What is Cryptocurrency and How Does it Work?

What is Cryptocurrency and How Does it Work?

Cryptocurrency is certainly one of the most exciting developments in either finance or technology this century—at least, that’s what you’ve probably been told. However, you might not be satisfied that you know enough about what cryptocurrency really is or how it works to start exploring the many opportunities it offers.

Fortunately, it’s relatively easy to become acquainted with the basics of cryptocurrency. You can get yourself off to an excellent start by checking out this article, which will put you in a position to begin investing in cryptocurrencies for yourself.

What is Cryptocurrency?

At the most basic level, cryptocurrency is simply money that exists exclusively in digital form. There are no physical bills or coins—just numbers representing sums.

That might not seem revolutionary to those of you who are used to the concept of internet banking, but cryptocurrency is more than just a form of money.

The key word here is “currency”—each crypto is a distinct currency in and of itself, akin to the dollar or the pound.

Cryptos are also unique in that the technology they are based on makes them extremely secure. Most cryptocurrencies use blockchain technology, which allows for the creation of a decentralized ledger in which to record transactions.

Instead of having all transaction records stored on a single server (or server bank), blockchain creates multiple copies of the ledger each time a new transaction occurs and distributes them to many individual devices linked to a global network.

As a result, it is effectively impossible to hack or fake transaction records that rely on blockchain technology, since they can always be verified by the copies.

Why are So Many People Investing in Cryptocurrencies?

Now that you know the answer to the question what is cryptocurrency, you probably want to know why so many people are excited about it.

The answer is simple: certain cryptocurrencies have risen dramatically over the past several years—sometimes literally overnight.

Bitcoin and Ethereum are two popular cryptocurrencies that have garnered significant media attention for exactly this reason. Ethereum notably saw a rise of 13,000% in just a year, creating unprecedented wealth for those lucky enough to be holding it at the time.

These success stories have inspired wave after wave of eager new investors, who take advantages of online currency conversion platforms like Uphold to create whole investment portfolios around different cryptocurrencies.

The Risks of Investing in Cryptocurrencies

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Before you run to change your savings into Bitcoin, you should be aware of the risks associated with cryptocurrencies. These risks stem from another crucial difference between cryptocurrency and many other assets: the value of cryptocurrency is based on nothing but the demand for it.

“Bitcoin has no underlying rate of return,” says Jack Bogle, the founder of Vanguard. “Bonds have an interest cupon, stocks have earnings and dividends. There is nothing to support Bitcoin except the hope that you will sell it to someone for more than you paid for it.”

Still, there’s plenty of reason to hope for that with the amount of attention cryptocurrencies are currently receiving. Just be advised that the cryptocurrency market can be as fickle as any of the investors in it.

Despite the risks, cryptocurrencies offer huge potential rewards to their early adopters. Use this guide answering what is cryptocurrency as a starting point to help you learn more about this exciting new technology, and make informed investment decisions that will support your future.

About The Author

Nick Rojas combines 20 years of experience working with and consulting for small to medium business and a passion for journalism to help readers grow. He writes about technology, marketing, and social media for the aspiring entrepreneur. When Nick is not sharing his expertise, he can be found spending time at the beach with his dog Presto.

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