Don't Let Cryptocurrency Be Your Financial Crypto-nite
What is Crypto?
By now, you’ve probably heard of popular cryptocurrencies such as Bitcoin, Dogecoin or Ethereum. But what exactly are they?
The definition of a cryptocurrency is a decentralized digital money designed to be used over the internet, but does that explain it? Let us break it down for you.
Decentralized
Unlike the U.S. Dollar or the Euro, cryptocurrencies have no central authority. Instead, they are broadly controlled among their users online. The buying and selling of crypto happens only online, and without the middleman of a bank or payment processor.
So if there’s no central authority and no middleman, is crypto safe?
Cryptocurrency works through a technology called a blockchain. A cryptocurrency’s blockchain is like a bank’s balancing sheet or ledger. Every cryptocurrency has their own blockchain that constantly records each transaction made. However, unlike a bank ledger, the blockchain is distributed across all participants of the digital currency network. Blockchain technology is only recently made possible after decades of computer, math and science innovations. This allows for cryptocurrency to be a secure payment method.
Validating Transactions
With no central authority, users of the currency will validate the transactions. Each transaction is validated by either proof of work or proof of stake.
Proof of work is a method where programmers will race to solve a mathematical problem that is provided by the blockchain. These programmers are referred to as “miners,” and the first to solve the problem is rewarded with a small amount of the currency. However, this method requires a large amount of computer power and electricity, causing most miners to barely break even.
The alternative to this method is proof of stake. Requiring much less computing power, proof of stake allows users to verify transactions based on the amount of crypto they’re willing to stake. The odds of being chosen to verify transactions increases with the more currency you’re willing to front. To limit fraud, if you verify invalid transactions, you will forfeit part of what you staked.
Investing and Uses
So now that we understand how cryptocurrencies function, should you invest?
Like all investment options, investing in cryptocurrency comes with its risks. You should do your research and speak with your financial advisor before making any decisions.
You can spend cryptocurrency for purchases as long as the retailer accepts it. You can use a cryptocurrency debit card or a cryptocurrency wallet. Some services allow you to select a contact from your phone. Keep in mind that due to the verification process happening in the blockchain, the transactions can take anywhere from 10 minutes to 2 hours.
The world of cryptocurrency evolves every day as more major players of the financial industry take an interest. Governments are looking into ways to regulate it and major banks are looking to create their own. As cryptocurrencies become more prevalent, it’s important to continue growing your understanding. Keep an eye out for more from us.
