Cryptocurrency at a Glance

Most Asked Questions About Cryptocurrency

What Is Cryptocurrency? Here’s What You Should Know

What is cryptocurrency? A cryptocurrency (or “crypto”) is a digital currency that can be used to buy goods and services, but uses an online ledger with strong cryptography to secure your online transactions. The interest in these unregulated currencies” crypto” is to trade for profit, with speculators at times driving prices upward.

Here are seven most asked questions about cryptocurrency

 

1. What is cryptocurrency?

Cryptocurrency or crypto is a form of payment that can be exchanged online for goods and services. Many companies have their own currencies, often called tokens, and these can be traded specifically for the goods that the company provides.  You need to exchange real currency for the cryptocurrency to access the goods or service.

Cryptocurrencies work using a technology known as blockchain.  A blockchain is a decentralized technology spread across computers that manages and records day to day transactions. Part of the appeal of this technology is its top security.

 

2. How many cryptocurrencies are there? And their What are they worth?

Currently now, more than 6,700 different cryptocurrencies are traded all over the world, according to CoinMarketCap a market research website. And cryptocurrencies continue to proliferate, promoting money through initial coin offerings, or ICOs. The total value of all cryptocurrencies as at Jan. 27, 2021, was more than $897.3 billion, according to the market research website and the total value of all bitcoins, which is  the most popular digital currency, was pegged at about $563.8 billion.

 

Best cryptocurrencies by market capitalization

Cryptocurrency Market Capitalization
Bitcoin $563.8 billion
Ethereum $142.9 billion
Tether $25.2 billion
Polkadot $13.9 billion
XRP $11.4 billion
Cardano $9.7 billion
Chainlink $8.3 billion
Litecoin $8.1 billion
Bitcoin Cash $7 billion
Binance Coin $6.2 billion

3. Why are cryptocurrencies so popular?

  • Traders see cryptocurrencies such as Bitcoin as the currency of the future and are racing to buy them now, before they become more valuable
  • supporters like the fact that cryptocurrency removes the central banks from managing the money supply, since over time these banks reduce the value of money via inflation
  • Also supporters like the technology chain behind cryptocurrencies, the blockchain, because it’s a decentralized system and can be more secure than traditional payment systems
  • Speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-term acceptance as a way to move money

 

4. Are cryptocurrencies a good investment?

Cryptocurrencies may sky rock in value, but many investors see them as mere speculations, not real investments. Because just like real currencies, cryptocurrencies generate no cash flow, so for you to gain, someone has to pay more for the currency than you did.

That’s what’s called “the greater fool” theory of investment. Contrast that to a well-managed business, which increases its value over time by growing the profitability and cash flow of the operation.

 

As cafegist writers have noted, cryptocurrencies such as Bitcoin may not be all that safe, and some notable voices in the investment community have advised upcoming investors to steer clear of them. Worthily of note, legendary investor Warren Buffett compared Bitcoin to a paper checks: “It’s a very effective way of transmitting money and you can do it anonymously and all that. A check is a way of transmitting money too. Are checks worth a whole lot of money? Just because they can transmit money?”

For those who see Bitcoin one of the cryptocurrencies as the currency of the future, they should note that a currency needs stability so that merchants and consumers can determine what a fair price is for goods. Bitcoin and other cryptocurrencies have been anything but stable through much of their history. For example, while Bitcoin traded at close to $20,000 in December 2017, its value then dropped to as low as about $3,200 a year later. By December 2020, it was trading at record levels again.

The price volatility creates a conundrum. If bitcoins might  worth a lot more in the future, people are less likely to spend them today, making them less valuable as a currency. Why spend a bitcoin when it could be worth three times the value next year?

5. How do I buy cryptocurrency?

Some cryptocurrencies, are available for purchase with U.S. dollars, others require that you pay with bitcoins or any other cryptocurrency.

To buy cryptocurrencies, you’ll need a “ewallet,” an online app that can hold your currency. Generally, you create an account on an exchange, and then you can transfer real money to buy cryptocurrencies such as Bitcoin or Ethereum.

 

6. Are cryptocurrencies legal?

There’s no question that they’re legal, though some countries like China has essentially banned their use, and ultimately whether they’re legal depends on individual country. Also know how to protect yourself from fraudsters who see cryptocurrencies as an opportunity to cheat investors.

 

7. How do I protect myself?

If you want to buy a cryptocurrency in an ICO, read the fine print in the company’s booklet for the following information:

  1. Who owns the company? A recognizable and well-known owner is a positive sign.
  2. Are there other major stakeholders who are capitalizing in it? It’s a good sign if other well-known investors want a piece of the currency.
  3. Will you own a prize in the company or just currency or tokens? This difference is important. Owning a prize means you get to participate in its earnings (you’re an owner.
  4. Is the money already developed, or is the company looking to raise money to develop it? The further along the product, the less unsafe it is.
  5. It can take a lot of work to comb through a prospectus; the more detail it has, the better your chances it’s legitimate. But even legitimacy doesn’t mean the currency will succeed. That’s an entirely separate question, and that requires a lot of market savvy.
  6. But outside those concerns, just having cryptocurrency leaks you to the risk of holdup, as hackers try to penetrate the computer networks that maintain your assets. One high-profile exchange declared bankruptcy in 2014 after hackers stole hundreds of millions of dollars in bitcoins. Those aren’t typical risks for investing in stocks and funds on major U.S. exchanges.

Should you buy cryptocurrency?

Cryptocurrency is an incredibly speculative and impulsive buy. Stock trading of established companies is generally less dangerous than investing in cryptocurrencies such as Bitcoin.

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