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 a few of the hottest names in this new and potentially revolutionary industry. Everyone these days 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 of the potential applications of these so-called “coins.”
What is Cryptocurrency?
Cryptocurrencies (or “crypto”) are a digital form of 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, and the amount is based on the exchange rate. Now, that doesn’t seem much different than paying in U.S. Dollars or Euros. However, the key difference here is cryptocurrencies are digital and do not have any 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 both security and reliability. It’s worth noting that these coins are not backed by any specific country’s currency, 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 Created?
The process used to create these coins is called mining, and this can be a rather complex topic. The electronic ledger mentioned above is often referred to as the Blockchain. Very in-depth and complex algorithms are required to be solved to create the next leg of the blockchain. When the blockchain is extended, more coins are created, and more information can be stored. When the computer solves the algorithms (complex math problems), more coins are earned for that specific cryptocurrency. This mining process requires a large amount of computer processing power and is a full-time job for some.
Should You Invest in Cryptocurrency?
There are plenty of risks to be aware of as it relates to 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 transactions, primarily those on the black market. These coins were derived from criminal activity and may prevent some potential users from adapting the currency.
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Zachary A. Bachner, CFP®
with contributions by Robert L. Wink, Kenneth R. Wink, and James D. Wink.