Cryptocurrency, or digital assets, are a rapidly emerging technology with profound implications for our financial system. Many people have heard of the likes of Bitcoin and Ethereum, but there are nearly 1,600 different cryptocurrencies now in circulation—and that number keeps rising. In addition, new cryptos are cropping up almost every day.
The idea behind cryptocurrencies is that they’re not tied to any physical item that has intrinsic value, as are traditional currencies. Instead, their value comes from online speculation. That means their price is determined largely by people’s opinions of how much they’re worth, similar to the way that stocks are traded on the stock market.
Because of this, cryptocurrencies are often highly volatile. Prices can jump or dive depending on a number of factors, including supply and demand, political or economic uncertainty, regulatory changes, and investor enthusiasm or skepticism.
As a result, they’re not suitable for everyone. Those who have significant assets or investments should consider carefully how they want to use them and should seek the guidance of their advisors.
Despite its volatility, cryptocurrency has many advantages. One of the most notable is its ease of use. In contrast to the complicated, paper-based processes required for opening a bank account, crypto transactions can be conducted with little more than a smartphone and an internet connection.
Furthermore, crypto transactions are typically private and secure. Thanks to encryption technologies, cryptos can be sent between digital wallets using public and private keys. And they’re verifiable through a process called blockchain technology. Blockchains are decentralized databases that record all transactions in a cryptocurrency, allowing them to be verified and recorded. In turn, this reduces the chances of a hack or other cybersecurity risks.
While some cryptocurrencies have been developed to serve a monetary function, others have been developed to solve specific challenges within the blockchain ecosystem. For example, some were created to speed up transmissions or increase scalability. Others, such as Dogecoin and Shiba Inu coin, were developed for fun or as novelty items.
Some cryptocurrencies, such as Bitcoin, are mined through proof-of-work (PoW) or proof-of-stake (PoS) algorithms, which reward miners for contributing computing power to the network. Many of them also allow for masternodes, which reward holders with extra coins.
Regulators around the world are working to develop rules for cryptocurrencies, but they’re facing a tough challenge. They must strike a balance between regulating the industry to limit traditional financial risks and ensuring that it doesn’t stifle innovation. And they must do so while ensuring that users remain protected against illicit activities, such as ransomware and money laundering.