What Is Cryptocurrency? Here’s What You Should Know

Some believe decentralized cryptocurrencies such as bitcoin now provide an outlet for personal wealth that is beyond restriction and confiscation. The Cambridge dictionary defines it as “a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority.” The fact today is, cryptocurrencies let you buy goods and services, or trade them for profit. Here’s more about what cryptocurrency is, how to buy it and how to protect yourself. First, from James Royal, and Kevin Voigt of Nerdwallet.

1. What is cryptocurrency?

A cryptocurrency (or “crypto”) is a form of payment that can circulate without the need for a central monetary authority such as a government or bank. Instead, cryptocurrencies are created using cryptographic techniques that enable people to buy, sell or trade them securely.

Cryptocurrencies can be exchanged for goods and services, though they often are used as investment vehicles. Cryptocurrency is also a key part of the operation of some decentralized financial networks, where digital tokens are an important tool for carrying out transactions.

The most popular cryptocurrency, Bitcoin, has had a historically volatile price. In 2021, it hit an all-time high above $65,000 before falling back.

2. How do I invest in cryptocurrency?

While some cryptocurrencies, including Bitcoin, are available for purchase with U.S. dollars, others require that you pay with bitcoins or another cryptocurrency.

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.

3. How many cryptocurrencies are there? What are they worth?

More than 16,000 different cryptocurrencies are traded publicly, according to CoinMarketCap.com, a market research website. And cryptocurrencies continue to proliferate. The total value of all cryptocurrencies on Jan. 3, 2022, was about $2.2 trillion, having fallen off an all-time high above $2.9 trillion weeks earlier.

4. Why are cryptocurrencies so popular?

People invest in cryptocurrencies for a variety of reasons. Here are some of the most popular:

Supporters see cryptocurrencies such as Bitcoin as the currency of the future and are racing to buy them now, presumably before they become more valuable.

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.

Other supporters like the technology behind cryptocurrencies, called blockchain, because it’s a decentralized processing and recording system and can be more secure than traditional payment systems.

Some speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-term acceptance as a way to move money.

5. Are cryptocurrencies a good investment?

Cryptocurrencies may go up in value, but many investors see them as mere speculations, not real investments. The reason? Just like real currencies, cryptocurrencies generate no cash flow, so for you to profit, someone has to pay more for the currency than you did.

That’s what’s called “the greater fool” theory of investment. Contrast that to a well-managed business, which increases its value over time by growing the profitability and cash flow of the operation.

Some notable voices in the investment community have advised would-be investors to steer clear of them. Of particular note, legendary investor Warren Buffett compared Bitcoin to paper checks: “It’s a very effective way of transmitting money and you can do it anonymously and all that. A check is a way of transmitting money too. Are checks worth a whole lot of money? Just because they can transmit money?”

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.

This price volatility creates a conundrum. If bitcoins might be worth a lot more in the future, people are less likely to spend and circulate them today, making them less viable as a currency. Why spend a bitcoin when it could be worth three times the value next year?

6. Are cryptocurrencies legal?

There’s no question that they’re legal in the United States, though China has essentially banned their use, and ultimately whether they’re legal depends on each individual country. Also be sure to consider how to protect yourself from fraudsters who see cryptocurrencies as an opportunity to bilk investors. As always, buyer beware.

7. How do I protect myself?

If you’re looking to buy a cryptocurrency in an ICO, read the fine print in the company’s prospectus for this information:

Who owns the company? An identifiable and well-known owner is a positive sign.

Are there other major investors who are investing in it? It’s a good sign if other well-known investors want a piece of the currency.

Will you own a stake in the company or just currency or tokens? This distinction is important. Owning a stake means you get to participate in its earnings (you’re an owner), while buying tokens simply means you’re entitled to use them, like chips in a casino.

Is the currency already developed, or is the company looking to raise money to develop it? The further along the product, the less risky it is.

It can take a lot of work to comb through a prospectus; the more detail it has, the better your chances it’s legitimate. But even legitimacy doesn’t mean the currency will succeed. That’s an entirely separate question, and that requires a lot of market savvy.

But beyond those concerns, just having cryptocurrency exposes you to the risk of theft, as hackers try to penetrate the computer networks that maintain your assets. One high-profile exchange declared bankruptcy in 2014 after hackers stole hundreds of millions of dollars in bitcoins. Those aren’t typical risks for investing in stocks and funds on major U.S. exchanges.

Should I buy cryptocurrency?

Cryptocurrency is an incredibly speculative and volatile buy. Stock trading of established companies is generally less risky than investing in cryptocurrencies such as Bitcoin.

And now, Neelanjit Das explains the different types of cryptocurrencies.

