Cryptocurrencies are like digital money that use a special kind of protection to do transactions. They don't need a big organization like a government or bank to control them.
Here are the important things to know:
- Cryptocurrency was made to be an alternative to regular money (like the dollar), and it can be a good way to invest your money.
- The technology behind crypto is called "blockchain," and it's seen as a big game-changer in the tech world.
- Just like when people invested in internet companies in the 1990s, investing in crypto can have big rewards, but it also comes with risks.
Let's break it down into simpler terms:
Cryptocurrencies (or "crypto" for short) are like money, but they're not controlled by a big bank. Some are created by their inventors, while others are made by computer programs.
Crypto is digital money, so you can't hold it in your hand like a coin or a bill.
Crypto transactions are recorded on a special public ledger called a "blockchain," which keeps track of all crypto transactions.
The blockchain uses strong security to make sure that no one can cheat or fake transactions. It's like a super-secure digital record book.
Is cryptocurrency a type of money?
Even though cryptocurrency is called "digital currency" and seems like money, not many businesses and people use it for everyday transactions. In simple terms, most stores don't accept cryptocurrency as a way to pay for things.
There is one exception, though: Bitcoin. Some businesses do accept Bitcoin as a payment method. But if cryptocurrency isn't widely used as money, why do people bother buying it?
Well, there are a couple of reasons:
1. It's like a different kind of investment. While some people hope that cryptocurrencies might become a common type of money in the future, most folks view crypto as an investment that can increase in value over time.
2. It's a way to invest in something called "blockchain technology." Some folks buy cryptocurrency to indirectly invest in the technology that makes it work, called blockchain.
What is blockchain?
Blockchain is like a secret, secure record book for digital stuff.
It's not controlled by one boss; instead, it's run by lots of computers all over the place. These computers make sure that every digital entry or transaction in the record book is real and can't be changed.
This is why blockchain is super safe. Many, many computers have to agree on every single transaction. If they don't agree, the transaction doesn't happen.
But there's a downside: because so many computers are involved, blockchain transactions can be slow and use a lot of energy.
Why is blockchain encrypted?
Blockchain uses a special code to keep important information safe from people who shouldn't see it.
Imagine this: Imagine you send a letter in a locked box. People can see that you sent a letter, but they can't read what's inside, and they don't know who you sent it to. Blockchain works a bit like that. It shows that something happened, but it keeps the details and people's names secret sometimes.
Why do people think blockchain is a technology that can change things a lot?
Blockchain's ability to securely and permanently save transaction records and information makes it appealing to numerous businesses and governments. Here's a brief list of some potential uses for blockchain:
1. Handling payments, both within a country and internationally.
2. Creating and managing contracts.
3. Storing healthcare records.
4. Recording real estate transactions.
5. Managing energy-related transactions.
6. Overseeing supply chains.
7. Facilitating digital art transactions, like non-fungible tokens (NFTs).
8. Conducting secure voting.
Moreover, blockchain is an open network. This means that developers can independently work on improving or inventing new features for it.
As the blockchain system becomes more efficient, it becomes easier for companies and governments to include it in their everyday operations.
What are the largest cryptocurrencies?
Out of the many cryptocurrencies (there are more than 18,000), Bitcoin and Ethereum are the top two based on their total value in the market.
Bitcoin, the very first and the biggest of all cryptocurrencies, was created in 2009. It was made as an option to regular money like the U.S. dollar. Even though some places might take Bitcoin as payment, most people consider it a kind of investment that involves risk.
On the other hand, Ethereum is the second-largest cryptocurrency when it comes to its total value. Unlike Bitcoin, Ethereum wasn't made just to be like money. Instead, it was created as a new and clever technology. It helps companies securely move information, store data safely, and build new computer programs and apps.
In simple terms, Ethereum is like a huge digital world where you can move, save, and even create digital stuff and computer programs.
What does crypto aim to achieve?
Certain cryptocurrencies, such as Bitcoin and Tether, were made to work like regular money. But there are others, like Dogecoin and Shiba Inu coin, that were created more for fun and depend on how much people like them and trade them.
Most cryptocurrencies, if not all, were created to tackle problems in the blockchain world. These issues include how fast things can be sent, how big the system can grow, how safe it is, how much energy it uses, and how much it costs to use.
How can I invest in crypto?
You can buy cryptocurrency from a cryptocurrency exchange or a financial institution that can help you with the transaction.
After you've bought cryptocurrency, you can keep it safe in a digital wallet, an online wallet, or a hardware wallet.
What are the risks of investing in crypto?
Here are some common dangers to consider when investing in cryptocurrencies:
1. Price Swings: Crypto prices often go through big ups and downs, especially during certain economic or market situations.
2. Trading Risk: Some cryptocurrencies are not traded much, so they can be easily influenced by people with a lot of money or those who own a big portion of that currency.
3. Cybersecurity Threats: Your cryptocurrency can be stolen if someone bad gets access to the private key of your crypto wallet.
4. 24/7 Risk: Cryptocurrencies are traded around the clock, so their values can change a lot even while you're sleeping.
5. Disappearing Risk: In rare cases, certain cryptocurrencies have disappeared for various reasons; this is unique to specific coins and not common.
The bottom conclusion line
Even though cryptocurrency was first made to be a different kind of money, many people buy it for reasons other than using it as cash. They see it as an alternative investment or a way to invest in the technology that makes it work, called blockchain.
The world of cryptocurrency is still growing, a bit like how technology was in the 1990s. There are lots of smart ideas in crypto, but not all of them will become widely used. So, if you're thinking about investing in cryptocurrencies, be careful and make sure you understand what you're getting into.