You may have heard a lot of the buzz about cryptocurrency on the news, but exactly what is cryptocurrency? Like dollars, euros and other traditional currencies, cryptocurrency is a form of payment that can be used to buy goods and services.
Like with traditional currencies, investors buy and sell cryptocurrency to make a profit from the difference in the exchange rate over time. Unlike currencies issued by governments, a new cryptocurrency is created and released every so often.
Cryptocurrency is created and released by private companies, rather than national government treasury departments. It is a digital form of payment that works using a decentralized technology called blockchain. One of the advantages of blockchain technology is that it is extremely secure.
The very first, and top cryptocurrency by market capitalization at $721 billion, is Bitcoin. All remaining market capitalization is split among around 6,700 other kinds of cryptocurrency. When a company wants to launch a new cryptocurrency, it raises money through an initial coin offering or ICO.
Some investors in cryptocurrencies see them as the currency of the future and want to buy them now before the exchange rate goes up. Other advantages of crypto include the iron-clad security provided by blockchain technology and the fact that they are not subject to the policies of central banks.
The value of individual cryptocurrencies fluctuates, sometimes wildly. For example, Bitcoin reached its all-time high in November 2021 $68,500. But it closed the year at $47,000 per Bitcoin; a loss of close to 30% from just the previous week. As of March 15, 2023, the famous cryptocurrency is worth around $24,950.
When a new cryptocurrency launches, its value can jump as much as forty times its initial valuation within the first few months. This volatility has attracted short-term investors looking to make a quick profit by looking for peaks in cryptocurrency prices and then selling. Unfortunately for investors, most cryptocurrencies lose the majority of their value subsequently, with over half falling in the first four months.
Because blockchain transactions are encrypted and do not involve a third party like a credit card company, cryptocurrencies are largely anonymous. Because of this, cryptocurrency has sometimes been used for criminal and otherwise shady transactions.
However, some government agencies, including the U.S. Securities and Exchange Commission (SEC) have recently signaled that they plan to regulate cryptocurrency exchanges. These exchanges are required to comply with subpoenas and other government-ordered requests.