Cryptocurrencies have seen immense popularity and price gains recently, leaving many confused as to their functions and operation. If you don’t belong to the tech world or live under a rock, chances are you have heard about Bitcoin and other cryptocurrencies – but many don’t really understand their inner workings. That’s okay though! Birdee is here to explain all your investing questions simply!
Cryptocurrencies rely on blockchain, an emerging technology which utilizes encryption to secure and verify transactions and oversee the issuance of new units of currency. A cryptocurrency’s value is determined by market forces; as this fluctuation can change quickly, investing can become risky for investors not comfortable taking high levels of risk.
When purchasing something with cryptocurrency, your transaction is recorded on a public ledger known as blockchain and recorded along with other recent transactions. Each user of the system has both a public and private key; whereas the former acts like an address for your currency; but only you have access to your private key; every time you complete a transaction on blockchain it records both keys and verifies whether or not the transaction was valid.
Once a transaction has been recorded on a blockchain, it becomes irrevocable – an advantage over traditional fiat currencies which may be altered after they’ve been issued by central banks. Furthermore, blockchain cannot be altered by hackers; as a result, cryptocurrencies provide users with unparalleled security and trustworthiness.
Mining is the process by which many cryptocurrencies are generated through community involvement; computers on a network compete to solve complicated cryptographic puzzles and verify transactions on the blockchain, an energy-intensive endeavor for which miners may receive newly minted coins as rewards for their efforts. More sustainable approaches exist now for creating and dispersing tokens – these methods may involve less environmental impact as well.
A cryptocurrency’s value is determined by how many people use it and its ability to function as either a medium of exchange, store of value or both. Supply and demand fluctuations or inflation could drive its price up further; but investing in them carries many risks such as regulatory uncertainty, cybersecurity concerns and management considerations.
Diversifying your portfolio to minimize risks related to cryptocurrency can reduce losses significantly; and without much historical data on this particular asset class it can be hard to gauge their behavior and how their values may relate to other assets.
It is also essential to distinguish between coins and tokens. A coin represents cryptocurrency in physical or virtual form; on the other hand, tokens are software-based assets on blockchain that represent ownership or use rights over something. Typically used to represent value on larger blockchain networks, coins can also be used for payment or investment projects.