocurrencies tick.
Though a September poll conducted by student loan refinancing market LendEDU found that nearly 79%of Americans were aware of bitcoin, a more recent poll found that just 32% were aware of Ethereum, the second-largest cryptocurrency by market cap. Additionally, 75% of folks had never heard of initial coin offerings, which are akin to initial public offerings, but for virtual currencies.
Perhaps even scarier, LendEDU asked respondents if owning bitcoin was illegal in the U.S. Some41.6% correctly answered that it wasn’t, but 10.7% believed it was, and a whopping47.7% weren’t sure. This suggests a major lack of understanding when it comes to cryptocurrencies.9. Digital currencies are exceptionally volatile The cryptocurrency market is a volatile one, so be prepared for ups and downs. You’ll see dramatic swings in prices.
If your investment portfolio or mental well-being can’t handle that, cryptocurrency might not be a wise choice for you. Cryptocurrency is all the rage right now, but remember, it’s still in its infancy. Investing in something that’s new comes with challenges, so be prepared.
If you plan to participate, do your research and invest conservatively to start. 10. Decentralization is key. What makes blockchain technology so enticing is the fact that it’s decentralized. In other words, there is no central hub where this information is stored, and therefore no major data center where cybercriminals can attack and gain control of a particular digital currency.
Instead, servers and hard drives across the globe contain bits and pieces of information about a particular blockchain network, but not enough to cripple it should the data inside fall into the wrong hands. This makes blockchain a particularly secure technology, which is appealing to big businesses.