Cryptocurrency isn’t the black sheep it once was. It’s hit the mainstream, and it’s grabbing up more headlines and investors than ever before.
These days, about 1 in 7 Americans own some type of cryptocurrency. And a little more than half of them bought it for the first time in 2020.1
Those numbers are likely to climb this year. More than a quarter of folks say they plan to buy cryptocurrency in the next 12 months.2 With all the headlines, it’s hard to ignore all of the excitement. And, yet, many also admit they still don’t know all that much about cryptocurrency.3
Test your knowledge and check out the facts below to see if the cryptocraze lives up to all of the hype — and if it really makes sense for you to jump on the bandwagon.
Top 6 Things to Know About Cryptocurrency
1. What is Cryptocurrency?
It's a digital or virtual currency created by encoding strings of data (Crypto) into units of currency. The feds define it as a "medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency."4
That means that, unlike the US dollar, cryptocurrencies are not issued by the government. They aren't regulated by any central authority, and they don't have a physical form. They are digital, decentralized, and encrypted.
Think of them like virtual tokens or credits you can only use in certain places - and that you can't necessarily cash out when you want to.
2. Top Three Types of Cryptocurrency
Bitcoin (BTC). This is the first and biggest name in crypto. It has dominated the market since its introduction in 2009. It's prized for its relative resilience and widespread acceptance in the marketplace. That's why some say it's the closest option for a "blue-chip" cryptocurrency.5
Ethereum (ETH). Second only to Bitcoin in market share, Ethereum is distinctive in that it's a software platform where users can exchange a cryptocurrency known as "ether." You may see the terms "Ethereum" and "ether" used interchangeably. Ethereum can be used as a hot for other cryptocurrencies. That means investors in Ethereum can benefit from wider uses of the platform, not just ether exchanges.5
Litecoin (LTC). This one was created in 2011 as the "silver to Bitcoin's gold." Using some of Bitcoin's fest features, Litecoin is a less complex cryptocurrency, resulting in shorter transaction confirmation times.
These are three of the more than 7,000 cryptocurrencies that exist. Each week new cryptocurrencies are created, and they all have different uses and goals.5,6
3. Should you invest in cryptocurrency?
That depends. Cryptocurrencies are attractive to people who like to be on the cutting edge of technology. Certain cryptos are designed for fast, low-cost, confidential transactions with anyone who has internet access. Their limited supply and freedom from government control gives them hedge-like qualities against inflation and unstable governments. This makes cryptocurrencies a worthwhile option for some, but this is not an investment type that is right for every investor. Before you jump into cryptocurrency, you need to be aware of its volatility and the risks associated.
👉Questions to ask before you invest in cryptocurrency:
What is my objective for investing?
Am I able to withstand huge swings in price?
Am I willing to lose it all?
4. Buyer Beware
Currently cryptocurrency markets are somewhat like the "Wild West." They aren't regulated or protected by the FDIC or any government body. That makes them ripe for hackers and scammers, who have stolen at least $11 billion in cryptocurrencies since 2011.7 Over half of that has been taken since 2019.8
Sophisticated hackers can hijack accounts, fake new currency offerings, and use other schemes to defraud.9, 10 Even simple scams are effective with naïve investors or insecure accounts. A scammer can drain an account within minutes, and that cryptocurrency can never be returned.
5. What is blockchain?
Blockchain is the technology behind cryptocurrency. It's a network that chains chunks of data (blocks) together to create permanent, time-stamped records of every transaction. This database is stored in a decentralized cryptocurrency network, with peers verifying and recording each transaction. The public record of those transactions is called the blockchain.
This setup provides transparency and traceability. In fact, even though cryptocurrency owners can be anonymous, their digital currency is not. Any time it's exchanged, it can be tracked, and every historical transaction for cryptocurrency is on record.
Beyond that, the peer verification in blockchain makes reliable transactions possible without a financial institution as a middleman - and outside of government authority and oversight.
These distinctive features of blockchain may not just change the way some industries do business. Some experts say blockchain has the potential to create new economic and social foundations.11
6. Industries ripe for blockchain disruption.
Art & Collectibles. Blockchain has paved the way for collectible digital assets. Known as non-fungible tokens (NFTs), these virtual tokens can represent anything from sports cards and clips of games to digital artwork, video game memorabilia, and other rare items. Each NFT is unique and not interchangeable like other cryptocurrencies. This is a blossoming space where multi-million-dollar transactions are occuring.12
Financial Services. Borders and banks don't matter of financial transactions that happen through blockchain technology. That's a game changer in developing countries where billions of people lack access to traditional banks. It also means faster, more transparent, and more efficient money transfers anywhere. Plus, blockchain has the potential to make bank records more secure while creating a real-time ledge and reducing operational costs.13
All of that is why some say that blockchain is poised to revolutionize the financial services industry in the same say the internet fundamentally changed media.14
Health Care. Patient records can be stored more securely, while remaining accessible using blockchain technology. That alone could save lives in an emergency. Beyond patient data, however, blockchain could solver other big problems in the health care industry, like managing drug supply chains, health care claims, and more.15
Digital Gold Rush??
All of the headlines and news stories about cryptocurrencies can play on our emotions. The hope of quick gains can cause us to plunge in without considering the risks.
It's important that you understand the basics of digital currencies, set realistic expectations, and carefully evaluate your reasons for investing. Answering these questions will help you resist getting caught up in crypto fever and help you make thought out decisions about any hot new investing trend.
Sources:
1. https://blog.chainalysis.com/reports/banks-cryptocurrency-exposure-risk-fincen
2. https://www.coindesk.com/retail-investors-own-crypto-survey
3. https://think.ing.com/uploads/reports/IIS_New_Tech_Cryptocurrencies_report_18092019.pdf
4. https://www.ncsl.org/blog/2018/08/16/cryptocurrency-currency-of-the-future-or-just-a-fad.aspx
5. https://money.usnews.com/investing/cryptocurrency/slideshows/whats-the-best-cryptocurrency-to-buy
7. https://www.smartcompany.com.au/startupsmart/news/hackers-11-billion-cryptocurrency/
8. https://www.securitymagazine.com/articles/94627-19b-in-crypto-currency-stolen-by-hackers-last-year
9. https://www.consumer.ftc.gov/articles/what-know-about-cryptocurrency-and-scams
10. https://www.consumer.ftc.gov/blog/2020/07/avoiding-cryptocurrency-scam
11. https://hbr.org/2017/01/the-truth-about-blockchain
13. https://www.cbinsights.com/research/blockchain-disrupting-banking/
14. https://hbr.org/2017/03/the-blockchain-will-do-to-banks-and-law-firms-what-the-internet-did-to-media
15. https://www.cbinsights.com/research/report/blockchain-technology-healthcare-disruption/
16. https://www.cbinsights.com/research/report/blockchain-technology-healthcare-disruption/
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