Many investors consider bitcoin (BTC) to be the original cryptocurrency. In 2010, a man from Jacksonville, Florida made the first real-world purchase with bitcoin. He bought 2 pizzas for 10,000 bitcoins. At the time, it was a reasonable price for 2 fast food pizzas. If this man had skipped his dinner and kept his bitcoin, he would be sitting on nearly half a billion dollars’ worth of cryptocurrency today.
By historical standards, bitcoin is a great investment. Bitcoin is the best-performing asset and cryptocurrency over the past decade, having appreciated by over 31,000%. If you invested just $1,000 in bitcoin ten years ago, you would have hundreds of millions dollars today. But can bitcoin sustain this exponential growth? Potentially, trading volatile cryptocurrencies involves a lot of risk compared to traditional investments, but the payoff can be life-changing.
What is Cryptocurrency?
Meaning of Cryptocurrency: – A cryptocurrency (or “crypto”) is a digital currency that can be used to buy goods and services, but uses an online ledger with strong cryptography to secure online transactions. A cryptocurrency is a medium of exchange that is digital, encrypted and decentralized that can be exchanged for goods and services online. Many companies issue their own currencies, often called tokens, and can be traded exclusively for a good or service provided by the company. Think of them like you would arcade tokens or casino chips. You will need to exchange real currency for cryptocurrency in order to access a good or service.
Cryptocurrencies are systems that allow for secure payments online which are denominated in terms of virtual ‘tokens’ which are represented by ledger entries internal to the system. ‘Crypto’ refers to the various encryption algorithms and cryptographic techniques that safeguard these entries, such as elliptical curve encryption, public-private key pairs, and hashing functions.
The word “cryptocurrency” is derived from the encryption techniques which are used to secure the network. A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.
Cryptocurrencies work using a technology called blockchain. Blockchains, which are organizational methods for ensuring the integrity of transactional data, are an essential component of many cryptocurrencies. Blockchain is a decentralized technology spread across multiple computers that manage and record transactions. Part of the appeal of this technology is its security.
What is a Blockchain?
Meaning of Blockchain: – Blockchain is a specific type of database. It differs from a typical database in the way it stores information; blockchains store data in blocks that are then chained together. Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.
For Example: – Imagine a book where you write down everything you spend money on each day, so each page is similar to a block, and the entire book, a group of pages, is a blockchain.
With a blockchain, everyone who uses a cryptocurrency has their own copy of this book to create a unified transaction record. Software logs each new transaction as it happens, and every copy of the blockchain is updated simultaneously with the new information, keeping all records identical and accurate.
One key difference between a typical database and a blockchain is the way the data is structured. A blockchain collects information together in groups, also known as blocks, that hold sets of information. Blocks have certain storage capacities and, when filled, are chained onto the previously filled block, forming a chain of data known as the “blockchain.” All new information that follows that freshly added block is compiled into a newly formed block that will then also be added to the chain once filled.
A database structures its data into tables whereas a blockchain, like its name implies, structures its data into chunks (blocks) that are chained together. This makes it so that all blockchains are databases but not all databases are blockchains. This system also inherently makes an irreversible timeline of data when implemented in a decentralized nature. When a block is filled it is set in stone and becomes a part of this timeline. Each block in the chain is given an exact timestamp when it is added to the chain.
How many cryptocurrencies are there in the market?
According to market research website CoinMarketCap.com, more than 10,000 different cryptocurrencies are publicly traded. And cryptocurrencies continue to spread, raising funds through initial coin offerings, or ICOs. According to CoinMarketCap, the total value of all cryptocurrencies as of August 18, 2021 was over $1.9 trillion – down from April’s high of $2.2 trillion. The total value of all bitcoin, the most popular digital currency, was estimated to be around $849 billion, gaining some ground from recent price lows. Nevertheless, bitcoin’s market cap remains well below its April high of $1.2 trillion.
Best Cryptocurrencies By Market Capitalization
The top 10 traded cryptocurrencies by market capitalization, which are tracked by CoinMarketCap, a cryptocurrency data and analytics provider is given as follows: –
| Cryptocurrency | Market Capitalization |
|---|---|
| Bitcoin | $891.5 billion |
| Ethereum | $380.8 billion |
| Cardano | $71.2 billion |
| Binance Coin | $69.5 billion |
| Tether | $68 billion |
| XRP | $47.5 billion |
| Solana | $45.6 billion |
| USD Coin | $31.7 billion |
| Polkadot | $30.7 billion |
| Dogecoin | $28.2 billion |
Why are cryptocurrencies so popular?
