What is Cryptocurrency?
My 20-year-old-son started investing in cryptocurrency through the Robin Hood app last year. He’s made a nice return so far. Cryptocurrency once was a scary and uncertain investment, but today, millionaires are being created without the use of dollars, and you can buy goods and services around the world using digital currency. Still, investing and using cryptocurrency requires one to be comfortable with new technologies and the crypto terminology which takes time and effort. I hope this article helps you gain the essential knowledge you need to discover whether digital currency is going to be part of your future wallet.
What is Cryptocurrency?
Surely most people have heard of Bitcoin, but many are still left with the question of what cryptocurrency really is. In essence, cryptocurrency is decentralized digital money that is based on blockchain technology. Although most people use cryptocurrency similarly to how they would stocks and precious metals, by investing in it, cryptocurrency can be used to buy regular goods and services as well. Currently, there are over 5,000 different circulations of cryptocurrency out there. With that in mind, it is crucial to really understand the crypto system and conduct thorough research before you decide to purchase this new asset class, as it can be risky. Here at Sound Bookkeeping our goal is to make life easier for our clients, this is why we have compiled information together to bring you the knowledge in an easy, digestible manner.
https://www.forbes.com/advisor/investing/what-is-cryptocurrency/
How Does Cryptocurrency Work?
Opposed to regular currency, such as the US Dollar that we know and use daily, cryptocurrency does not have central authority that manages and maintains its value. In lieu, this duty is put upon the users of cryptocurrency. It is important to keep in mind that as stated previously cryptocurrency is a digital, encrypted, and decentralized medium of exchange. Satoshi Nakamoto, who outlined the principle of Bitcoin back in 2008, stated that it is “an electronic payment system based on cryptographic proof instead of trust.” This cryptographic proof that Nakamoto mentions is ultimately transactions that are verified and recorded in a blockchain.
One might wonder what exactly a blockchain is. Inherently it is an open, distributed ledger that records the transactions in code. The transactions are recorded in blocks which are then linked together on a chain of cryptocurrency transactions that took place beforehand. As a result, this is similar to a checkbook that is shared around the world on a multitude of computers. This is so due to the fact that every user of crypto has their own copy of this “checkbook” in order to create this unified transaction record. All records are kept identical, and as a result are accurate, through the use of software, which logs every single transaction that is made as it happens, and simultaneously updates every copy of the blockchain. In order to prevent fraud, every transaction is checked by either proof of work or proof of stake.
- The proof of work validation technique verifies the transactions by having computers race to solve a mathematical problem that is provided by an algorithm. That being said, to solve these problems a great amount of computer power and electricity is needed, and although the first computer to solve the puzzle is rewarded with crypto, it is oftentimes barely enough to break even when the cost of resources used is accounted for.
- The proof of stake validation technique uses less power to check the transactions, but the number of transactions that a person can verify becomes limited by the amount of crypto that person is willing to stake for the chance to participate. The more crypto you stake, the more your chance to be chosen to participate increases. This form of validation allows for faster validation due to it being more efficient as the energy-intensive aspect is removed. The stake owner is rewarded for their work with cryptocurrency, but fraud is discouraged by having them forfeit a part of what they staked.
Fraud becomes very unlikely due to the fact that although individual users verify transactions, every verified transaction has to be checked and approved by the majority of the ledger holders. That means that the person who wants to commit fraud would need to make sure that over half of the ledgers match the fraudulent version.
https://www.forbes.com/advisor/investing/what-is-cryptocurrency/
How Can Cryptocurrency Be Used?
Although many people use crypto as an alternative option to stocks and bonds for investment, it can be technically used to buy things regular money would. The caveat here is that it has not reached the level of acceptance to become a mainstream form of payment. That being said, there are already some online retailers, such as Overstock.com, that do accept crypto, and you can also exchange crypto for gift cards to retailers and restaurants at eGifter. Another option that is available in the United States is a BitPay card that a person can order, though it does carry fees, and use it as a debit card which converts the cryptocurrency into dollars that can be used to make purchases. Another big step towards making crypto a more accepted form of payment is the fact that PayPal has recently announced the launch of a service that will allow customers to buy, hold, and sell crypto from their PayPal accounts.
