What is a Cryptocurrency?
A cryptocurrency, like Bitcoin, is a form of digital currency that typically is based on blockchain technology.
Bitcoin. Ethereum. Ripple. There is a variety of cryptocurrencies (aka "crypto") that, like the US dollar or Mexican peso, are intended to be used as a form of payment. But some of the things that separates cryptocurrencies from the cash in your pocket are its fundamental digital and virtual elements. Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are based on the blockchain, a system that records transactions across a computer network in order to maintain trackability and security. The blockchain allows crypto to be decentralized so that no individual establishment, like a government or central bank, has to issue them or can alter them. You can trade cryptocurrencies in the market just like you could buy euros or sell yen (although crypto tends to be more volatile). But keep in mind that cryptocurrency trading is very risky (you could lose all the money you put into it) and should only be pursued if you can handle the losses.
Bitcoin was the first blockchain-focused cryptocurrency and it's spawned thousands of other forms of crypto (called "altcoins" short for “alternative coins”). It was created in 2008 by an elusive person (or a group of people) named Satoshi Nakamoto who still has never been confidently identified. Bitcoin records transactions on the blockchain and isn't issued by any government (it's decentralized). While Bitcoin has been used to purchase some things, it isn't nearly as commonly accepted as payment as any government-issued currency. It's most known for how it trades (which is extremely volatile), famously doubling in price above $18,000 per coin in the final month of 2017, but falling to lose half its value just a couple months later.
Cryptocurrencies generally want to achieve mainstream use…
but they aren’t there quite yet. While cryptocurrencies like Bitcoin trade on crypto exchanges with wild ups-and-downs, at their core, their goal is to become a secure, digital first, virtual currency. The big question remains — can cryptocurrencies become a standard form of payment? Will the positives outweigh the negatives?
Blockchain. It’s become almost synonymous with Bitcoin and other cryptocurrencies. Blockchain. Your friends drop the term or it’s weaved into some article on “the future of shipping.” Out of all the terms used in defining cryptocurrencies, blockchain is one that even applies to uses beyond virtual currencies.
At its core, blockchain is a type of digital record-keeping system. You can literally picture it as a chain of virtual blocks that contain data. The digital information stored on each block throughout the chain can contain details like the date, time, amount, or who was a part of a transaction. To differentiate between blocks, each block in the chain has a specific identifier, known as a hash. And since each block can contain a significant amount of information, multiple transactions can be accounted for in each.
Blockchain is a fundamental concept behind Bitcoin and other cryptocurrencies, but it’s not the only one. For a set of other key terms to nail down on cryptocurrencies, we’ve got a list for you below.
There are 5 key steps that break down how a new block gets added to the blockchain. If you were to buy or sell a Bitcoin, for example, this is how that process would happen — and we can explain it simultaneously and in much simpler terms as if you’re buying your morning coffee (although cryptocurrency transactions are much riskier than espressos).
As you finish up that small almond milk latte and get on with your day, keep in mind this isn’t a perfect analogy — the main risk to your coffee is spilling, while cryptocurrencies carry a lot more downside potential. The cryptocurrency trading process is more complicated, and can often take time if buyers or sellers aren’t available (unlike your fast coffee swipe transaction). And unlike a coffee, cryptocurrency trading can be extremely volatile, with price spikes and drops that can result in losing your entire investment.
We just covered blockchain and the 5 key steps to a blockchain transaction, like when you buy or sell a Bitcoin (a process, though riskier, analogous to your morning coffee purchase). But here are a few other key crypto terms to keep in mind if you’re jumping into conversation with a friend who knows the material well (and we all have that friend who’s been talking about cryptocurrencies for years).
This isn’t a complete list of all the possible cryptocurrency related terms — plenty more exist, and many are created each day as the usage of cryptocurrency grows. Think of this as a starter kit to knowing some of the basic concepts. Just like anything in life, the more research you do, the more knowledgeable you’ll become on this topic.
Cryptocurrencies have gained attention for their potential — enabling transactions to happen digitally, seamlessly, quickly, and securely. As the new concept of crypto is fleshed out and grows, there are significant risks that come along with it. These are some of the core benefits though that crypto aims to offer now and in the future:
Significant investor and pop culture interest has poured into cryptocurrencies over the years. While there are some potential benefits to the future usage and adoption of cryptocurrencies, they come with significant negative elements that any reader, fan, hater, trader, or investor should be aware of.
