What are cryptocurrencies and why is the world paying attention?

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New asset class rising.

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Cryptocurrencies are digital assets that rely on an encrypted network to execute, verify, and record transactions, independent of a centralized authority such as a government or bank.

This is a complicated concept, so let’s break it down:

Although cryptocurrency is defined as a form of “digital currency”—implying it’s a kind of money—most businesses and consumers have not adopted it as a common medium of exchange. In other words, most stores will not accept crypto as a form of payment.

Bitcoin may be an exception, as some businesses have accepted it as payment for goods and services. So, if crypto isn’t a common form of money, why do people buy it?

Blockchain is an encrypted public ledger through which digital assets can be transferred, recorded, and stored.

It’s essentially a decentralized network, also called a distributed-ledger technology (DLT). This means there is no single authority serving as a gatekeeper or facilitator for the transactions taking place within the network.

Instead, the computers participating in the network are tasked with verifying and facilitating each “block” (i.e., entry or transaction) within the chain. In some cases, all the computers work together to verify and facilitate each block action. In other cases, a group of computers is selected at random.

This is what makes blockchain transactions secure and nearly impossible to alter. Tens of thousands of computers must verify a single transaction or entry. If there’s a disagreement among computers, the transaction will be voided.

This verification procedure is also what can make blockchain transactions slow and energy inefficient. There are lots of computers across the globe working to verify every single transaction.

Blockchain uses encryption to protect sensitive data from those who are not privy to receiving it.

For instance, the public can see that a transaction has taken place or a piece of information has been recorded. But they may not be able to see the identities of those involved in the transaction or, in certain cases, the contents of the transaction.

Blockchain’s capacity to permanently record and store transaction records and information in a highly secure manner makes it an attractive technology for many businesses and governments. Here’s a limited list of potential use cases for blockchain:

Furthermore, blockchain is an open source network. This means developers can work autonomously to improve its functions.

The more efficient a blockchain ecosystem becomes, the easier it is for corporations and governments to adopt it as part of their regular operations.

Among the 18,000-plus cryptocurrencies in existence, Bitcoin and Ethereum are the two largest cryptocurrencies by market capitalization. Bitcoin, the original and largest cryptocurrency, was developed in 2009 as an alternative monetary asset. It was meant to be an alternative to the U.S. dollar and other fiat currencies. Although some vendors may accept Bitcoin as payment, most investors view it as a speculative investment.

Ethereum is the second-largest cryptocurrency by market cap. Unlike Bitcoin, Ethereum was not designed to function solely as an alternative monetary asset. Instead, it was designed as an innovative ledger technology to help companies securely transport data, store data, and build new programs and applications.

In short, Ethereum is a massive digital ecosystem through which digital information and computer applications can be transported, stored, and even created.

Some cryptocurrencies, like Bitcoin and Tether, were developed to serve a monetary function. Others, such as Dogecoin and Shiba Inu coin, are considered “meme coins,” developed as novelty items whose values rely on popularity and trading.

Many, if not most, cryptocurrencies were developed to solve challenges within the blockchain ecosystem, such as transmission speed, scalability, security, energy efficiency, and cost efficiency.

You can purchase crypto through a cryptocurrency exchange or any financial institution that can broker a cryptocurrency transaction.

Once you purchase cryptocurrency, you can secure your crypto coins in a digital wallet, online wallet, or hardware wallet.

Here are a few of the more common risks in cryptocurrency investment:

Although the original idea behind cryptocurrency was to create an alternative monetary asset, many investors purchase cryptocurrency not as money, but as an alternative asset or a way to invest in its underlying blockchain technology. Crypto is an emerging field, not unlike the technology sector in the 1990s. There are plenty of brilliant ideas in the crypto world, but not every blockchain innovation will find its way to mainstream use. So, if you’re planning on investing in cryptocurrencies, proceed with a healthy dose of caution.