We’ve all heard about Bitcoin, and how its price have skyrocketed almost uncontrollably in recent months. But what exactly are the cryptocurrencies? What are they for, and what is their impact on your personal finances?
What makes up a currency? What do you need to consider in case you are already a cryptocurrency investor? Here are the answers for those questions and more.
What are cryptocurrencies?
Cryptocurrencies are a digital currency unit. They use decentralized technology that allow users to make secure payments and store money without the need to use their name or use a financial institution.
What is Blockchain?
Blockchain is the information coding system that is behind all cryptocurrencies and that sustains its entire structure. It makes possible the transfer of digital data with very sophisticated encryption and in a completely secure way.
In addition, it does not require any centralized entity to identify and certify information, instead it distributes it among multiple independent nodes that register the origin of this transaction, which makes falsifying information almost impossible.
Why are cryptocurrencies decentralized?
Contrary to the currency of any country, or Fiat money, cryptocurrencies are not issued by a national financial authority. The groups behind cryptocurrencies, for different reasons, seek not to depend on these financial entities to generate means of exchange.
How are cryptocurrencies created?
The units of cryptocurrencies are created through a process called mining, in which the use of computers to solve mathematical problems generates the coins. It is also possible to buy the coins from intermediaries, then store and spend them using cryptographic wallets.
What is a cryptographic wallet ?
Cryptographic wallets are files that store the cryptographic keys – public and private – of the cryptocurrencies you have. These keys allow you to make business transactions.
What are the most common cryptocurrencies?
Bitcoin: Bitcoin was the first and is the most commonly marketed cryptocurrency to date. The coin was developed by Satoshi Nakamoto in 2009, a mysterious figure who developed his blockchain. It has a market value of around $ 230 billion in the market as of December 2017, and is limited to 21 million Bitcoins.
Ethereum: Developed in 2015, Ether is the currency token used in the Ethereum blockchain, the second most popular and valuable cryptocurrency. Ethereum has a market capitalization of around $ 67 billion as of December 2017. It has proven to be very popular as a launch pad for other cryptocurrencies, that use the Ethereum code of blockchain. Unlike Bitcoin, Ethereum can store Blockchain codes which makes possible to use the so-called smart contracts.
Ripple: Founded in 2012. Ripple can be used to track more types of transactions, not just cryptocurrencies, and has been used by banks such as Santander and UBS. It has a market capitalization of around $ 10 billion.
Litecoin: this currency is more similar to Bitcoin in form, but has moved more quickly to develop new innovations, mainly payment transactions. The total value of all Litecoin is around $ 5 billion.
Is it safe to invest in cryptocurrencies?
Due to the level of anonymity they offer, cryptocurrencies are often associated with illegal activity, particularly in the dark web.
Investing in cryptocurrencies is as risky as investing in high-risk stocks, due to market volatility and creates an environment attractive to professional and amateur speculators.
Why would I use a cryptocurrency?
Cryptocurrencies are known to be safe and provide a certain level of anonymity. The transactions can’t be falsified or reversed, and tend to have lower costs per transaction. They are available to all, contrary to conventional banking institutions that by minimum demand that you have some type of account.
Cryptocurrencies are a relatively new instrument in finance and although they have the potential to revolutionize the way in which economic and financial operations are carried out, they are still in their early stages of development. However, is this potential that makes them an alternative investment method, so choosing a cryptocurrency as a long-term investment could help you improve your personal finances, at your own risk.
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