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What Is Cryptocurrency And How Does It Gain Value?

The digital currency cryptocurrency, also known as “crypto”, is a medium of exchange and a store of value, but because it’s new, it’s mostly held as speculative investments.

Blockchain technology records cryptocurrency transactions in a ledger system. Cryptocurrency is secure for online transactions and nearly impossible to counterfeit since it can be viewed publicly but cannot be changed or controlled by anyone.

How Many Cryptocurrencies Are There?

Thousands of cryptocurrencies are publicly traded today, and new ones are constantly being created. Cryptocurrencies like these are not well known and don’t have a lot of trading volume.

Among the most popular and widely traded cryptocurrencies are:

  • Bitcoin (BTC-USD)
  • Ethereum (ETH-USD)
  • Litecoin (LTC-USD)
  • Bitcoin Cash (BCH-USD)

Is Cryptocurrency Legal?

Most developed markets, including the U.S., the U.K., Germany, and Japan, accept cryptocurrency. There are some countries that have either banned or restricted its use. Despite heavily restricting Bitcoin use, China does not make Bitcoin ownership illegal.

How Does a Cryptocurrency Gain Value?

Cryptocurrencies are valued at more than $3 trillion as of Spring 2022. Like other currencies, the value of cryptocurrency is largely determined by its supply and demand. Cryptocurrencies, however, are neither issued nor backed by central banks or governments. As a result, monetary policy, inflation, and economic growth have no effect on the value of cryptocurrencies.

Cryptocurrency value can be influenced by a variety of factors, including:

  • Market demand and supply of currencies
  • The cost of production (mining process)
  • The supply and demand of competing cryptocurrencies
  • The exchanges it trades on
  • Any governing regulations or restrictions upon it

Pros & Cons of Investing in Cryptocurrency

The rapid growth and popularity of cryptocurrency has been covered extensively by the financial media. There are some significant risks and disadvantages associated with growth potential and benefits of other types of financial assets.

Pros of Cryptocurrency

  • Anonymity: Cryptocurrency transactions are completely anonymous, which makes them appealing to privacy-conscious users.
  • Transparency: Blockchain technology enables the recording of anonymous transactions on an open ledger. In other words, the data is transparent and available to the public at any time.
  • Decentralization: Cryptocurrencies are not issued or backed by governments, so government interference and monetary policy influence are not present.
  • Potential for quick gain: Bitcoin has experienced many short periods of significant gains, including the first four months of 2021, during which its value more than doubled.).

Cons of Cryptocurrency

  • Price volatility: Many investors are attracted to crypto because of its potential for quick and extreme gains. From April to June 2021, Bitcoin’s price dropped 50% in just two months. As of January 2022, Bitcoin has fallen over 30% from its January high (CNBC).
  • Excessive cost to produce: Mining many cryptocurrencies requires large amounts of electricity and other resources. A Harvard Business Review article explains that the majority of Bitcoin’s costs are related to its mining.
  • Regulatory restrictions: Cryptocurrencies are generally legal in many developed countries, but central governments do not formally regulate them. As long as federal governments do not adopt and regulate cryptocurrency in the same way as fiat currencies, such as the U.S. dollar, the risk of investing in cryptocurrency will be elevated.
  • Risk of losing coins: Cryptocurrencies like Bitcoin require private keys to access their currency tokens. If your private key is lost, or if your computer fails, you lose your tokens, which cannot be recovered.

Where To Buy & Trade Cryptocurrency

Bitcoin and other popular cryptocurrencies can only be bought or traded on a handful of trading platforms, despite thousands of cryptocurrencies available today. Examples of cryptocurrency trading platforms include Robinhood and Sofi Active Investing. Coinbase (COIN) is another popular exchange where users can buy, sell, transfer, and store digital currencies.

Cryptocurrencies can be bought and traded in the following ways:

  1. Select a trading platform or exchange.
  2. Store your cryptocurrency in an exchange “Bitcoin wallet.”
  3. To fund your account, add a payment method, such as a debit card.
  4. Choose a cryptocurrency and buy it.

Is Cryptocurrency a Good Investment?

The risks associated with cryptocurrency should be understood before buying it. The suitability of cryptocurrency for a given investor’s investment goals and risk tolerance will determine whether or not cryptocurrency is a good investment. Cryptocurrency, for instance, can result in outsized gains, but there is also a risk of significant declines or permanent losses.

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