Know The Four Types of Cryptocurrencies Based On Their Utility

Cryptocurrencies can be broadly categorised into four types based on their utility. In 2011, the cryptocurrency market was only worth $10 million. According to a report published in Statista the crypto market for the first time touched a $10 million market cap on February 9, 2011.  On November 10 ,2021, the crypto market cap was $ 3048.57 billion or roughly $ 3 trillion dollars. Only a handful of cryptocurrencies existed back then and the primary goal for most of them was to provide a cheap and fast alternative to the US dollar for cross-border payments. As on December 13, there are more than 15,000 cryptocurrencies, according tocoinmarketcap.com and more are getting added every day, though it remains to be seen how many are left finally.

Former Reserve Bank of India (RBI) governor Raghuram Rajan believes that out of the 6,000-odd cryptocurrencies in existence today, most will perish. “Only one or two, or at most a handful, would survive,” he told CNBC-TV18 last month.

But there are various kinds of cryptocurrencies. “Crypto can be classified into different categories, like DeFi, NFT, utility tokens, store of value tokens like bitcoin and litecoin, and yield farming tokens like Aave,” says Sidharth Sogani, CEO of Crebaco, a crypto research firm.

Based on their utility, we have broadly categorised cryptocurrencies into four types.

Currency

The world’s first cryptocurrency, bitcoin, was made for this utility. The aim was to make cross-border payment transactions cheaper and faster. Over the years, it has proved to be a store of value. While in 2009, one bitcoin was roughly equal to $1, now the value has grown to $48,000, according to data fromcoinmarketcap.com.

“Crypto(s) can be used on any public decentralized blockchain. It’s like the Ethereum blockchain has Ether as its token. Solana Blockchain has Sol as its token. So the tokens have enabled the developers and the public to use that particular blockchain using its native tokens,” says Sogani.

Asset

Stablecoins can be categorised as assets as the value of these cryptocurrencies is derived from the value of an external asset. For example, USDT derives its value from the US dollar. Gold GLC is tied to the value of gold. Earlier, if investors decided to exit any cryptocurrency, they could exchange it for either any other crypto (which may or may not be preferable) or fiat currency. Now due to the availability of stablecoins, they could choose to remain in the crypto ecosystem by exchanging their cryptocurrency for a more stable crypto while they decide on the next preferable choice.

“It (cryptocurrency) includes features of a commodity as well as currency, sort of like a hybrid. Commodities can also be used to settle a transaction. They do not impact the economic structure of a country directly, so considering them as a commodity is fine,” says Sogani.

Object

A lot of buyers think this is where the future of cryptocurrencies lies. These types of cryptocurrencies were created to finance special projects aimed at solving the problems of the world. For example, Siacoin (SIA) aims to solve the problem of expensive cloud storage. As mentioned in their official website, “Sia is the leading decentralized cloud storage platform. No signups, no servers, no trusted third parties. Sia leverages blockchain technology to create a data storage marketplace that is more robust and more affordable than traditional cloud storage providers.”

Another example is Decentraland, which is an Ethereum-based application where users can buy virtual land (NFT-based) using its cryptocurrency (MANA). Similarly, there are many more crypto coins that provide this type of utility.

Terra (LUNA) is working towards becoming the stablecoin provider for e-commerce payment and making decentralised finance (Defi) accessible to the common man. “Terra is a public blockchain protocol deploying a suite of algorithmic decentralized stablecoins which underpin a thriving ecosystem that brings DeFi to the masses,” says its website.

Meme or Joke Coin

These were created strictly for fun, with no specific goal or purpose, yet they are worth millions now. For example, Dogelon Mars (ELON) was created as a joke. It is supposed to facilitate “InterPlanetary Money Transactions” when it becomes viable. Its market capitalization is over $500 million as on December 13, according to coinmarketcap.com.

 “Meme coins don’t have any purpose and are very speculative assets which work on the simple idea of community-based pumped-up trading. Most of them have no use case. Nascent investors should stay away from such risky crypto(s). They can go bust, which means their value becomes zero at any time. Like what happened recently with the Squid crypto. Its owner ran away with millions of dollars of investor’s money,” says Sogani.

 But some have stood the test of time for now. Both Dogecoin and Shiba Inu started out their journey as meme coins in their early days, but now they are part of the crypto race. “Working with Doge devs to improve system transaction efficiency. Potentially promising,” Tesla CEO Elon Musk tweeted this week. Dogecoin developers are now working to make their coin a serious contender for bitcoin.

 Shiba Inu’s founder Ryoshi recently revealed that the Shiba Inu Core Devs (SICD) is working towards developing its metaverse known as “Oshiverse”. According to a report on Yahoo Finance, the anonymous developer stated, “We are working on so many aspects of Shiba Inu, including Shibarium, Shi, Shibanet, The Decentralized Shiboshi Game, Incubator and much more that won’t become evident until the near future.”  But like any cryptocurrency, caution is the key that investors should never ignore.