Cryptocurrency is a digital currency which allows peer-to-peer transactions without a middleman or third party (e.g., a bank). Instead of physical cash being exchanged and traded, cryptocurrency payments are digital entries into an online system. The transactions are stored and verified using a complex set of algorithms. People have physical wallets for cash. You can have digital wallets for cryptocurrency.
The name “cryptocurrency” is derived from the fact that all transactions are verified using cryptography and encryption. Most cryptocurrencies run these transactions on something called a blockchain. A blockchain is a digitally distributed public ledger which contains the entire transaction history of its native currency. Bitcoin, the most popular crypto in market cap by far, has every transaction in its history recorded on its blockchain.
The blockchain works by using very complex cryptographic algorithms to verify a transaction, making it almost impossible to hack. Once a transaction has been verified successfully, a new “block” is added, represented by a transaction hash. The blocks are then chained together, creating the entire history of the currency.
Cryptocurrency has skyrocketed in popularity due to ridiculous increases in prices in a short time. Because it’s a new and unregulated commodity, its volatility (price fluctuation) is much higher than that of any other market, like stocks or real estate. For example, Bitcoin is the least volatile crypto asset by far, yet according to Swissquote education, it is 2.4 times more volatile than the US equity benchmark: the S&P 500.
The world of digital currencies seems very lucrative and the idea of having direct peer-to-peer transactions is very appealing. But it comes with a unique set of risks.
Sources
“What Is Cryptocurrency? Cryptocurrency Security: 4 Tips to Safely Invest in Cryptocurrency.” Kaspersky, 11 Jan. 2019, www.kaspersky.com/resource-center/definitions/what-is-cryptocurrency.
Hayes, Adam. “Blockchain Explained.” Investopedia, 5 March 2022, www.investopedia.com/terms/b/blockchain.asp.
Gianti, Stefano. “Bitcoin vs Risk: Understanding Volatility.” Swissquote, 4 May 2022, https://medium.com/swissquote-education/bitcoin-vs-risk-understanding-volatility-472efe96e439.