Cryptocurrency, or crypto, is a digital asset that uses blockchain technology to record and verify transactions. It does so without relying on central authorities or banks to enforce trust and police the currency, and instead uses a system of rewards and penalties that is decentralized. This eliminates the risk of a single institution failing, which can trigger global financial crises like those that happened in 2008, according to research from Fidelity Digital Assets.
A cryptocurrency’s value comes from its supply and demand, but it also has intrinsic economic value. Like traditional currencies, cryptocurrencies are used to buy goods and services, and can be stored in wallets. But unlike traditional cash, cryptocurrencies aren’t backed by a government or bank, so they can’t be redeemed for a certain amount of the money that was originally spent on them. Instead, cryptocurrencies are “mined” by a network of computers, called miners, that compete to solve complex math problems in a race to be the first to add new blocks to the blockchain. Miners are rewarded for their efforts with coins. The blockchain is the public record that cryptos use to store transaction data, which is verified by several computers at once.
While the Bitcoin blockchain was originally developed to store transaction data for the cryptocurrency, it has since evolved to support a wide range of other applications. These include security tokens, which represent ownership of an asset (like a stock) on a public blockchain, and digital contracts, which automatically execute the terms of a contract.
In addition, the blockchain allows for quick and secure exchanges of funds between institutions. For example, if you bought shares of a company in the stock market and transferred them to another investor’s account, it could take up to three days for that transaction to complete, which can incur significant fees and risks for investors. By using the blockchain, those transfers can happen in minutes or seconds, and for a fraction of the cost.
The list of products and services you can buy with cryptocurrency grows by the day, as consumers and vendors become more comfortable with virtual money. From consumer staples to luxury watches to event tickets, you can use Bitcoin and other cryptocurrencies at many retailers and online stores. Most major crypto exchanges offer debit cards that allow you to spend your balances at participating merchants.
But it’s important to remember that crypto is a high-risk investment and should only make up a small percentage of your overall portfolio. You should also diversify your investments by purchasing a variety of different cryptocurrencies to reduce the impact of losses in one particular asset class.
