What Are Cryptocurrencies?
Cryptocurrencies offer an innovative new way of exchanging value online, using blockchain technology and decentralization – meaning no central authority governs them; rather they’re managed by a network of computers running free, open-source software. Cryptocurrency makes money more accessible, instantly and for low fees globally – people can send and receive money globally, near-instantaneously and around the clock, 24/7, for low fees. Traditional currency comes in bills or coins you can hold in your hand or deposit into banks; cryptocurrency takes things further. Buy and sell cryptocurrency using digital exchanges, apps like Coinbase or Cash App, brokers or even financial derivatives such as the Chicago Mercantile Exchange’s Bitcoin futures contract.
Cryptocurrencies differ from traditional national currencies by not having any legal tender status and instead basing their value solely on what other people will pay in the market place for them.
Cryptocurrencies’ attraction lies in their security, speed and lower costs than most payment methods – especially credit card companies that charge 3-4% per transaction compared with cryptocurrency’s typically one percent or lower costs per trade. Furthermore, cryptocurrency transactions don’t tie buyer or seller back to any one country or physical location, making it particularly suitable for cross-border commerce.
Most cryptocurrencies are produced through a process called mining, in which computers use complex mathematical problems to verify other blockchain transactions and in exchange are given newly created currency as payment for their computing efforts. Some cryptocurrencies utilize alternative mining techniques that require less energy consumption while some don’t mine at all.
Cryptocurrency investments can be high-risk propositions. Their investments may be tied to technological products in early development or rollout stages, making it hard to predict which will succeed and which may fail. There may also be regulatory risks, with governments grappling with how best to regulate them; sudden regulatory crackdowns could make selling your cryptocurrencies difficult or illegal and even negatively affect their value.
Even with their risks, there are compelling arguments for adding cryptocurrency investments to your investment portfolio. You might do it to diversify assets, take advantage of increased returns or hedge against inflation – these revolutionary technologies offer many compelling benefits that should not be discounted. Just ensure you do your homework prior to investing your capital with any particular investments; an experienced financial advisor will help find an optimal combination of risk and return that meets your individual goals. Discover ways you can save more with NerdWallet!