Understanding Digital Currency

What is cryptocurrency?

Cryptocurrency (or "crypto") refers to a type of digital asset that includes Bitcoin, Ethereum, and Tether. Cryptocurrencies are named after the cryptographic mechanisms that let individuals to purchase, sell, and exchange them safely.

Unlike traditional fiat currencies, which are governed by national governments, cryptocurrencies can exist without the intervention of a monetary authority, such as a central bank.

Why are there so many different types of cryptocurrency?

It's critical to note that Bitcoin is not the same as cryptocurrency in general. Despite the fact that Bitcoin was the first and most valued cryptocurrency, the industry is vast.

According to CoinMarketCap.com, a market research website, over 22,000 distinct cryptocurrencies are openly traded. While some cryptocurrencies have market capitalizations in the hundreds of billions of dollars, others are obscure and basically worthless. If you're thinking about investing in cryptocurrency, it's a good idea to start with a cryptocurrency that is widely traded and reasonably well established in the market.

NerdWallet has published guidelines for certain popular cryptocurrencies, such as Bitcoin and some altcoins, or Bitcoin alternatives:

• Bitcoin is the first and most valuable cryptocurrency.
• Ethereum is commonly used to carry out financial transactions more complex than those supported by Bitcoin.
• Cardano is a competitor to Ethereum led by one of its co-founders.
• Litecoin is an adaptation of Bitcoin intended to make payments easier.
• Solana is another competitor to Ethereum that emphasizes speed and cost-effectiveness.
• Dogecoin began as a joke but has grown to be among the most valuable cryptocurrencies.
• Shiba Inu is another dog-themed token with more complex mechanics.
• Stablecoins including Tether and USDC are a class of cryptocurrencies whose values are designed to stay stable relative to real-world assets such as the dollar.

However, carefully picking your cryptocurrency is no guarantee of success in such a turbulent market. An problem in the tightly interconnected crypto business may sometimes spill over and have far-reaching consequences for asset values.

For example, the market suffered a significant blow in November 2022 when the cryptocurrency exchange FTX struggled to deal with liquidity concerns amid a surge in withdrawals. As the consequences spread, the value of both major and small cryptocurrencies plummeted.

How does cryptocurrency work?

Cryptocurrencies are enabled by blockchain technology, which retains a tamper-resistant record of transactions and keeps track of who owns what. The use of blockchains addressed a difficulty encountered by past attempts to establish solely digital currencies: prohibiting users from producing duplicate copies of their holdings and attempting to spend them twice.

Individual cryptocurrency units are known as coins or tokens depending on how they are utilized. Some are designed to be units of trade for goods and services, while others are value stores and may be used to engage in specialized software programs like as games and financial products.

How are cryptocurrencies created?

The method of mining, which is employed by Bitcoin, is one typical way bitcoins are generated. Bitcoin mining is an energy-intensive process in which computers solve complicated problems to verify the legitimacy of network transactions. Owners of those machines may earn freshly minted bitcoin as an incentive. Other cryptocurrencies manufacture and distribute tokens in other ways, and several have a substantially lower environmental effect.

Pros and cons of cryptocurrency

Across the board, investors have strong feelings about cryptocurrency. Here are a few reasons why some people feel it is a transformative technology and others say it is a passing fad.

Cryptocurrency pros

Some proponents prefer the idea that cryptocurrency eliminates central banks from regulating the money supply because these institutions tend to devalue money over time through inflation.

• Some individuals regard cryptocurrencies as a possible footing in groups that have been underserved by the traditional banking system. According to Pew Research Center statistics from 2021, Asian, Black, and Hispanic persons are "more likely than White adults to have ever invested in, traded, or utilized a cryptocurrency."
• Others like cryptocurrency blockchain technology because it is a decentralized processing and recording system that might be more secure than traditional payment systems.
• Some cryptocurrencies allow its owners to earn passive income through a practice known as staking. Crypto staking entails utilizing your cryptocurrency to assist in the verification of transactions on a blockchain technology. Staking carries risks, but it might let you build your crypto holdings without buying more.

Cryptocurrency cons

• Many bitcoin initiatives are unproven, and blockchain technology in general is still in its early stages of widespread use. Long-term investors may never realize the rewards they hoped for if the basic principle behind cryptocurrencies does not reach its full potential
• Other hazards exist for short-term cryptocurrency investors. Its values fluctuate swiftly, which means that although many people have gained money quickly by investing at the correct moment, many others have lost money by doing so shortly before a crypto crash
• Those dramatic price swings may also run counter to the fundamental concepts underlying the initiatives that cryptocurrencies were designed to assist. People may be less willing to use Bitcoin as a payment mechanism, for example, if they are unsure what it will be worth the next day.
• Bitcoin and other projects that employ similar mining techniques have a major environmental impact. According to the University of Cambridge, worldwide Bitcoin mining consumes more than twice as much electricity as all household lights in the United States. Some cryptocurrencies employ less energy-intensive technologies.
• Governments throughout the world have yet to properly comprehend how to deal with cryptocurrencies, so legislative reforms and crackdowns have the potential to have unanticipated effects on the market.

Your decision: Is cryptocurrency a good investment?

Regardless of how you slice it, cryptocurrency is a rather dangerous investment. In general, high-risk investments should account for a tiny portion of your entire portfolio – one frequent rule is no more than 10%. You may wish to start by increasing your retirement savings, paying off debt, or investing in less volatile stock and bond funds.

Other approaches to limit risk in your crypto portfolio include diversifying the types of cryptocurrency you purchase. Crypto assets may increase and decrease at various rates and over different time periods, so by diversifying your holdings, you may protect yourself — to some extent — from losses in one of your holdings.

The most essential thing to remember when investing in anything is to conduct your research. This is especially true for cryptocurrencies, which are frequently related to a specific technical product that is being created or put out. When you acquire a stock, you are purchasing a piece of a firm that is subject to well-defined financial reporting obligations, which can provide insight into its future.

Cryptocurrencies, on the other hand, are less tightly controlled in the United States, making determining whether projects are sustainable even more difficult. It may be worthwhile to get advice from a financial advisor who is experienced with bitcoin.