Cryptocurrencies appeal to their supporters for a number of reasons. Here are some of the most popular: –
- One of the biggest reasons why cryptocurrency is popular around the world is that there are very few fees associated with using it. When you’re using various other types of online payment options, you’re often going to attarct large fees. The very low fees that you have to deal with when using various cryptocurrencies will be a much better deal for you.
- Supporters see cryptocurrencies like bitcoin as the currency of the future and are rushing to buy them now, possibly before they become more valuable. Lots of people who invested in cryptocurrencies before they got super hot wound up making huge profits. Investors are still making money from cryptocurrencies because the market has not cooled in recent years.
- Some proponents like the fact that cryptocurrency removes central banks from managing the money supply, as over time these banks reduce the value of money through inflation.
- Another good reason why people place faith in cryptocurrencies is that these currencies aren’t associated with world governments. This means that cryptocurrencies have the potential to remain stable even when there is turmoil in a specific country. Some investors see cryptocurrencies as a good way to protect their wealth and this is one reason why cryptocurrency has continued to rise over the years.
- Other supporters prefer cryptocurrency, the technology behind blockchain, as it is a decentralized processing and recording system and can be more secure than traditional payment systems. Using cryptocurrency to pay for things online is actually a lot safer than many other traditional payment options. The security of cryptocurrency is one of the things that has helped it to become so popular over time.
- Some speculators like cryptocurrencies because they are increasing in value and are not interested in long-term acceptance of currencies as a way to move money.
- Using cryptocurrency is getting easier all the time, thanks to more online companies adopting it. You’ll find that more websites are starting to accept cryptocurrencies as payment and this will only become more prevalent in the future.
Is Cryptocurrency Safe?
Bitcoin and other cryptocurrencies run on the blockchain. Blockchain is a distributed ledger technology operated by cryptocurrency miners. The blockchain technology backing cryptocurrency is inherently secure, thanks to the decentralized and public nature of distributed ledger technology and the encryption process every transaction undergoes. Bitcoin’s network has an estimated 10 to 20 times the processing power of Google’s servers, making it one of the most secure networks in the world.
To hack a blockchain, you would have to hack 51% of the miners on the network simultaneously, making security breaches nearly impossible. Nevertheless, crypto exchanges are still prone to hacks, and unless you store your crypto in a hardware wallet, you are not completely safe from bad actors.
But that doesn’t mean it’s completely secure in the same way most people consider the U.S. dollar or other established currencies to be secure. Since cryptocurrency isn’t backed by any governmental authority, it doesn’t have the same protections as many standard currencies throughout the world.
And, importantly, just because cryptocurrency is secure does not make it safe. As much as some of the recent popularity of cryptocurrency is driven by investors’ belief in its value, that value is still based on speculation. For those who invest in crypto, it will be among the riskiest investments they make.
Although blockchains are virtually impenetrable, bitcoin and other cryptocurrencies are risky investments. It is not unusual for bitcoin to drop by 80% to 90% in a bear market, like in 2015, bitcoin lost 84% of its value, and in the 2018 bear market, bitcoin lost nearly 85% of its value. For those who see cryptocurrencies such as Bitcoin as the currency of the future, it should be noted that a currency needs stability so that merchants and consumers can determine what a fair price is for goods. Bitcoin and other cryptocurrencies have been anything but stable through much of their history. For example, while Bitcoin traded at close to $20,000 in December 2017, its value then dropped to as low as about $3,200 a year later. By December 2020, it was trading at record levels again.
Investing In Crypto
Cryptocurrency is an incredibly speculative and volatile buy. Stock trading of established companies is generally less risky than investing in cryptocurrencies such as Bitcoin.
Many cryptocurrency investors view crypto as a long-term investment. Some investors claim that they will never sell their cryptocurrencies because they believe that crypto will replace both gold and fiat currency.
On the other hand, some crypto traders view cryptocurrencies as a short-term investment. Some traders will even buy cryptocurrency tokens that have no real value because they think the price will increase.
