What is Cryptocurrency?
A Cryptocurrency (or “crypto”) is a digital currency that can be used to buy goods and services, but uses an online ledger with strong cryptography to secure online transactions.
Cryptocurrency is considered a digital asset and is designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in the form of a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership. Cryptocurrencies usually do not exist in physical form (like paper money) and are normally not issued by a central authority. Cryptocurrencies are instead based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities. In addition, Cryptocurrencies are usually traded by means of a blockchain.
What is Blockchain?
Each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.
A blockchain is a growing list of records, called blocks, that are linked together using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. The timestamp proves that the transaction data existed when the block was published in order to get into its hash. Blocks contain the hash of the previous block, forming a chain, with each additional block reinforcing the ones before it.
Types of Cryptocurrency
Bitcoin was the first Cryptocurrency, but today there are more than 6,700 Cryptocurrencies traded on public markets according to the website CoinMarketCap. Some of the popular Cryptocurrencies include:
- Binance Coin
- Doge Coin
- Bitcoin Cash
Investing in Cryptocurrency
Cryptocurrency is considered to be an incredibly speculative and volatile investment. Stock trading of established companies and investments in bonds are generally considered less risky than investing in Cryptocurrencies. Cryptocurrencies may go up in value but many investors see them as speculations only and not real investments.
The below chart shows the volatility in price of Bitcoin over the last year, therefore, anyone looking to invest in Cryptocurrency should make sure that they do proper research and understand the risks before investing their money.
This article was originally published in The Accountant’s Diary on May 24, 2021.