By Alex Jimenez
Courtesy Creative Commons
Cryptocurrency has grown to be one of the biggest financial phenomenons across the globe, and people are making (or losing) money, yet not many people know what it is.
Simply put, crypto is a digital currency. It can be traded online and often used as a form of payment.
How it works
Crypto uses a technology called blockchain, which is essentially a network of computers around the world that is recording the transactions. Each block contains records in code, and together all the blocks create the blockchain.
As quoted in a Forbes article: “Imagine a book where you write down everything you spend money on each day,” said Buchi Okoro, CEO and co-founder of African cryptocurrency exchange Quidax. “Each page is similar to a block, and the entire book, a group of pages, is a blockchain.”
The most common way of verifying transactions in a blockchain is “proof of work,” which provides a math problem that computers in the network race to solve. Once solved, the fastest computer receives a small amount of cryptocurrency. Because of this, people set up computer(s) to solve these math equations to collect crypto with minimal effort. This is known as mining.
Benefits
What makes cryptocurrency the phenomenon it is today is its decentralization from the government, thanks to blockchain. This eliminates the need for brokerage fees or commissions to be added on top of your payments and trades, creating more confidential transactions.
As more people begin to believe in cryptocurrency as a legitimate form of currency, the value of cryptocurrency will increase. If you play your cards right and do your research, big profits can be made.
In 2011, Bitcoin, the most popular crypto today, was worth about $3.50. If you invested $1,000 into Bitcoin at the time (hindsight is 20/20) you’d receive over 285BTC, which today would be worth over $13.3 million.
Risks
With an outrageously bullish market comes risk, and lots of it. For example, Bitcoin saw a 13% decrease in less than 24 hours Sept. 7 to Sept. 8.
When new types of investments become popular, the inevitable happens: Scammers and get-rich-quick gurus start to pop up. Ponzi schemes are one of the most common scams, where “traders” use illegitimate cryptocurrencies just to profit off courses and membership fees.
The rise of cryptocurrency also has led to the creation of “fake” crypto for people to make a quick buck – often using pump-and-dump schemes, where the founders of the coin will look for celebrities to back the coin to increase value. Once the value is at its peak, the owners can sell their coins and get an insane return on investment, before the price inevitably plummets. Of course, timing is everything.
Cryptocurrency is looked at as a new, fun investment, but it’s important to remember that it is still that – an investment – that should be researched before investing. Not every new coin is “going to the moon” and resulting in high profits.