A Cryptocurrency, as defined by Wikipedia, “Is a type of money that is transmitted digitally instead of through cash transactions. Transactions may be grouped together in networks or through an online interface. The term can also refer to a system of private digital key systems that allow users to generate their own cryptosystem (typically using public key infrastructure) and manage their own private keys.” This definition may seem broad, but it is often used interchangeably with digital cash.
Cryptocurrencies differ in many ways from conventional money. Typically, a typical cryptocoin will function as a payment platform. This means that if you wish to purchase a product from a seller on the platform, you will need to provide proof of funds before you are able to send the payment. In order to make purchases on the platform you will need to also prove your account balance, though this usually requires the use of a payment channel, which is an intermediary between buyers and sellers on the platform. Unlike conventional money, however, you do not have to provide any evidence of ownership of the funds you wish to transfer.
Traditional cryptosystems such as the traditional Wachovia prepaid debit card system and PayPal utilize elliptic curve cryptography. This form of cryptography was originally developed for use in digital cash. By changing the elliptic curve which is used to scramble financial transactions, digital currencies such as bitcoins eliminate the need for a third party to authenticate the transactions. This is why most cryptographers consider elliptic curve cryptography superior to other forms of cryptography.
Most other forms of cryptography use a more traditional proof of ownership of the resources being cryptographic. A stake is taken in transaction for the right to spend coins. Transactions using stake have a few benefits over those that use digital cash: stake based transactions are faster than transfers with no proof of ownership, transfers with stake require no extra cost for a third party authentication tool, and if there is an error in the transaction the victim does not lose any money.
Many people invest in many currencies because they believe that one will rise in value versus other currencies. With the notable exception of the Swiss National Bank, though, investors do not normally place a great deal of weight on the relative strength of one particular currency. One of the reasons that decentralized cryptosystems are appealing is that they eliminate the need to rely on a single institution to manage the diverse balances of the various currencies held by the investors. In addition, decentralized systems are less susceptible to outside influences since the different currencies are traded on their own terms.
Investing in various cryptosystems has many advantages but also comes with some risks. Investors should exercise due diligence and research each decentralized currency they may be interested in before making purchases. A wise investor should educate himself on the underlying merits of each form of encryption as well as how each individual transaction works. They should never invest money that they cannot afford to lose, especially in what is often a highly volatile market. A smart investor knows that they must be ready to lose some money to be successful.