What Is Cryptocurrency? How Do Bitcoins Work? What Should I Invest In?

What Is Cryptocurrency?

Cryptocurrency is a form of payment that can be exchanged online for goods and services. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides. Think of them as you would arcade tokens or casino chips. You’ll need to exchange real currency for the cryptocurrency to access the good or service.

Cryptocurrencies work using a technology called blockchain. Blockchain is a decentralized technology spread across many computers that manages and records transactions. Part of the appeal of this technology is its security.

There are currently over a thousand other cryptocurrencies floating around the internet, all of which play off of bitcoin’s concept of an anonymous and nation-less digital cash. Some of the others include Ethereum, Ripple and Bitcoin Cash, a totally different currency despite its namesake. However, none are as widely accepted as their prototype, bitcoin.

Bitcoin, the best known cryptocurrency, had a rough time in February 2020. At one point it shed about 10% of its value in three days against a backdrop of growing unease about the potential severity of a global coronavirus outbreak — a fear that infected stocks as well, dragging the S&P 500 down about 12% for the month.

Alternative.me, which tracks investor sentiment around crypto currencies in broad terms, says the fear-and-greed pendulum was stuck in the “fear” zone through the last half of the month after an ebullient first half.

For Bitcoin and the crypto-asset space generally, this slide came at an awkward moment. Just weeks earlier, with some strong returns for the nascent asset class in 2019, the financial press was abuzz with talk of crypto’s growing acceptance among investors and — rather more grudgingly — financial advisors.

How Do Bitcoins Work?

Bitcoin users exchange these digital “coins” for goods and services or trade them for cash. You pay electronically using a computer or mobile app, sort of like sending money via PayPal. Both bitcoin mining and trading are handled anonymously, making the cryptocurrency scene prime for cybercrimes, like phishing and blackmail schemes. All that, combined with the fact that bitcoin is not regulated by any bank or tied to any country, makes for a scary combination.

However, bitcoin recently gained credibility when a large financial firm created a futures exchange for the currency. (A futures exchange is just fancy investment lingo for a central marketplace for buying and selling futures contracts.) A futures contract obligates a buyer or seller to buy or sell a certain type and amount of an asset (like gold) at a certain price. Depending on what people are willing to pay for these assets, futures contracts help determine the value of that asset.

What Should I Invest In?

I recommend partnering with a financial advisor, whether you’re just starting to learn about investing or you’ve been investing for years. I know all about investing, but I still work with a financial advisor!

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