Asset or money: what is cryptocurrency and how safe is it

Nowadays it is difficult to find a person who has not heard about bitcoins. Everyone knows that this is a cryptocurrency and quite expensive (a little more than $ 60 thousand for 1 bitcoin). In addition, Elon Musk's company Tesla recently announced that it will allow people to buy electric cars for bitcoins. But in reality, bitcoin has a long and rich history. Everything you need to know about this cryptocurrency, the edition decided to tell GoBankingRates.

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Bitcoin history

Bitcoin was invented in 2009 as a form of digital currency. Unlike paper money or debit cards, which are paper money that a customer holds in a bank, bitcoin has no physical form. All of this is stored digitally, which provides increased security compared to checks, paper money transactions, and even other digital transactions, which, again, are exchanges of paper money stored in accounts.

As of the end of October 2021, the cost of bitcoin exceeded $ 60 thousand. For comparison, in 2010, one bitcoin was worth only 8 cents.

Other cryptocurrencies

Bitcoin was the first cryptocurrency, but there are over 6700 cryptocurrencies in open markets today. Although Bitcoin and other cryptocurrencies are used to exchange goods and services in the private market, they are not considered legal tender like dollars and other currencies.

The most common cryptocurrencies today include Ethereum, Bitcoin Cash and Litecoin, which you can purchase through Paypal. Other, less common cryptocurrencies are called altcoins. The most popular altcoin is Dogecoin, popularized by billionaire Elon Musk's tweets.

What is cryptocurrency and cryptography

“Cryptocurrency is fully decentralized peer-to-peer electronic money implemented using cryptography,” explained Rob Zehl, founder of the crypto exchange bitni.com.

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By their nature, cryptocurrencies are not regulated, which carries the risk of market volatility and losses for investors. However, the security risks and risk of fraud when using bitcoins and other cryptocurrencies are significantly reduced.

In addition, due to the high level of transaction security, it is impossible to track purchases. This means that people can use cryptocurrency to buy illegal or highly regulated goods, including certain classes of drugs or firearms.

Cryptocurrencies use cryptography technology to ensure the security of transactions and coins. “Cryptography, or cryptology, is the practice and study of secure communication methods in the presence of third parties, called attackers. The most common form of cryptography is the use of codes to securely transmit messages between two people,” explains Alexander Shipilov, CEO of iModX, a blockchain-based marketplace.

How blockchain works

Cryptocurrencies are exchanged using blockchain, which Shipilov describes as "a way for multiple computers to come to a consensus on a set of information." He says: "The most common use of blockchain is to create a ledger of financial transactions between multiple people."

Blockchains work through cryptography, with each block in the chain cryptographically linked to the previous one. “Blockchain is stored and shared across a peer-to-peer network, similar to file-sharing torrents. The blocks are cryptographically protected from hacking,” says Zel.

Thus, thanks to blockchain technology, bitcoin and other cryptographic transactions can be inherently more secure than other types of digital transactions, such as online banking, money transfers through digital wallets, or peer-to-peer payment services. But it is important to emphasize that all of these services use the most advanced encryption technologies to protect your funds digitally. In addition, most banks offer fraud protection, so if your account is compromised, the bank will refund the missing funds up to a certain amount, which depends on the institution.

Also effective is the technology used to protect cryptocurrency investments. In fact, it is so secure that some people who invested in bitcoin many years ago have lost their password without being able to renew it. This won't happen with a regular bank account or peer-to-peer payment service, which offer ways to reset your online banking password so you can access your money.

Why is cryptocurrency so risky

While your investments in cryptocurrency are likely “safe”, this does not mean that they are “safe” in any way. There are two elements that make cryptocurrency more risky than keeping cash in a bank account: market volatility and a lack of federal insurance and regulation.

When you keep your money in a bank account, it is FDIC insured for up to $ 250. This means that if you have your own $ 000 checking account, $ 100 savings account and $ 000 investment, all in one insured bank FDIC, all your funds are protected by the FDIC. If your bank goes bankrupt, you will not lose your money.

On the other hand, if something happens to the company that owns your cryptocurrency, you could lose all of your investment.

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Crypto, like stocks and other investments, also tend to fluctuate a lot. When you keep cash in the bank, the value will fluctuate slightly based on inflation or deflation. But it is unlikely that you will lose or gain large amounts of money overnight.

“Cryptocurrencies tend to be very volatile,” says Zell. — In one day, the value of a coin can move by 20% or more. Some newly made coins can jump 40x in the first few months.”

“Sometimes the coin that is just made turns out to be a complete scam, and the founders take money from investors and disappear, leaving them with a worthless token,” Zel explains.

Can you use bitcoins to buy things?

Right now, Bitcoin and other cryptocurrencies are considered both an asset traded in both stocks and the currency used in the exchange of goods and services. However, the high transaction fees and volatility of coins prevent them from being widely used as a currency.

Shipilov adds that now the overwhelming majority of cryptocurrencies are viewed as assets, and not as a currency: "Investors speculate on them, who assume that the value of the asset will grow in the long term."

However, while people made millions from their bitcoin investments in the past year, cryptocurrency may not be the best choice for novice investors or those who are not willing to take risks.

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