Crypto is a confusing and ever-changing topic, this article brings clarity to what it is and how it works.
What is cryptocurrency?
Cryptocurrency (or “crypto”) is a digital currency, such as Bitcoin, that is used as an alternative payment method or speculative investment. Cryptocurrencies get their name from the cryptographic techniques that let people spend them securely without the need for a central government or bank.Here’s an example:
Bitcoin was initially developed primarily to be a form of payment that isn’t controlled or distributed by a central bank. While financial institutions have traditionally been necessary to verify that a payment has been processed successfully, Bitcoin accomplishes this securely, without that central authority.Why do people invest in cryptocurrencies?
People invest in cryptocurrencies for the same reason anyone invests in anything. They hope its value will rise, netting them a profit. If demand for Bitcoin grows, for example, the interplay of supply and demand could push up its value. If people began using Bitcoin for payments on a huge scale, demand for Bitcoin would go up, and in turn, its price in dollars would increase. So, if you’d purchased one Bitcoin before that increase in demand, you could theoretically sell that one Bitcoin for more U.S. dollars than you bought it for, making a profit.
Why is Bitcoin still popular?
Since its inception, Bitcoin has been regularly derided as dead, worthless or a scam, in part because its price is prone to meteoric rises and dramatic falls. When Bitcoin’s price rose to $60,000 in 2021 before collapsing to. But, if there’s anything about Bitcoin that appears to be predictable, it’s that it will continue to be volatile. In the relative short-term, both camps are likely right: Bitcoin will rise and Bitcoin will fall. around $17,000 in 2022, many experts and investors said it wouldn’t recover from this burst.How does cryptocurrency work?
Cryptocurrencies are supported by a technology known as blockchain, which maintains a tamper-resistant record of transactions and keeps track of who owns what. The use of blockchains addressed a problem faced by previous efforts to create purely digital currencies: preventing people from making copies of their holdings and attempting to spend it twice.
Individual units of cryptocurrencies can be referred to as coins or tokens, depending on how they are used. Some are intended to be units of exchange for goods and services, others are stores of value, and some can be used to participate in specific software programs such as games and financial products.
Cryptocurrency pros
Some supporters like the fact that cryptocurrency removes central banks from managing the money supply since over time these banks tend to reduce the value of money via inflation.Cryptocurrency cons
Many cryptocurrency projects are untested, and blockchain technology in general has yet to gain wide adoption. If the underlying idea behind cryptocurrency does not reach its potential, long-term investors may never see the returns they hoped for. [Rosen, Andy]
Within the last few years, crypto has risen in popularity and is becoming more mainstream. Like any investment, it’s important to be informed about what it is and how it works. However with crypto specifically I feel as though there’s a lot of uncertainty in what it is. There also appear to be a lot of crypto scams out there. I feel like every month I see a new headline about the latest crypto scam. However, there has been a lot of success in the crypto world. What can financial institutions do to take advantage of this success? Is there a way to help educate account holders in crypto so they are less likely to fall into scams? How can banks help protect against these possible scams? What lessons can be learned from crypto investment that carry over into regular investing?
Rosen, Andy. “Cryptocurrency Basics: Pros, Cons and How It Works.” NerdWallet, www.nerdwallet.com/article/investing/cryptocurrency. Accessed 11 Sept. 2024.
