Cryptocurrencies have been one of the most talked about topics in the financial world over the past few years. With the price of Bitcoin reaching an all-time high in December 2017, and other cryptocurrencies following suit, there is no doubt that this new asset class is here to stay.
While there is no doubt that cryptocurrencies have taken the world by storm, there is still a lot of uncertainty about what they are and how they work. In this blog post, we will attempt to shed some light on the innovation that is cryptocurrency.
What are Cryptocurrencies?
Cryptocurrencies are digital or virtual tokens that use cryptography to secure their transactions and to control the creation of new units. Cryptocurrencies are decentralized, meaning they are not subject to government or financial institution control.
What Gives Cryptocurrencies Value?
Unlike fiat currencies, which are issued by central banks and regulated by governments, Cryptocurrencies are not subject to inflationary pressures. Additionally, Cryptocurrencies are scarce, with a limited supply of tokens that cannot be increased. This limited supply combined with increasing demand has caused the price of many cryptocurrencies to skyrocket in recent months.
How Do Cryptocurrencies Work?
Cryptocurrencies use a decentralized ledger system, typically called a blockchain, to record transactions. Blockchain technology allows for secure, transparent and tamper-proof ledgers that can be shared amongst a network of computers.
Each transaction that takes place on a blockchain is verified by the network of computers, known as nodes, before it is added to the ledger. This verification process ensures that the transaction is valid and that the funds are available. Once a transaction is verified and added to the blockchain ledger, it cannot be altered or removed.
What are the Benefits of Cryptocurrencies?
There are many benefits of cryptocurrencies, including:
-Decentralized: Cryptocurrencies are not subject to government or financial institution control.
-Secure: Cryptocurrency transactions are secured by cryptography and recorded on a decentralized ledger, making them tamper-proof.
-Transparent: Cryptocurrency transactions are transparent, meaning that all parties involved can view the transaction on the blockchain ledger.
-Fast and Global: Cryptocurrency transactions can be processed quickly and are not limited by geographical boundaries.
What are the Risks of Cryptocurrencies?
While there are many benefits of cryptocurrencies, there are also some risks to be aware of, including:
-Volatility: The price of cryptocurrencies is highly volatile and can swing up and down rapidly.
- hacking: Cryptocurrencies are stored in digital wallets and are therefore vulnerable to hacking.
-Lack of Regulation: Cryptocurrencies are not currently regulated by any government or financial institution.
-Unknown or Scam Projects: There are many new cryptocurrency projects appearing every day, and it can be difficult to know which are legitimate and which are scams.
Despite the risks, the potential rewards of investing in cryptocurrencies are great. Cryptocurrencies have the potential to revolutionize the way we interact with the digital world and could provide a new level of financial inclusion.
If you’re thinking about investing in cryptocurrencies, we recommend doing your own research and speaking with a financial advisor to understand the risks involved.