Since that time, over 10,000 cryptocurrencies have launched. The most widely accepted and largest cryptocurrencies by market capitalization are Bitcoin and Ethereum. Many supporters praise cryptocurrencies because they are decentralized and independent of governmental influence, eliminating practical risks such as a government’s aggressive spending or “easy money” fiscal policy that can cause inflation – which happens with standard fiat currency.1
Applications of Cryptocurrency
Cryptocurrency is most often thought of as a store of value or an investment (like gold). For instance, Bitcoin has scarcity since only 21 million will ever be created. This scarcity further increases its investment attractiveness.
Another potential application is as a medium of exchange (like the US dollar). However, cryptocurrency’s current price volatility and the requirement for online and brick and mortar stores to accept it alongside the USD has made this utility less popular in most countries, at least for now. One Central American country is putting the idea of Bitcoin as a medium of exchange to the test. El Salvador made Bitcoin legal tender2 on September 7, 2021. It will be interesting to watch whether this experiment of sorts turns out positively and confirms this important application of Bitcoin.
Connection Between Cryptocurrency and Blockchain
You probably have heard Bitcoin, cryptocurrency and blockchain being used in the same conversations. Most cryptocurrencies’ backbone infrastructure for transactions is blockchain. This decentralized system allows for cryptocurrency transactions, both incoming and outgoing, to be confirmed on a distributed ledger. Members of the cryptocurrency ecosystem called miners solve complex mathematical equations with high-powered computers. The massive computational power required to be the first to solve this equation is evidence (or proof – this is where the term proof of work3 (PoW) comes from) to this digital community that a substantial investment was made – incentivizing the miner to be an honest participant in the network. The miners who solve the transactions first are currently rewarded with cryptocurrency coins. The confirmed transactions on the blockchain remain in force and visible for the public and regulators to review. This blockchain technology has other applications outside of cryptocurrency, too. Overall, blockchain technology is expected to make financial services and other industries more efficient in the future.
Look for the next article in this Basics of Cryptocurrency series.
2 Legal tender is a form of money that courts of law are required to recognize as satisfactory payment for any monetary debt.
3 Proof of work (PoW) is a decentralized consensus mechanism that requires members of a network to expend effort solving an arbitrary mathematical puzzle to prevent anybody from gaming the system. Proof of work is widely used in cryptocurrency mining, for validating transactions and mining new tokens.
All investing involves risk, including the risk of loss. Investment risk exists with equity, fixed income and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Diversification does not guarantee a profit or protect against a loss.
The views and opinions expressed may change based on market and other conditions. This material is provided for informational purposes only and should not be construed as investment advice. There can be no assurance that developments will transpire as forecasted. Actual results may vary.