The OG. Bitcoin (nicknamed BTC) is considered the first blockchain-focused cryptocurrency — and the concept it pioneered has led to thousands of other cryptocurrencies known as "altcoins." The origins of Bitcoin in 2008 (when the domain was registered) are as mysterious as its creator, Satoshi Nakamoto. That person (or group of persons) has never been identified, but remains a cult-like figure in the cryptocurrency community.
Here’s the core of how Bitcoin works. The cryptocurrency’s most basic element is that it verifies, records, identifies, and stores transactions on a blockchain, adding blocks as transactions accumulate. It isn't issued by any government, which is why it’s considered “decentralized.” Despite the publicity and hype around Bitcoin as a potential payment tool of the future, it currently isn’t accepted as payment as most government-issued currency (aka “fiat currencies”) are.
You’ve probably noticed Bitcoin for the attention it earns for how it trades, which is volatile. At the end of 2017, it famously doubled to reach over $18,000 per coin — just months later in early 2018, Bitcoin prices fell to lose half its value. As of Monday, July 15, 2019, as tracked on Robinhood, Bitcoin was going through another volatile stretch and had reached $10,893 at one point while trading, then losing 10% the following day.
Just like other currencies, Bitcoin contains some key risks to keep in mind. There’s the primary risk of how the price fluctuates significantly as it trades. Then there’s also the external risk of how it will be regulated, since it’s such a new concept that governments worldwide want to ensure is safe for consumers. These are just a couple of the risks, but it’s critical to keep them in mind whenever you’re thinking of investing in cryptocurrencies.
Influenced by Bitcoin, a bouquet of other cryptocurrencies has blossomed over the last few years — and these “altcoins” carry similar crypto characteristics and risks. Like Bitcoin, Altcoins are digital currencies carrying different names that can be traded on many crypto exchanges. The most common element to cryptocurrencies like Bitcoin is that they are decentralized, typically using a blockchain to record and store transactions, after they’re issued through a mining process.
Here are some sample Altcoins to keep in mind that also have large market capitalization:
Other Altcoins are continuing to pop up. For instance, in June 2019, Facebook announced it was launching Libra, its own cryptocurrency to allow sending money internationally more easily through the social network. Another Altcoin, “Dogecoin,” was created in 2013 with the logo of a Japanese Shiba Inu dog, but it’s become popular for its small transaction fees and times compared to other virtual currencies.
These are just a few of the names to know if you’re curious about Altcoins — many more exist and are being created frequently. But don’t forget that, like Bitcoin, they can trade with significant volatility — in fact, since some of these Altcoins are much smaller than Bitcoin, it can even be hard to find buyers or sellers on an exchange, and it’s possible to lose your entire investment if you purchase them (no matter the cryptocurrency).
Cryptocurrencies are a complicated, interconnected, and technical concept whose value is still being proven. Above, we jumped on some of the drawbacks to cryptocurrencies, such as their use for some illegal activities by criminals. Even if you’re not a criminal, there are still critical risks to recognize when trading cryptocurrencies. For example, cryptocurrency prices can change radically in a trading day given how few places there are to trade them and their uncertain value and regulatory status. Crypto exchanges are also sometimes vulnerable to hacks in which coins are stolen, which has happened before to some notable exchanges.
Purchasing cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.
Cryptocurrency trading can be extremely risky. Cryptocurrency trading may not generally be appropriate, particularly with funds drawn from retirement savings, student loans, mortgages, emergency funds, or funds set aside for other purposes.
Cryptocurrency trading can lead to large and immediate financial losses. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price. This can occur, for example, when the market for a particular cryptocurrency suddenly drops, or if trading is halted due to recent news events, unusual trading activity, or changes in the underlying cryptocurrency system.
Just like with stocks or bonds, you need to find an exchange in order to trade cryptocurrencies. Exchanges are marketplaces, acting as platforms to connect buyers and sellers. One of the earliest large exchanges was Coinbase. Robinhood Crypto, LLC offers a means of commission-free cryptocurrency exchange that allows customers to trade on a state-by-state basis on a variety of cryptocurrencies (other fees may still apply. Please see our commission and fee schedule to learn more). To see if your state or a particular coin are available, you can check out the options on Robinhood Crypto here. But like we’ve mentioned before, keep in mind that cryptocurrency trading isn’t easy and isn’t for everyone — there are plenty of risks involved, and you should you make sure you understand them before jumping in.
Cryptocurrency trading offered through Robinhood Crypto, LLC. Robinhood Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services and is not a member of FINRA or SIPC. Cryptocurrencies are not stocks and your cryptocurrency investments are not product insured by either FDIC or SIPC.
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