Everyone knows them or, at least, has heard of them: cryptocurrencies! Bitcoins are probably best known, as they were regularly present in the news due to their strong fluctuations. Although the term is familiar, many people do not know the specifics surrounding them. In this article, we will explain to you what cryptocurrencies are, what their advantages and disadvantages are and whether it is worth investing in them.
What is a cryptocurrency?
A cryptocurrency is a digital asset. The currency is based on a decentralized network – based on blockchain technology – and distributed across a large number of different computers. As a result, it escapes the control of a central authority. It is secured by cryptography – hence the name cryptocurrency – which makes counterfeiting or double spending almost impossible.
Cryptocurrencies enable secure online payments for their users. To use them, you need to exchange a real currency for the cryptocurrency – like chips in a casino. The trade is offered by crypto exchanges. The money is then replaced with virtual tokens, which you can use as online payment for goods and services.
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Different types of cryptocurrencies
Bitcoin is one of, if not the most popular cryptocurrency. It was the first blockchain-based cryptocurrency and is still the most valuable. The currency was introduced in 2009. Today, there are about 18.8 million Bitcoins in circulation, worth a total of about $849.5 billion. However, due to the strong fluctuations, the number is constantly updated. To prevent inflation and manipulation, only 21 billion Bitcoins exist worldwide.
Other cryptocurrencies are, for example, Litecoin, Peercoin, Ethereum and Cardano. There are more than 10,000 different cryptocurrencies worldwide with a current estimated total value of $1.9 trillion – Bitcoin’s share is estimated at 46.5%.
Let’s take a look at the price fluctuations using Bitcoin as an example. In 2021 alone, the price fluctuated between about $30,000 and $60,000. The current rate right now is around $50,000, but it may change again in just a few days. The highest exchange rate ever was on April 14, 2021 with a value of $64,748.91. This is almost unthinkable, considering that the rate was below $1 when Bitcoin was launched.
The sharp rise began in 2012 and reached a peak value of about $20,000. Since 2018, strong fluctuations developed, the value even fell below $4,000. In 2020, the price rose again, but suffered another severe setback due to the Corona pandemic. It was not until the end of the year that the value rose again and even exceeded $25,000.
The year 2021 again saw major fluctuations. While the price rose steadily at the beginning of the year and even reached the current record value in April, it fell to about half again in the middle of the year. In the last few weeks, the value has risen above $40,000 and is currently hovering around $50,000.
Advantages of cryptocurrencies
One of the main reasons for using cryptocurrencies is their security. Based on blockchain technology, they offer secure transactions and are virtually immune to government interference or manipulation.
Moreover, cryptocurrencies allow exchanges between two people without the need for a bank as a third party. Due to the low processing fees, even large amounts can be transferred without high fees for wire transfers.
Another positive aspect is that, unlike banks, they are resistant to inflation. In addition, many people see cryptocurrencies as money’s future. Numerous people are already investing and hoping for another strong increase in value.
Disadvantages of cryptocurrencies
However, cryptocurrencies do not receive encouragement from all sides. They are often criticized for their use in illegal activities. While some appreciate the high level of anonymity, others see it as dangerous. Bitcoin may be less suitable for illegal transactions, – in the past, criminals have already been found and arrested through the blockchain technology – however, other cryptocurrencies are far more difficult to track.
Another major drawback is the price fluctuations. While on the one hand large profits are possible through cleverly planned investments, you can also lose a lot of money. Ater all, fluctuations are difficult to predict. Even if the price is just on a good path, it can crash again in just a few weeks or months.
Conclusion: Should you use cryptocurrencies?
After looking at cryptocurrencies’ pros and cons together, the big question is: Should you invest in them? This question is very difficult to answer. There is always a risk due to the unpredictable developments. However, it is also possible that cryptocurrencies are the future; whether they will ever replace real money is unclear, though. Nevertheless, they can be used for good purposes.
If you want to learn more about cryptocurrencies and how to invest in them, you can book a TeachMeDeFi online course.