Cryptocurrency is often described as “digital money.” This description may be true, but it fails to capture what makes cryptocurrency unique and so appealing to many investors.
What is cryptocurrency?
At its core, cryptocurrency is a system of value. When investors buy a cryptocurrency, they are betting that the value of that asset will increase in the future, just as stock market investors buy securities when they believe the company will grow and share prices will increase.
Stock valuations boil down to discounted estimations of a company’s future cash flows. There is no comparable valuation metric for cryptocurrencies because there is no underlying company; the value of a cryptocurrency is tied only to investor appetite.
Cryptocurrency valuations boil down to one of two factors: the likelihood of other investors buying the asset or the utility of the cryptocurrency’s blockchain.
How does cryptocurrency work?
Cryptocurrency runs on blockchain technology, but what exactly is a blockchain? The term has become so commonplace, its meaning and significance are often blurred. A blockchain is simply a digital ledger of transactions. This ledger (or database) is distributed across a network of computer systems. No single system controls the ledger. Instead, a decentralized network of computers keeps a blockchain running and authenticates its transactions.
Proponents of blockchain technology say that it can improve transparency, increase trust and bolster security of data being shared across a network. Detractors say that blockchain can be cumbersome, inefficient, expensive, and can use too much energy.
Rational crypto investors buy a digital asset if they believe in the strength and utility of its underlying blockchain. All cryptocurrencies run on blockchain, which means crypto investors are betting (whether they know it or not) on the resiliency and attractiveness of that blockchain.
Cryptocurrency transactions are recorded in perpetuity on the underlying blockchain. Groups of transactions are added to the ‘chain’ in the form of ‘blocks,’ which validate the authenticity of the transactions and keep the network up and running. All batches of transactions are recorded on the shared ledger, which is public. Anyone can go and look at the transactions being made on the major blockchains, such as Bitcoin (BTC) and Ethereum (ETH).
But why do people dedicate computing power to validating blockchain transactions?
The answer is, they are remunerated with the underlying cryptocurrency. This incentive-driven system is called a proof-of-work (PoW) mechanism. The computers ‘working’ to ‘prove’ the authenticity of blockchain transactions are known as miners. In return for their energy, miners receive freshly minted crypto assets.
Investors in cryptocurrencies don’t hold their assets in traditional bank accounts. Instead, they have digital addresses. These addresses come with private and public keys -- long strings of numbers and letters -- that enable cryptocurrency users to send and receive funds. Private keys allow cryptocurrency to be unlocked and sent. Public keys are publicly available and enable the holder to receive cryptocurrency from any sender.
It is fair to say that Bitcoin has changed the paradigm -- there has been nothing quite like it before, and it has unleashed an entirely new technology, a new platform for investing, and a new way of thinking about money.
Cryptocurrency began as a grassroots movement with an anti-establishment ethos, but today, corporations and financial institutions are embracing cryptocurrencies for their potential to disrupt clunky legacy systems and diversify investment portfolios. As innovations continue to reshape the cryptocurrency sector, including exciting new projects like decentralized finance (“DeFi”), the meaning of cryptocurrency will continue to evolve.
How to invest in crypto currencies?
Investing in cryptocurrencies can be an exciting but risky venture. Here are some steps you can take to invest in cryptocurrencies:
Research: The first step in investing in cryptocurrencies is to do your research. Learn as much as you can about cryptocurrencies, blockchain technology, and the different types of cryptocurrencies available in the market.
Choose a cryptocurrency exchange: Once you have done your research, choose a reputable cryptocurrency exchange to buy and sell cryptocurrencies. Some popular exchanges include Coinbase, Binance, and Kraken.
Create an account: Create an account on your chosen exchange and verify your identity. This usually involves providing personal information such as your name, address, and government-issued ID.
Fund your account: To buy cryptocurrencies, you will need to fund your account with fiat currency (such as USD or EUR) or another cryptocurrency.
Buy cryptocurrencies: Once your account is funded, you can buy cryptocurrencies such as Bitcoin, Ethereum, or Litecoin.
Store your cryptocurrencies: After you buy cryptocurrencies, it's important to store them securely. You can store your cryptocurrencies in a digital wallet, which is a software program that stores your private keys and allows you to send and receive cryptocurrencies.
Monitor your investments: Keep an eye on the performance of your investments and make informed decisions about when to buy or sell based on market trends and your investment goals.
Remember, investing in cryptocurrencies is a high-risk, high-reward proposition, so it's important to only invest what you can afford to lose and to do your own research before making any investment decisions.
How much will bitcoin be worth in the future?
We cannot predict the future with certainty, and it is not appropriate for us to provide financial advice. The value of Bitcoin, like any other asset, is influenced by a wide range of factors such as market demand, supply, government regulations, technological advancements, and investor sentiment, which are difficult to predict accurately.
It is important to note that cryptocurrency markets are highly volatile and can experience significant price fluctuations in short periods. Some people believe that Bitcoin will continue to grow in value over time, while others predict that it may experience a decline. It's essential to do your research, understand the risks involved and seek professional advice before making any investment decisions.