Cryptocurrency is an electronic payment system that uses cryptography to verify and transfer ownership of digital assets. It isn’t backed by any government or bank, and it doesn’t offer the same protections as traditional money. Investors hold cryptocurrencies in digital wallets, and some exchanges act as middlemen for buying and selling them. Other exchanges, called decentralized exchanges (DEX), cut out the middlemen and allow users to trade directly with each other.
Many investors view cryptocurrencies as an investment, and they’re often touted as alternatives to stocks and bonds. Some investors even say they’re part of a “crypto portfolio.” But before you jump into this emerging industry, it’s important to understand what crypto is and how it works.
A cryptocurrency’s value can fluctuate dramatically, which can make it difficult to use as a currency. For example, the price of bitcoin has soared and plummeted over the past few years. In some periods, the value of a single bitcoin has more than doubled. These dramatic swings can be hard for some investors to stomach.
Some cryptocurrencies are designed as currencies, while others have more speculative uses. For instance, there are “collectibles,” such as the dogecoin, which has become popular because Elon Musk tweeted about it (perhaps genuinely or perhaps as a joke). These coins have limited utility, but they can still be a fun way to play with the technology.
Another type of crypto is known as a “token.” These are noncash assets that can help fund projects and later grant access to a service or facilitate decision-making. For example, a token might give holders the right to vote on a company’s board of directors or to receive dividend payments. Tokens aren’t regulated like currencies, and they can be used for illegal activities.
The blockchain is a shared ledger that records transactions on a cryptocurrency network. It’s protected by cryptography, which makes it difficult to tamper with or alter the records. In addition, the blockchain is immutable—once a transaction is recorded on it, it can’t be reverse-engineered or undone.
As a result of these features, the blockchain is considered the most secure platform in the world. Some cryptocurrencies also use other security measures, including proof of work and proof of stake, to safeguard the integrity of their records. The blockchain has several advantages over other payment systems, including the speed and cost of transfers. For these reasons, many banks are exploring the potential of using crypto to make international payments. However, this remains a developing area of the market, and the security challenges remain substantial.
