Unless you've been under a rock for the past ten years—and if you were, brilliant timing!—you've probably heard about Bitcoin and other cryptocurrencies. Daily headlines seem to cycle between "Crypto - the Money Revolution!" and "Crypto - Millennials Line Up For Their Chance To Hold the Bag."
But what if you don't know anything about crypto? Are you missing out? Or is this another passing fad?
The truth is, you're not alone. Most people don't know much about cryptocurrency. Many vocal supporters of crypto even admit that they don't fully understand what they've invested in.
What is Crypto?
Cryptocurrency is a digital currency that can be used as payment for online transactions. It is not a fiat currency like the dollar, as it has no government backing or involvement.
When researching cryptocurrency, you may see mention of the term "blockchain technology." This is a decentralized technology made up of many computers all working together to manage and record transactions. This "decentralized" database is where the term "decentralized finance" ("defi" for short) comes from. The lack of government involvement is very appealing to those who have adopted cryptocurrency.
Bitcoin has been the most notable player in the crypto space since it was conjured into existence in 2009. At its inception, it had a mere $0.08 valuation. Quite a bit less than the ~$50k each coin fetches today.
The overall cryptocurrency marketplace has grown exponentially since then. Today, there are estimated to be more than 4,500 different cryptocurrencies available for trade, with more seeming to appear every time we try to educate ourselves on what crypto is. Some other cryptocurrencies that are becoming commonplace have been Dogecoin, Ethereum, and Ripple.
What's the Point?
Cryptocurrencies have several benefits that make them an attractive option as a form of currency.
Many early adopters were excited by the innovative nature of the technology. Early on, it wasn't just a fear of missing out or an investment opportunity; it was (and still is!) believed by many to be the currency of the future.
In many ways, cryptocurrencies and the blockchain technology they are built on can be more secure than traditional transactions. The technology itself has strong redundancies and less opportunity for physical theft.
There is also a growing audience that embraces crypto because of the continual overreach of big data. Privacy has gone by the wayside in favor of convenience. Some people yearn for the opportunity to take that back and see crypto as a step in that direction.
How Does Crypto Work?
Cryptocurrencies are presently serving two primary roles—a currency and an investment. Embracers of the currency and investors in the market both face unique challenges and opportunities. Let's take a look at both sides to see how it all works.
Crypto as a Currency
A cryptocurrency is a digital currency that is used in online transactions. There are no physical coins or dollars. They only exist online. It's different from regular currencies because it uses encryption techniques to regulate the generation of units and verify the transfer of funds.
Cryptocurrencies can be traded for traditional fiat currencies like dollars or euros at many exchanges worldwide. But unlike stocks or bonds, which trade on centralized exchanges where buyers meet sellers, these decentralized markets have no central location and instead rely on peer-to-peer networking to match buyers with sellers. This allows them to operate 24 hours a day without interruption and gives their traders access to worldwide markets even if they live in countries that restrict other types of financial activity.
Crypto As an Investment
It is probably clear by now that crypto has become more than just a form of currency. It is also widely used as an investment with no intention on the investors' part of actually using it as a currency.
The value of a cryptocurrency will depend on how much people exchange it for at any given time and what the investors think it's worth - just like traditional stocks. When people are eager to buy cryptocurrencies, the price will go up. When they're not interested in purchasing any more of it, the currency may be devalued. Given the wild swings that we've seen among the various cryptocurrencies, it is widely considered a volatile market.
Should I care?
If you're wondering if it's worth your time to invest in cryptocurrency or not, the answer, as always, is: maybe.
Don't you wish someone would just give a clear answer for a change?
There are many benefits to crypto that make it an attractive option as a form of currency. Still, you should also consider some possible drawbacks and risks before deciding to invest in this arena.
The biggest risk has already been discussed, and that is volatility. Prices can change quickly depending on market sentiment, making people who have invested feel like they're always betting on something rather than saving money for future use.
Other risks include uncertainty of future government involvement and inventive scammers exploiting the marketplace.
Whether or not you should care depends on what kind of investor you are.
If you want more privacy, less regulation, and a sense of independence from the global financial system, then this is for you. But, if you're someone who likes to play it safe or feels like they might not have enough knowledge about crypto investing to make an informed decision, then this may not be your best option.
Crypto is a high-risk investment that has been known to result in significant losses and astronomical gains. All of this said, you certainly have not missed the boat. This technology still offers an excellent opportunity for those willing to take on the risk of entering an emerging market that has yet to find a defined place in society.