Cryptocurrencies have been a hot topic over the past few years, but the excitement seems to have exploded in 2021. Bitcoin, Ethereum & Dogecoin are just some of the hottest names in this new and potentially revolutionary industry. Everyone seems to be either thrilled or at least curious about this new form of currency. But what exactly is a cryptocurrency, and how does it works?
This blog will dive into the high-level details of cryptocurrency and some potential applications of these so-called “coins.”
What is Cryptocurrency?
Cryptocurrencies (or “crypto”) are a digital currency used for goods, services, etc. For example, instead of paying $100 in cash for a product, you could pay using a virtual currency like Bitcoin, which is based on the exchange rate.
That doesn’t seem much different than paying in U.S. Dollars or Euros. However, the critical difference here is that cryptocurrencies are digital and have no physical form. Therefore, this virtual currency is more aligned with using a credit card than cash, but cryptocurrencies operate much deeper.
How Does Cryptocurrency Work?
These digital “coins” are part of a global electronic ledger that secures transaction information. The ledger follows the coin throughout the transaction process, adding a unique layer of depth not found in any other currency.
The fact that the transactions are recorded and protected offers security and reliability. It’s worth noting that any specific country’s currency does not back these coins, so the potential here is global. One of the most significant potentials for this industry is the possibility of adopting a single coin globally, creating a universal currency for international trade and commerce.
How is Cryptocurrency Made?
The process used to create these coins is called mining, which can be a somewhat complex topic. The electronic ledger mentioned above is often referred to as the Blockchain. Very in-depth and complex algorithms must be solved to create the next leg of the Blockchain.
More coins are created when the Blockchain is extended, and more information can be stored. In addition, more coins are earned for that specific cryptocurrency when the computer solves the algorithms (complex math problems). This mining process requires a large amount of computer processing power and is a full-time job for some.
How to Invest in Cryptocurrency
There are plenty of risks to be aware of concerning this speculative industry. First, no one knows which coin will become the most popular or how widely accepted this currency will be. Second, China has already placed restrictions on the use of cryptocurrency, and it is assumed that other countries will try to impose regulations.
Third, the complexity of the mining process may deter some individuals, organizations, or countries from using the currencies since they may not fully understand how the currency is created.
Lastly, the origin of the coins themselves has worried some potential users. Originally, cryptocurrency was used to hide illegal, black market transactions. These coins were derived from criminal activity and may prevent some potential users from adopting the currency.
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For helpful tips on other popular financial topics, check out our articles on the U.S. Inflation Rate, Capital Gains Tax, and When to Start Saving for Retirement. Also, please forward this commentary to a friend, family member, or co-worker.
Please get in touch with the Team at Summit if you have had any changes to your income, job, family, health insurance, risk tolerance, or overall financial situation. We hope you learned something today. We would love to hear any feedback or suggestions if you have any feedback or suggestions.
Zachary A. Bachner, CFP®
contributions by Robert L. Wink, Kenneth R. Wink, and James D. Wink.