Cryptocurrency inspires passionate opinions, from those who believe it’s a transformative technology to those who worry it’s just a fad. But what exactly is cryptocurrency, and how does it work? The short answer is that cryptocurrencies are units of exchange for goods and services, stores of value and some can be used to participate in specific software programs. But this is a complicated area, and there are many different types of cryptocurrencies, each with their own merits and risks.
Bitcoin, the best-known form of cryptocurrency, was designed as a medium for everyday transactions. Since its release in 2009, people have found ways to use it for everything from buying coffee and furniture to transferring money between bank accounts. The list of products and services that can be bought with Bitcoin grows every day, as do the number of companies that accept it as payment.
The basic idea behind Bitcoin and other cryptocurrencies is that they’re not controlled by any central authority, but rather by networks of computers running open-source software. As these networks process and record transactions, they create a digital ledger called a blockchain. The blockchain is public and anyone can access it, so that no one person controls the currency’s security or its integrity. The blockchain also ensures that all data is accurate by verifying every new transaction with a computer program that checks to see if a previous block of data matches up.
These computers are known as “nodes.” Each node runs a copy of the cryptocurrency’s software and is assigned a unique address, which is linked to its wallet application (where all transactions take place). When a user wants to make a transaction, the nodes choose one of them to validate or record it. In this way, all the nodes maintain a complete and accurate record of all past and current transactions.
The price of a cryptocurrency depends on a variety of factors, including scarcity, adoption, and inflation. In general, a coin’s price rises the more it is used for real purchases, and declines as it becomes less in demand. The price of a cryptocurrency can also be influenced by market events, such as political instability or natural disasters.
Investors buy cryptocurrencies with the hope that their price will rise, netting them a profit. However, these currencies aren’t federally backed or insured, and there are no guarantees that they will increase in value. The volatility of cryptocurrency prices makes them risky investments for some investors.
There are several ways to invest in cryptocurrencies, including using Bitcoin trusts (which can be purchased with a regular brokerage account) and buying shares of blockchain companies or ETFs. Investors should carefully weigh these options against their investment goals and risk tolerance before making any investments.
Cryptocurrency trading is done through online exchanges or brokers, where you can purchase a certain amount of a given cryptocurrency at its current market price. The process of adding funds to your account varies by platform, and can include connecting a bank account, initiating ACH or wire transfers, or using credit cards for deposits. Depending on the method you use, fees for deposits and withdrawals can add up quickly, especially when combined with transaction or exchange fees.