Cryptocurrency has grown increasingly popular, yet many remain unfamiliar with how or why it operates differently from other forms of money. Cryptocurrency is digital currency that operates independently from governments and banks using encryption techniques for secure transactions between users. Cryptocurrencies can serve as an alternative payment method or investment vehicle and often serve as speculation investments – though many question whether cryptocurrencies will ever replace more conventional forms as mainstream means of transaction.
Bitcoin, created in 2008, remains the world’s most renowned cryptocurrency. Since then, many other cryptocurrencies have emerged, some similar but some with advanced features. Most rely on blockchain technology which enables instantaneous global value transfers at very low fees – all on peer-to-peer networks with very fast transfer times and near instant transactions.
Most cryptocurrencies are mined, meaning that new units of currency are created through solving complex math problems on computers and being the first one to solve these equations is rewarded with coins. One such cryptocurrency mining practice is Bitcoin mining which involves competing against other miners to be the first in verifying and adding transactions to its blockchain and then receiving more coins in return. Once 21 million bitcoins have been mined, no further mining will take place.
Cryptocurrencies have gained acceptance as an accepted payment option, yet their purchasing power can often fluctuate, and studies suggest only a minority of their holders use them regularly for purchases. Their unpredictable purchasing power renders them unsuitable as a store of value or as reliable money alternatives.
One key difference between traditional currencies and cryptocurrencies lies in their respective governments’ backing; while governments back traditional currencies with fiat money, they don’t support cryptocurrencies directly. While a government cannot print more fiat to increase supply, they may create regulations or policies which impact value such as capital requirements for cryptocurrency exchanges or requirements that the cryptocurrency be backed by physical commodities.
Stablecoins, designed to reduce volatility and maximize utility by linking their value to an external factor such as fiat currency or gold, have recently emerged. By doing this, cryptocurrency becomes less risky as an asset class for payment or investment purposes.
While the SEC has yet to establish their position on cryptocurrencies, it seems likely that some will be treated as securities, impacting how they can be traded and raising questions about regulation in the future. NerdWallet’s ratings take into account more than 15 factors such as account minimums, investment choices, customer support capabilities and mobile app features – using our free tool you can compare brokers or read up on how best to choose one!