Another way you can make a purchase with crypto is by using a cryptocurrency wallet, which is a software program that is able to interact with the blockchain to enable users to send and receive crypto. To pay that person or retailer using this method you typically need to scan the QR code of your recipient, or you need to manually enter their wallet address. Sometimes you are able to simplify this process by entering a phone number or selecting a contact from your phone. Depending on the type of crypto used it can take between ten minutes and two hours for the transactions to take place since they must be validated using one of the two methods previously discussed.
https://www.forbes.com/advisor/investing/what-is-cryptocurrency/
What Are the Pros and Cons of Cryptocurrency
Due to crypto transactions not needing a third party, such as a bank, to take place, it is a promising way to directly transfer funds more easily. This is in consideration of the fact that the transfers are secured by public and private keys in addition to systems such as proof of work and proof of stake. The cryptocurrency wallet has an account address that has a public key, but then the owner has a private key that is used to sign transactions. With crypto, the fund transfers require minimal processing fees, as such users can avoid traditional fees charged by financial institutions that result in much greater amounts.
Similarly, another advantage of cryptocurrency is the fact that it makes it possible to manage everything on your phone and gives you access and the ability to spend or buy anywhere you happen to be. All of the data, though anonymous, is also viewable by anyone at any time because all of the transactions are stored on the blockchain, as such, it gives those who wish for a more transparent banking system this opportunity.
Nevertheless, the fact that cryptocurrencies are semi-anonymous by nature can make it suitable for people to partake in illegal activities such as tax evasion and money laundering. That being said, it can also be seen as a pro as well in terms of people feeling safe that identity theft will not happen and that they aren’t handing over too much of their digital data.
Cryptocurrency is a novel concept, and it can be quite difficult to comprehend making that a fairly large con. Many struggle to even grasp the idea of a financial system stored by a blockchain, so they tend to stay away from the benefits that crypto can offer. As a result, many people that do use cryptocurrency tend to merely use it as an investment which means that one needs to wait for dramatic market fluctuations to work in their favor.
Another con is the fact that there is no security in case of a loss. This risk can be minimized if one is careful with their transactions and doesn’t trust companies that offer unrealistic promises in terms of offers, odds, or bonuses.
https://www.investopedia.com/terms/c/cryptocurrency.asp
How Can You Mine Cryptocurrency?
New units of cryptocurrency are released through a process called mining. Typically this is done as a compensation for validating transactions. Even though it is technically possible for anyone to mine cryptocurrency, it is becoming harder to do so. As networks like Bitcoin grow, it gets more intensive and complicated, as a result, requiring more power which increases expenses. There are more chances for an average person to mine through the proof of stake technique as it is based on people being randomly chosen based on the amount of the stake. However, you need to already have cryptocurrency in order to participate as you need to have something to stake.
https://www.forbes.com/advisor/investing/what-is-cryptocurrency/
What Are the Best Cryptocurrency Investments Currently?
Bitcoin is the first cryptocurrency to be invented in the world, and it is the most popular form of crypto. The first bitcoins were mined in January of 2009, and by April of 2021 Bitcoin accounted for over 45% of the cryptocurrency market. That being said, earlier in the year Bitcoin accounted for 70% of the market, so it is evident that other cryptocurrencies are on the rise. Bitcoin is often used as a hedge against inflation and macroeconomic instability, and it is becoming a so-called gold standard within decentralized finance. Though Bitcoin has faced volatility over the years, it has a well-known name that gives it an acceptance that other, less known cryptocurrencies, don’t have.
Cosmos, another form of crypto, allows for sovereign, independent blockchains to communicate and transfer funds through a breakthrough known as IBC, and it leaves a low carbon footprint in comparison to other networks. Cosmos also launched new services that are value-adding, as a result of everything it has a great reward system.
