What Is Cryptocurrency? Here's What You Should Know

A cryptocurrency (or "crypto") is an electronic form of money that circulates without necessity of a central financial institution such as a government or bank. They are instead created with cryptographic technology that allows users to purchase, sell or trade them securely.

They can be used to exchange items and services, although they are often used to fund investments. It is also an integral element of some decentralized financial platforms in which digital tokens serve as essential for carrying out transactions.

The most well-known digital currency, Bitcoin was a subject of historically high volatility in its value. In 2021, the price reached an all-time high of more than $65,000 and then fell back. (You can check the current price for buying Bitcoin right here.)

While some cryptocurrencies, including Bitcoin is available to purchase using U.S. dollars, others require that you pay with bitcoins or a different cryptocurrency.

To buy cryptocurrencies then you'll need a "wallet" -- an online application that stores the currency you've purchased. The most common method is to open an account with an exchange that allows you to make transfers of real money for crypto currencies like Bitcoin as well as Ethereum. Learn more on how you can make investments in Bitcoin.

If you're more accustomed to traditional brokerage accounts. There are some online brokers offering access to crypto as well as stocks. The online brokerages that were reviewed by NerdWallet these are Robinhood, Webull, SoFi Active Investing and TradeStation. If you're looking for an exchange solely within the cryptocurrency world search for crypto pure-play exchanges. They include Coinbase, Gemini and Kraken aren't able to provide access to other assets, such as bonds and stocks, however they generally have a larger selection of currencies as well as more crypto storage options.

More than 17,000 different cryptocurrencies are traded publicly, according to CoinMarketCap.com, a market research website. And cryptocurrencies continue to proliferate. The total value of all digital currencies on Jan. 28 2022, was $1.7 trillion. It had fallen dramatically from a record-high above $2.9 trillion in 2021.

The reason why people invest in cryptocurrency is many motives. Here are some of the most popular:

Cryptocurrencies may go up in value but most investors view them as mere speculations, not real investments. Why is that? Just like real currencies, The cryptocurrency does not produce cash therefore, in order to profit, someone has to spend more money for the currency than what you paid.

That's what's called "the greater fool" theory of investing. Compare that with a properly managed company, which can increase its value over time by improving the profit and cash flow of the operation.

"For those who see cryptocurrencies such as bitcoin as the currency of the future, it should be noted that a currency needs stability."

Some notable voices in the financial world are advising potential investors to avoid these types of investments. It is worth noting that the legendary investor Warren Buffett compared Bitcoin to paper checks "It's an effective method of transferring money. It can do this anonymously and all that. A check is a way to transmit money as well. Can checks be worth a lot of money? Simply because they are able to transfer money?"

Are Bitcoin secured?

For those who see cryptocurrencies like Bitcoin as the future of currency in the future, it must be remembered that any cryptocurrency needs to be stable so the consumers and sellers have the ability to decide what a fair price for goods. Bitcoin and other crypto currencies aren't always stable through much of their history. In the case of Bitcoin, for instance, Bitcoin reached a peak of $20,000 in December 2017, Its value plummeted to as low as about $3,200 a year later. As of December 2020, it was trading at record levels and again.

The price fluctuation creates a conundrum. Even if bitcoins are much more valuable in the future, people will be less inclined to use or circulate them which makes them less useful as a currency. It is not a good idea to spend money on bitcoin in the event that it will be worth three times as much in the next few years?

There's no doubt that they're lawful in the United States, though China has effectively stopped their use. But ultimately whether they're legal depends on the specific country. Also be sure to consider what you can do to avoid fraudsters who see cryptocurrencies as a chance to steal money from investors. Remember, always be wary of the buyer.

If you're planning to purchase the cryptocurrency of an ICO, read the fine print of the company's prospectus for this information:

It's a lot of effort to analyze a prospectus; the greater the amount of information it contains more information, the greater your chance it's legitimate. Yet, just because it's legit doesn't mean it will be successful. It's a different matter and it requires a lot of expertise in the markets.

In addition to these concerns simply having crypto exposes users to risk of the theft of your assets, since hackers attempt to penetrate the computer networks to safeguard your possessions. A prominent exchange went bankrupt in 2014 following the theft of thousands of dollars in bitcoins. There are fewer risks to investing in stocks and funds on major U.S. exchanges.

The cryptocurrency market is a highly speculative and highly volatile purchase. Trading in stocks of well-established companies is usually safer than investing in cryptocurrencies such as Bitcoin.