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Cryptocurrency 101: What to Know

Cryptocurrency 101: What to Know

Cryptocurrencies are an increasingly common way to trade and invest online. Digital currencies like Bitcoin have the potential to revolutionize the global financial system but come with their own set of challenges.

Whether you’re crypto-curious or just crypto-confused, our cryptocurrency guide is sure to answer some of your questions. Let’s learn more about the opportunities — and risks — for investors.

What Is Cryptocurrency?

Cryptocurrency is a digital currency that exists only electronically. It is usually not linked to any physical asset. It can be used to buy goods and services online, held as an investment, or traded for profit.

Unlike money, cryptocurrencies are not issued or controlled by any government, bank, or other central authority. Instead, networks of computers work together to track, cross-check, and reconcile a secure record of cryptocurrency transactions.

Types of Cryptocurrency

There are thousands of different kinds of cryptocurrencies. Bitcoin, launched in 2008, is the oldest and best-known form of cryptocurrency, but there are many others, such as Ethereum, Tezos, and Litecoin. Each cryptocurrency works slightly differently and is designed to be used for different types of exchanges.

What Makes Cryptocurrency Different?

Cryptocurrency aims to provide the advantages of cash for the online economy. By providing a secure global asset with a value everyone agrees on, cryptocurrency allows online transactions to be conducted seamlessly and without a lot of intermediaries.

Cryptocurrency is fully portable, meaning it is not tied to any particular country or institution. It has the same value worldwide, no matter where or how it is used.

Unlike many traditional monetary assets, cryptocurrency is not backed by any government or financial institution, so its value is not guaranteed by physical holdings such as gold or cash. That means its value is not tied to any one country’s economy or the success or failure of a particular financial institution. Its value is free to fluctuate, soar — or lose value completely!

How Does Cryptocurrency Work?

All cryptocurrencies are powered by blockchain technology. A blockchain is a database that works like a banking ledger, recording all the transactions for a particular unit of cryptocurrency. This record is shared, or distributed, among all the computers linked to a cryptocurrency trading network.

These computers work constantly to reconcile who has sold what to whom and for how much. Because no one controls all the computers, any attempt to defraud the system is quickly picked up as a discrepancy in the blockchain and replaced with the correct, commonly agreed-upon value.

Cryptocurrency Value

But how does cryptocurrency get its value? The value of a cryptocurrency is usually determined entirely by the market — by the relative supply of and demand for that particular cryptocurrency.

The same networks that maintain the blockchain for a cryptocurrency also work together to control its supply. Groups of computers do this by competing for the right to create new cryptocurrency units or “coins”. Typically, computers that complete computational problems faster earn crypto coins that can then be traded or held as an investment.

Meanwhile, demand for a cryptocurrency is determined by how reliable, safe, and easy it is to use and by how widely it is already held.

Should I Own Cryptocurrency?

Cryptocurrencies such as Bitcoin are increasingly accepted as a method of payment. As adoption rises, their value and utility do, too. This makes holding and trading cryptocurrency as an investment increasingly attractive.

You should consider investing in a cryptocurrency if you are looking for an asset that:

  • Is not backed by debt, assets, or stocks

  • Is not denominated in a national currency

  • Is accessible everywhere

  • Cannot be frozen or confiscated

  • Has high potential growth on your investment

Risks of Cryptocurrency

At the same time, investing in an emerging asset like cryptocurrency also carries risks. You should only invest in cryptocurrency if you are willing to accept:

  • High volatility due to market uncertainty

  • Low liquidity as demand outstrips supply

  • Potential loss of principal

Over the years, many cryptocurrency coins have seen huge increases in value but also major fluctuations in price. As a rule, cryptocurrency values remain far more volatile than most assets considered appropriate for mainstream investing.

Buying and Owning Cryptocurrency

You can purchase cryptocurrency directly by opening an account with a cryptocurrency exchange like Coinbase or Binance.

Exchanges allow investors to buy parts of individual cryptocurrency units. While many individual crypto coins now cost thousands of dollars, you can buy increments as small as a couple of dollars. This allows you to limit your risk and greatly increase the liquidity of your assets.

Storing Cryptocurrency

Cryptocurrency is a fully transferable form of value, like cash, and needs to be stored securely, usually in a digital wallet that can be linked to your online exchange account on your computer or removable hard drive.

Remember, cryptocurrency investments are not insured. So, if your exchange goes out of business, your digital wallet is hacked, or you lose your removable hard drive, you are not protected against the loss.

You can limit your exposure by:

  • Investing with a reputable exchange, and

  • Regularly moving earnings to your bank account or other investments

Stablecoin: Cryptocurrency Adjacent

If you’re still on the fence about cryptocurrency, stablecoin may be a way to get your feet wet.

A stablecoin is a hybrid digital currency that offers many of the advantages of cryptocurrencies while still being pegged to an external physical asset. For instance, USD Coin is a variation of Bitcoin that is pegged to the valley of the U.S. dollar.

Stablecoin is a great choice if you are looking to get into the cryptocurrency market but are wary of volatility. Be aware that these assets are still not insured by the FDIC or NCUA in the same way most traditional bank or credit union products are.

Cryptocurrency Guide: Free Financial Guidance and Services

At Listerhill Credit Union we care about your financial wellness. When deciding if an investment is the right move for you, it is important to think about where it fits in the financial plan for you and your family

Listerhill works with our members and the wider community to support and encourage financial literacy. Our Listerhill Works financial wellness workshops are designed to give you the tools you need to establish good spending and saving habits and to help build lasting financial stability for your family.

Click below to learn more about how Listerhill can help you improve your financial wellness.

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