What is a cryptocurrency?
By now you’ve probably heard so much about bitcoin that you may consider yourself an expert. Since bitcoin launched in late 2009, a whole range of different cryptocurrencies have emerged, all of which are designed for different purposes.
You may have even heard of some of these cryptos, such as ethereum, ripple, or litecoin. In fact, there are now over 1,500 different cryptocurrencies in circulation. But it’s their enigmatic nature that has captured the attention of the finance industry.
Which begs the question: What exactly is a cryptocurrency?
A crypto is a new form of digital money. And it’s only found online. There are no tangible coins or notes; all payments and storage are handled via the internet. This is all made possible via a unique system called the blockchain.
The blockchain is the technology that makes cryptos unique. Sometimes referred to as distributed ledger technology, it is a massive online record of every transaction ever made for a crypto.
However, what makes this record unique is that it isn’t updated by a central authority, like a bank. Instead, blockchain uses peer-to-peer networks. Meaning that all the individuals making the transactions keep the record updated themselves. Cutting out the need for a third party completely.
This decentralised nature is what makes cryptos superior to normal transactions. By cutting out the middlemen, payments are faster, cheaper and more secure.
Why are there so many cryptos?
1,500 currencies does indeed sound like a lot. For most people it’s hard enough keeping track of the five biggest cryptos. What’s more, the number of cryptos in circulation is only growing by the day.
However, not all of them are going to be successful. At present, only 26 coins have a valuation over US$1 billion. And just five have a valuation in excess of US$10 billion. Though these numbers are fluctuating rapidly.
A new crypto could skyrocket in value literally overnight. While others can crash just as fast. These coins are extremely volatile, due to the fact that they’re still quite new.
Think of them as a financial experiment. We’re still not quite sure where they fit in the bigger picture. Which means valuing these coins is incredibly difficult and subject to sudden and dramatic swings.
Right now bitcoin is the oldest and most popular crypto. However, that could change in the future. Every crypto is currently trying become the top dog. Desperately looking for that one genius idea that makes them the next Amazon.com, Inc. [NASDAQ:AMZN] or Facebook Inc. [NASDAQ:FB].
That’s what makes cryptos so exciting. Not one of them has really broken through to mainstream adoption just yet. Whichever coin cracks that code however could change transactions forever.
There are plenty of hopefuls, but not all of them will be winners. There will certainly be a market for a few coins, but not thousands of them. Which is why investing in cryptos is incredibly risky.
There are no ifs, buts or maybes about it. Cryptos are very risky. There is no safety net if things go belly-up. No regulator to make sure traders aren’t getting scammed. We call it the Wild West of investing.
Things are getting better, and in time regulators and precautionary measures may make it a safer investment. For now, though, this isn’t a market for the faint-hearted. This isn’t the type of investment to dump your life savings into.
You’ve got to be smart and have your wits about you. It’s perilous, but there are some serious gains to be made if you’re an investor that doesn’t mind putting down money on a risky investment.