Cryptocurrency has been all of the rage as of recently, but not many people understand what it is exactly. People are familiar with the Dollar and other forms of paper currency like the Euro, the Japanese Yen, and the British Pound. All of these currencies are based in a physical form, whether it by paper or coins.
But as you may have notices, there are many people who use credit or debit cards today. These are electronic types of payments. In many cases, the Visa or Mastercard that people use are linked to bank accounts where people exchange physical forms of money in order to use it electronically with their card.
Cryptocurrencies are different in that they are completely digital and not based in a physical form in any way. These cryptocurrencies, such as Bitcoin, are created with a finite amount just like the U.S. Dollar is created with a finite amount. Based on this amount, the value of the currency is created and maintained.
You may ask yourself, how can a value be created with a completely digital currency? The answer is the same as how the value is created with the paper currency; it is presumed that the issuing bank such as the Federal Reserve with the U.S. Dollar, has the wealth and assets to back and support the value of the currency. The same is true with Bitcoin and other cryptocurrencies.
But whereas in the past currency used to be backed by the gold standard, meaning the federal reserve had to have a certain amount of gold in its reserves, today the currency is backed by the ‘full faith and credit of the United States government’; whatever that may be. But this actually holds a strong value, which is why the U.S. Dollar is one of the strongest currencies in the world.
Bitcoin was initially created with the same idea and, of course, when it first came out it was not very powerful. As a result, Bitcoin was as low as $600 a Bitcoin a few years ago. The currency was created with a limited amount. As with anything where there is only a limited amount, its value rises significantly the more people want it.
Over the years, the makers of Bitcoin and other cryptocurrencies have worked to establish the validity and reliability of their currency. They monitor every single transaction and record it to make sure the integrity of the currency is maintained. As time went on, Bitcoin as maintained its reliability through its ability to verify its currency and make sure the same unit of currency is not being spent twice.
There are several advantages to Bitcoin and other cryptocurrencies. One of these is the borderless nature of the currency. People in the United States and China don’t have to exchange their currency for one another when they can simply trade through Bitcoin. Also, this digital currency is unregulated meaning that people can make purchases without any regulating entity such as the Federal Reserve tracking where the currency is coming and going. For this reason, cryptocurrency is highly advantageous to regular currency in this regard.
There is also the significant advantage of Bitcoin not being tied to the politics of a country. If, for example, politics slows down the U.S. or European economy, or a war breaks out, the currency of a country may plummet, but the independent cryptocurrency such as Bitcoin will essentially be affected, if not increase in value. This is yet another major advantage to the investment and use of cryptocurrency.
As time has gone on, more people have become aware of Bitcoin and its advantages. As a result, the demand for cryptocurrency has gone up significantly. And as with anything in a limited amount, when the demand goes up, so does the value. Thus, the value of Bitcoin has skyrocketed from $600 a unit a few years ago to as high as $18,000 a few months ago.
A major reason for this skyrocket in value has been the ability of these currencies to maintain the integrity of their currency through the verification and tracking of the blockchain system where they track where each unit of their currency is spent. But unlike a central bank or regulatory agency, they really don’t care where the money is being spent. They only care that each unit of currency is well-tracked which makes the security of the system higher and the value of the currency higher as well.
Cryptocurrencies are all the rage as of recently, primarily because of their significant increase in value. And as society is increasingly shifting towards paperless systems of payment, such as with credit and debit cards, cryptocurrencies are becoming more reasonable for people to use. While people were doubtful at first, the ability of cryptocurrencies such as Bitcoin to reliably track and maintain the information on their system makes it so not one unit of currency of an individual is lost; making the security of the system incredibly reliable. This, along with the advantages of using a cryptocurrency, has made it so that people are becoming more attracted to cryptocurrency and therefore the value of these currencies is going up significantly.
The future looks bright for cryptocurrency if they continue to develop themselves in this trend. However, the investor should be very careful for the reason that if countries begin to see negative impacts on their own currency, they may begin regulating or even banning these types of currency which will crash their value back down to zero. This is the most significant risk associated with cryptocurrency as it is right now. As of now, however, there has been no mention of regulating or banning these currencies which makes them reliable for the time being.