Cryptocurrency as a Short-Term Investment
Traders who invest in cryptocurrencies for the short-term care less about the usefulness of cryptocurrencies and more about the value history of the coin. For example, many short-term crypto investors invest in Dogecoin, which has no competitive advantage over other large cryptocurrencies like bitcoin. In order to make rapid profits, these traders buy Dogecoin for its high volatility.
Other short-term traders buy bitcoin during price increases, hoping it will be quick enough to exit out of excitement. Some traders can make money this way, but for most people it is better to buy their cryptocurrencies only for the long term.
Cryptocurrency as a Long-Term Investment
If you believe in blockchain technology, cryptocurrency is a great long-term investment. Bitcoin is seen as a store of value, and some think that bitcoin may replace gold in the future. Ethereum, the second largest cryptocurrency by market cap, also has great growth potential as a long-term investment.
If bitcoin is to cryptocurrency what PC computing was to computer, then ethereum will be to the internet. Ethereum hosts a decentralized app (dApp) that lets people use Ethereum for more complex financial transactions, such as loans, insurance, and derivatives. Dapps can also be video games–running games on Ethereum allows users to buy and sell each other in-game items using the blockchain.
Before investing in cryptocurrency for the long term, be sure to understand what you are investing in. Find out what problem cryptocurrency is trying to solve and then assess whether there is really any benefit to using blockchain technology as part of the solution. Some cryptocurrency companies create a token to easily raise funds from unaccredited investors, and there is no competitive advantage for their company to operate on the blockchain.
How to Invest in Cryptocurrency?
Buying bitcoin or other cryptocurrencies can be a fun way to explore an experimental new investment. But it’s also true that any investment in cryptocurrency should carry a warning label like cigarettes: “This product may be harmful to the health of your finances. Never buy more than you can afford to lose.”
To buy cryptocurrencies, you’ll need a “wallet,” an online app that can hold your currency. Generally, you create an account on an exchange, and then you can transfer real money to buy cryptocurrencies such as Bitcoin or Ethereum.
Coinbase is one popular cryptocurrency trading exchange where you can create both a wallet and buy and sell Bitcoin and other cryptocurrencies. Also, a growing number of online brokers offer cryptocurrencies, such as Tradestation, Charles Schwab, TD Ameritrade, Robinhood, Binance.US, Gemini and Sofi Active Investing. Robinhood offers free cryptocurrency trades (Robinhood Crypto is available in most, but not all, U.S. states).
What are the advantages of Cryptocurrency?
The advantages of Cryptocurrency are as follows: –
- Inflation Protection: – Inflation has caused many currencies to decline in their value over time. Almost every cryptocurrency is issued with a fixed amount at launch. The source code specifies the amount of any coin; As such, only 21 million bitcoins have been issued in the world. Therefore, as demand increases, its value will increase which will keep up with the market and prevent inflation in the long run.
- Self-Governed and Managed: – The governance and maintenance of any currency is a major factor for its development. Cryptocurrency transactions are stored by developers/miners on their hardware, and they receive transaction fees as a reward for doing so. Since the miners are being paid for it, they keep the transaction records accurate and up to date, keeping the integrity of the cryptocurrency and the records decentralized.
- Secure and Private: – Privacy and security have always been a major concern for cryptocurrencies. Blockchain ledger is based on various mathematical puzzles, which are difficult to decode. This makes a cryptocurrency more secure than normal electronic transactions. Cryptocurrencies, for better security and privacy, use pseudonyms that are unrelated to any user, account or stored data that may be linked to a profile.
- Currency Exchange Can Be Done Easily: – Cryptocurrency can be purchased using multiple currencies such as US Dollar, European Euro, British Pound, Indian Rupee or Japanese Yen. With the help of various cryptocurrency wallets and exchanges, one currency can be converted into another by trading in cryptocurrency, in different wallets, and with minimal transaction fees.
- Decentralized: – A major proponent of cryptocurrencies is that they are primarily decentralized. A lot of cryptocurrencies are controlled by the developers who use it and by people who own a significant amount of the coin, or by an organization developing it before releasing it to the market. Decentralization helps keep currency monopolies free and under control so that no single organization can determine the flow and value of the coin, which, in turn, will keep it stable and secure, unlike government-controlled fiat currencies.
- Cost Effective Way of Transaction: – One of the major uses of cryptocurrencies is to send money across borders. With the help of cryptocurrency, the transaction fee paid by the user is reduced to negligible or zero amount. It does this by eliminating the need for third parties, such as Visa or PayPal, to verify transactions. This removes the need to pay any additional transaction fees.
