Cryptocurrency is a digital asset that uses encryption to conduct transactions. Bitcoin is the most familiar form of crypto, but the blockchain technology that underlies it has many other use cases.
The blockchain is a database that records every transaction made using a cryptocurrency. This ledger is updated in real time across a global network of computers. The blockchain is public, meaning anyone can view the transaction record at any time.
It’s also impossible to change or reverse a cryptocurrency payment once it’s finalized. This makes it very difficult for fraudsters to scam merchants or consumers. It can also reduce the cost of doing business for consumers and retailers, as it eliminates the need for credit card companies to charge a fee to reverse a fraudulent transaction.
A cryptocurrency’s value can rise or fall based on a number of factors, including its perceived worth, how it’s used and how much people are willing to pay for it. For example, a currency may become more popular as it becomes more widely accepted, which could drive demand and push up its price. Alternatively, a government crackdown or other major events can send crypto prices plummeting.
Unlike traditional currencies, crypto isn’t backed by any government or central bank and can’t be printed on demand. Instead, it’s created and managed through a computer software program that is open-source and run by the community. This gives cryptocurrency its decentralized structure.
While crypto’s price volatility can be scary, some people believe it has the potential to transform the world economy by enabling new ways of conducting business and exchanging value globally. It can provide access to financial services and products for people in countries with unstable currencies and poor banking infrastructures.
For example, an estimated 1.3 billion adults don’t have bank accounts and must receive their income in cash. This can make them vulnerable to robbery and other forms of theft. Blockchain and crypto can help by reducing the need to carry large amounts of physical cash, while providing secure and instant ways to send money around the world.
There are a growing number of businesses and apps that accept crypto as payment. These include online retailers, travel booking companies and even home rental platforms like Airbnb. Some companies are combining crypto with other technologies to create unique new products, like the Orchid security app that includes both a VPN and a cryptocurrency called OXT. It’s also possible to purchase virtual land in a game that runs on the Ethereum blockchain, or invest in non-fungible tokens (NFTs) that behave like stocks or bonds but aren’t physically owned.
While there are many benefits to cryptocurrency, it’s important to remember that it’s not protected by the federal deposit insurance or Securities Investor Protection Corporation, and that it’s not guaranteed against loss like money in a bank account. Cryptocurrencies can be hacked, and exchanges can fail. Only buy or trade cryptocurrencies with money you’re willing to lose. For more information, see NerdWallet’s guide to cryptocurrencies.