Dogecoin is now the fourth-largest cryptocurrency by market cap due to it increasing by over 13,000% this year. This is considered a fairly lighthearted form of crypto, and because of its large circulation, the price of it remains less than a dollar. For reference, Bitcoin is capped at 21 million coins, while Dogecoin has 129 billion coins in circulation already, and new blocks can be mined every year.
Ethereum is a technology-forward form of cryptocurrency. Not only is it decentralizing money, but its goal is to decentralize the internet as a whole, by replacing servers with a worldwide system of nodes, according to Weiss. On this platform crypto called ether is exchanged, and it has become one of the most popular cryptocurrencies in the world. The system has many technological advancements and is constantly improving upon itself.
Polkadot was founded in 2016 and is currently the eighth-largest cryptocurrency. It is believed that this crypto will revolutionize blockchain technology and will bring about the transformation and advancement in the decentralization of the internet. This network boasts its speed, security, and governance in addition to its ability to immediately scale at a global level.
With all of this in mind, there are several other forms of cryptocurrency that are currently great investments, yet all of this can change at any moment due to several factors. It is also smart to have a diversified portfolio to mitigate the risks.
The Future of Cryptocurrency And Its Impact On Your Business
Although only about 15% of the American population currently owns some form of digital currency, there is a large chance that cryptocurrency will have an impact on you and the future of your business transactions in the near future.
One aspect of this can be seen in the fact that crypto makes crowdfunding and raising capital more transparent. It is to no surprise that it is already popular to raise money through online platforms, as this way the fundraising is transparent. In addition to this, it is also an avenue for people to publicly ask for funds and offer an explanation of why they need them. As such, it is likely that the use of these types of platforms will be continued. By using crowdfunding that has a dedicated blockchain wallet the total amount of donations is open to the public, and as a result fees from third-party platforms will be avoided, while the trust of the people donating will not be hindered. Another benefit is that the crypto wallet also lets everyone, the sender and receiver, be able to see how many donations have come in.
Another way that cryptocurrencies have started to influence businesses is the fact that the coins can be instantly transferred anywhere around the world. Due to the coins being fairly secure and the fact that there is a finite supply of the coins, while demand is increasing, it has started to become a more popular form of payment in the business world.
Cryptocurrency can also be used for business equity. It is one of the popular trends right now to give early employees shares of the companies profit. Due to the large growth of crypto over the past several years, it will be no surprise that many businesses will start to provide employees with cryptocurrency as equity shares.
On a more basic level, another influence that crypto will have on businesses is that there will be an increase in the number of customers that will want to pay with cryptocurrency. A large appeal of crypto is its anonymity and privacy that is offered, so some customers are greatly attracted simply to this benefit. In addition to this, foreign customers do not need to deal with conversion fees or worry about businesses accepting their nation’s currency. Other benefits include the fact that business owners won’t need to secure account information or worry about the payments clearing, and a chargeback cannot be issued as easily as it is with credit cards. With the rise of interest, demand, and use of cryptocurrencies there are several hybrid options, such as BitPay, that are emerging as well.
As we start to see the stabilization of cryptocurrencies, there will be a push for more mass adoption as they will become less volatile and people will start to fear them less. Similar to other forms of currency, there will be more sophistication in terms of financial instruments.
Opportunities will open up with cryptocurrencies as well. Due to the fact that cryptocurrency is available to everyone all over the world, people have access to credit that they otherwise wouldn’t have. In addition, when people start to feel a concern for the stability of their nation’s currency, they can simply buy crypto and hold it in a wallet without needing to go to a financial institution. Cryptocurrency is available anywhere they are and currency controls cannot limit it or take it away from you. Furthermore, the technology of blockchain is very attractive to many as it allows for anonymous, secure, and distributed asset tracking. As such, it is starting to be used to track other valuable assets such as intellectual property rights. This opens up an opportunity for small businesses to license intellectual property, track each use, and send payment to the rights holder. The records of blockchains can all be verified by anyone and are independent which increases trust while minimizing errors.
It is evident that cryptocurrencies, although a relatively new concept, are on the rise, and the use of them will become more widespread and affect many people’s lives. As such, it is crucial to learn about this topic and be prepared to embrace the changes that are happening while being knowledgeable about it.