icon of two gears to show concept of expanded lessons Expanded Lesson 6 min read

Cryptocurrency Explained

  • Facebook
  • Twitter
  • LinkedIn
  • LinkedIn Copied link to Clipboard!

There’s a new form of currency taking the world by storm known as cryptocurrency, or simply “crypto.” It’s a digital form of currency used to purchase goods and services around the world, but it doesn’t behave the same way as traditional cash. Here’s what you need to know about crypto before you invest.

Yellow notepad with pen svg icon Lesson Notes:
  • Cryptocurrency is a new form of currency that lives on the internet, using decentralized technology called the blockchain, so no one person, company or nation controls the flow of funds.
  • Because users must validate their identity before exchanging services or goods for cryptocurrency, it appeals to many users for being a secure currency.
  • You can use crypto to purchase a variety of goods and items, but this currency is still a new phenomenon, and its future remains uncertain around the world.
  • Learn more about cryptocurrency and how it works before investing your money.

How Does Cryptocurrency Work?

To obtain crypto, you’ll need to trade in your traditional currency for what are known as tokens, which live on the internet. These tokens are issued by different companies and range in monetary value. Once you obtain cryptocurrency, you can spend that money however you like, assuming that the seller or merchant accepts crypto as a form of tender. You can also trade it in for cash similar to selling stocks.

While there are several benefits to investing in cryptocurrency, the value of these tokens can fluctuate dramatically.

Unlike dollars and other forms of currency issued by national governments, cryptocurrency is decentralized. It is made up of a series of digital transactions that live on what’s known as the blockchain. Every block represents a different transaction. The system records the details of the transaction while keeping the identities of both parties anonymous.

To complete the transaction, both parties must enter a private key to verify their identity. The goods and funds will only be released once both parties have entered this information. Once the transaction is complete, the details cannot be altered or erased, creating a permanent chain of previous transactions.

To create cryptocurrency, companies and individuals must first create their own tokens. These tokens are then mined online using computers. To mine the currency, the owners must code and complete a complex equation. Once the currency has been created, it can be sold on the digital market, where its value will vary based on supply and demand. Users can then exchange traditional currency for these tokens. Once you start spending your tokens, you will add new blocks to the blockchain as each transaction gets logged into the system.

Is Investing in Cryptocurrency a Good Idea?

Cryptocurrency offers an alternative to traditional banking, giving users the chance to trade and sell currency on the global stage. However, crypto comes with certain limitations that you should be aware of before investing.

Pros:

Supporters argue that cryptocurrency is more secure than other forms of payment. Blockchain is a new technology that ensures secure transactions. Users must verify their identity before exchanging goods or services for money. The data on the blockchain can’t be altered or erased, creating a secure history of transactions. Users don’t have to worry about the other party committing fraud or pretending to be someone they are not.

Cryptocurrency isn’t subject to the same rules and regulations as traditional currency. It is not regulated by financial institutions and national governments. Users can spend their money wherever crypto is accepted without having to exchange their money for another type of currency.  This form of currency doesn’t depend on the value of the dollar and other forms of currency. The value of each token varies based on factors not directly tied to the global market, which can help insulate the tokens from inflation.

Crypto also has positive uses. It is a cheaper way for workers to send money back to their home country in the form of remittances. It is also used by citizens in unstable economies and oppressive governments to escape monetary repression and inflation. For this reason, some countries now view it as an acceptable form of currency.

Cons:

The value of cryptocurrency is not stable. The price continues to rise and fall sharply based on supply and demand. Once users invest in cryptocurrency, there is a chance that the value of their tokens will rise or fall dramatically over a short period of time.

Due to crypto being decentralized, it is widely used in black markets and money laundering schemes. Because of this, some governments are starting to pass legislation sharply limiting how this currency can be used.  Countries all over the world may enforce similar laws in the years to come, which may render crypto useless. Cryptocurrency isn’t accepted everywhere. In fact, most businesses don’t accept crypto as a legitimate form of payment. Users will likely have to exchange their tokens for traditional currency before spending their money.

Crypto has a large time and energy cost. While some transactions only take a couple of minutes, some transactions could take hours or days to complete. Crypto also has a large carbon footprint currently using .55% of global energy production.

How to Invest in Cryptocurrency

You will need to set up a digital wallet to invest and trade cryptocurrency. There are many apps that can help you. From there you will have the chance to exchange your traditional money for cryptocurrency. These apps and markets typically have different kinds of tokens for sale, with the most popular being Bitcoin and Ethereum. You should also be able to sell these coins on the same marketplace. It’s best to invest in tokens with an established history on the market. Other tokens may come and go, so choose a currency that will stand the test of time.

When investing in new tokens or companies, consider what it means to invest in their currency. Some tokens come with ownership of the company, which can help insulate you from potential losses.

You will need to watch the value of your tokens closely over time. Many traders will try to sell their tokens when the price is right in order to make a profit. Cryptocurrency remains legal throughout the United States, but its long-term role in financial markets is still unknown. Stay up to date on the latest laws to make sure it will still be accepted as legal tender in your area. Be aware that if new laws limit the use of crypto, tokens you invested in may have reduced or no value.

Cryptocurrency may be a fad or a lasting part of the global economy. It’s just too soon to tell. Predicting the future of these tokens may be next to impossible, so you should avoid putting too much of your hard-earned money into the crypto market. If you’re new to cryptocurrency, only use your disposable income before betting the whole farm on a particular token. If you’re looking to maximize every dollar you make, consider traditional investments that tend to be less risky. Other investments may be less volatile and may not rise and fall as sharply as cryptocurrency, which can help insulate you from any potential losses. Keep this information in mind as you outline your investing strategy and consider your financial goals before investing in cryptocurrency.

PLEASE NOTE: This article is intended to be used for informational purposes and should not be considered financial advice. Consult a financial advisor, accountant or other financial professional to learn more about what strategies are appropriate for your situation. Ent Credit Union does not buy, sell, store or transact in any form of cryptocurrency.

Related Resources

View All