- A Faster Way to Transfer Funds: – Cryptocurrencies have always positioned themselves as an optimal solution for transactions. Transactions, whether international or domestic in cryptocurrencies, are lightning-fast. This is because the process for verification takes very less time as there are very few hurdles to cross.
What are the disadvantages of Cryptocurrency?
The disadvantages of Cryptocurrency are as follows: –
- Can Be Used For Illegal Transactions: – Since the privacy and security of cryptocurrency transactions is high, it is difficult for the government to track any user from their wallet address or keep tabs on their data. Bitcoin has been used as a way of exchanging money in a number of illegal transactions in the past, such as buying drugs on the dark web. Cryptocurrency is also used by some to hide its source, converting illegally obtained money through a clean intermediary.
- Data Loss Can Cause Financial Loss: – The developers wanted to create virtually untraceable source code, strong hacking protection, and impenetrable authentication protocols. This will make it safer to put money in cryptocurrencies than in physical cash or bank wallets. But if a user loses his wallet’s private key, he will not get it back. The wallet will be closed and the number of coins inside it. This will cause financial loss to the user.
- Decentralized But Sill Run By An Organization: – Cryptocurrencies are known for their characteristic of being decentralized. But, the flow and volume of some currencies in the market are still controlled by their creators and some organizations. These holders can manipulate the coin to cause large fluctuations in its price. Even highly traded coins are susceptible to these manipulations such as bitcoin, whose value doubled several times in 2017. Because crypto is a highly speculative investment, with the potential for intense price swings, some financial advisors don’t recommend people invest at all.
- Some Coins Are Not Available In Other Fiat Currencies: – Some cryptocurrencies can only be traded in one or a few fiat currencies. This forces the user to first convert these currencies into one of the major currencies such as Bitcoin or Ethereum and then through other exchanges to their desired currency. This only applies to certain cryptocurrencies. By doing so, additional transaction fees are added to the process, leading to unnecessary spending of money.
- Adverse Effects of Mining On The Environment: – Mining cryptocurrencies requires a lot of computational power and power input, making it extremely energy-intensive. The biggest culprit in this is bitcoin. Mining bitcoins requires advanced computers and a lot of energy. This cannot be done on ordinary computers. Major bitcoin miners are in countries like China that use coal to produce electricity. This has led to a tremendous increase in China’s carbon footprint.
- Susceptible To Hack: – Although cryptocurrencies are very secure, exchanges are not as secure. Most exchanges store user wallet data for user IDs to operate properly. This data can be stolen by hackers, giving them access to a lot of accounts. After getting access, these hackers can easily transfer funds from those accounts. Over the years some exchanges like Bitfinex or Mount Gox have been hacked and thousands and millions of US dollars’ worth of bitcoins stolen. Most exchanges are highly secure nowadays, but there is always the possibility of another hack.
- No Refund or Cancellation Policy: – If there is a dispute between the parties concerned, or if a person mistakenly sends funds to the wrong wallet address, the coin cannot be received by the sender. It can be used by many people to cheat others with their money. Since there is no refund, they can easily be made for a transaction whose products or services they have never received.
Criticism of Cryptocurrency
Since market prices for cryptocurrencies are based on supply and demand, the rate at which a cryptocurrency can be exchanged for another currency can fluctuate widely, since the design of many cryptocurrencies ensures a high degree of scarcity.
Bitcoin has experienced some rapid surges and collapses in value, climbing as high as $17,738 per Bitcoin in Dec. 2017 before dropping to $7,575 in the following months. Cryptocurrencies are thus considered by some economists to be a short-lived fad or speculative bubble.
There is concern that cryptocurrencies like Bitcoin are not rooted in any material goods. Some research, however, has identified that the cost of producing a Bitcoin, which requires an increasingly large amount of energy, is directly related to its market price.
Cryptocurrency blockchains are highly secure, but other aspects of a cryptocurrency ecosystem, including exchanges and wallets, are not immune to the threat of hacking. In Bitcoin’s 10-year history, several online exchanges have been the subject of hacking and theft, sometimes with millions of dollars’ worth of “coins” stolen.
Nonetheless, many observers see potential advantages in cryptocurrencies, like the possibility of preserving value against inflation and facilitating exchange while being easier to transport and divide than precious metals and existing outside the influence of central banks and governments.