Do you have friends or family who talk about cryptocurrency? Perhaps you’ve seen it on social media or heard it in the news. No matter how you came across it, you need to understand more about this new technology that everyone seems to be investing in. In this post, we explain the details you should know about cryptocurrency before investing.
Cryptocurrency is a virtual or digital currency that is powered and secured by cryptography — techniques that offer protection against conflicts — which makes it almost impossible to double-spend or counterfeit.
Many of these work through decentralized networks on blockchain technology, which is enforced by distributed ledger on different computer networks. A huge advantage offered by cryptocurrencies is that they’re not issued by a central authority in general. This means that they are immune to government manipulation or interference in theory.
According to CoinMarketCap.com, there are currently more than 13,000 different cryptocurrencies available to the market. However, more and more are created, and work to raise money through initial coin offerings. As of October 22, 2021, the total value of all cryptocurrencies reached over $2.5 trillion. The most popular and well-known cryptocurrency, Bitcoin, accounted for around $1.2 trillion of that amount.
There are various reasons why cryptocurrency appeals to its supporters, here are just a few of them:
- Plenty of people see cryptocurrency to be the currency of the future and are buying them today while they’re more affordable. Presumably, these supporters think that Bitcoin and other cryptocurrencies will become more valuable in the future.
- Some people prefer to use cryptocurrency since it doesn’t go through banks. Banks tend to lower the value of money due to inflation, which is another thing that cryptocurrency doesn’t suffer from.
- Other people who use cryptocurrency appreciate the technology that provides a decentralized system, which can provide more security compared to traditional payment systems.
- Others like cryptocurrencies because they go up in value (although they also go down) and don’t mind the currencies’ long-term use. In other words, they only use it as a means to move money.
While cryptocurrencies can have an increase in value, many investors don’t see them as actual investments. The reason behind this is that just like traditional currency, cryptocurrency doesn’t create cash flow. This means that before you make a profit, someone else will need to pay more for the cryptocurrency than you originally did.
Cryptocurrency is often compared to a well-managed business, which will increase in value through the years, growing in profitability as well as cash flow. Unfortunately, the same can’t be said for cryptocurrency, since it first needs to see stability before it can be called the currency of the future. For many cryptocurrencies, stability isn’t something that has been recorded throughout their history.
For instance, in December of 2017, Bitcoin was traded around $20,000, only to have its value drop to a low of $3,200 in 2018. But by December 2020, it was once again being traded at record levels. Because of this, some of the most influential voices when it comes to investments advise investors to stay away from cryptocurrency.
Warren Buffett, one of the most recognizable names in the industry, once compared checks to Bitcoin. He explained that while both are an effective way of transferring money, with Bitcoin allowing you to do so anonymously, it all boils down to just that. He points out that both Bitcoin and checks are just a means of transmitting money, and that neither will grow your money for you.
Moreover, the volatility in prices is another factor to consider. Because Bitcoin can be worth so much more in the future, some people will hesitate to spend them, and would rather hoard them making it a less viable type of currency. After all, why would you spend your bitcoin when it can reach a bigger value in just a few months?
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