Want to start investing in cryptocurrency but aren’t quite sure what it’s all about? Here’s what you need to know before getting into the game.
In the world of investment and finance, cryptocurrencies are like an uninvited and disruptive party guest. Governments and central banks around the world wish to control them or outright ban their use, while many see them as the future of money itself.
Cryptocurrencies as an asset are highly volatile, sometimes soaring to dizzying heights and crashing to devastating lows in a matter of hours. But with great risk often comes great reward, so what do you need to know when looking to dip your toes in this emerging market.
How does cryptocurrency work?
In short, a cryptocurrency is a form of digital currency designed to function as a medium of exchange over a computer network (e.g. the internet), and do not exist in any physical form.
Individual cryptocurrency tokens are formed through a process known as ‘mining‘, which uses computer processing power to solve complex mathematical problems to earn digital tokens, or ‘coins’.
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Records of individual coin ownership and transactions are stored on a decentralised digital ledger known as a blockchain – a set of replicated, shared and synchronised databases located on the devices of thousands of individual users.
The records being replicated across so many individual physical devices – coupled with strong encryption – makes faking transactions difficult. They can operate independently of any central authority such as a government or bank. As such cryptocurrencies are known as decentralised finance.
Users can also purchase the currencies from brokers, which they can access through a set of encryption keys known as a wallet.
These currencies can be exchanged for goods and services like any other, which means they also have a value in real-world currency. This value can range from a tiny fraction of one cent to tens of thousands per coin.
Why the volatility?
The economic value of cryptocurrencies, like financial instruments, comes primarily from supply and demand. Cryptocurrencies are new, and investors are looking to generate wealth quickly by experimenting, so this movement of money can drive prices up and down.
There are usually a finite number of coins that a cryptocurrency system can produce. This is by design, as this artificial scarcity makes the coin’s price rise rapidly as the maximum number of tokens draws near.
If you’ve heard of cryptocurrency, then chances are you’ve heard of Bitcoin. It was the world’s first cryptocurrency, introduced to the world by a mysterious person or group of people working under the pseudonym Satoshi Nakamoto in 2008.
Initially, the value of Bitcoin was driven by its adoption for use in online black markets. In its first five years of existence, Bitcoin rose from $0.70 per coin to over $18.
This rise attracted investors from outside the black markets and an astronomical rise has followed, punctuated by some sharp dives.
At the beginning of 2017, one Bitcoin was worth more than $1385. But by January 2018, its value had skyrocketed to almost $19,000 per coin.
In 2020, Bitcoin started to attract the attention of leading institutional investors and billionaires such as Elon Musk. Since then it has become the poster child for cryptocurrency, and at one point in 2021 was rising at a rate $5000 per hour.
Today, one Bitcoin is worth just under $60,000. If you’re worried that may be a little too steep an entry price for you, it is possible to buy just a fraction of a Bitcoin at a time.
Bitcoin might be the behemoth in the cryptocurrency scene, but it’s just one of thousands of different cryptocurrencies out there. Coins that aren’t Bitcoin are generally known as altcoins.
One standout is Ethereum. Officially the second biggest cryptocurrency on the market, it derives its value not just from supply and demand but from the fact the Ethereum network can be used for many other tasks beyond just currency. In 2018, one Ethereum coin was worth $187 and today is worth more than $4000.
Have you invested any money in cryptocurrency? Has it been a success? Let us know in the comments section below.
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