What to tell newcomer friends about digital currency

Curiosity in crypto has been rising because the 2017 bull market and has elevated even additional since 2021, which noticed the nonfungible token (NFT) increase and Bitcoin (BTC) hitting its highest value to date. 

So, what can a crypto investor inform household and buddies who’re fascinated about cryptocurrency? Listed here are some widespread and vital questions that one can come throughout concerning crypto and a few applicable responses with opinions from consultants within the trade.

What’s cryptocurrency?

Probably the most widespread questions a crypto investor may get requested is what cryptocurrency is within the first place. Cryptocurrency is a digital foreign money that’s designed for use as a medium of alternate. This alternate can come within the type of peer-to-peer (P2P) funds and retail purchases. 

Lucaz Lee, CEO of Affyn — a mobile-based metaverse platform — advised Cointelegraph, “A cryptocurrency is a digital or digital foreign money designed to work as a medium of alternate. It makes use of cryptography to safe and confirm transactions, making it troublesome for anybody to create pretend transactions or counterfeit cash.”

Lee continued, “Moreover, cryptocurrencies are decentralized and use distributed ledger expertise, that means no central financial institution or authorities is controlling them.”

Cryptocurrencies exist on the blockchain, which is a public ledger that information all transactions that happen, making it doable for anybody to see how cash strikes via the community. Whereas anybody can see how a lot cash a person owns and the way it’s spent. Customers want a pockets to ship and obtain crypto, and these wallets use alpha-numerical identifiers, which add a layer of anonymity to the customers.

What objective does cryptocurrency serve?

The primary objective behind cryptocurrency is the flexibility for anybody to ship and obtain cash via a decentralized P2P community. This works as a digital model of money. For instance, when customers pay with money, they pay straight to a different individual with out having to undergo an middleman equivalent to a financial institution or fee processor.

Cryptocurrency does this on a digital stage, permitting anybody to switch cash straight to a different individual, entity or group whereas retaining management of their funds always. Lee agreed with this take, stating, “cryptocurrencies can be utilized as a medium of alternate or fee for particular providers with none middleman or centralized management. It removes the constraints of conventional finance, enabling the globe’s massive numbers of unbanked and underbanked customers to entry monetary providers.”

Cryptocurrencies are additionally getting used as funding automobiles, with customers having the ability to make excessive returns attributable to their restricted provide, excessive volatility and excessive stage of hypothesis.

Lee added, “With every passing day, cryptocurrencies have gotten extra enticing funding choices. Sure variations additionally assist alternatives to generate passive returns, serving to traders broaden and diversify portfolios.”

If crypto isn’t backed by something, how is it price something?

Most cryptocurrencies aren’t backed by any conventional property other than stablecoins like USD Coin (USDC) and Tether (USDT), which have a big portion of their tokens backed by reserves of fiat cash and bonds. Some individuals might surprise why cryptocurrency has any worth in the event that they aren’t backed by something. 

First, a whole lot of the worth comes from the utility of a cryptocurrency. The extra a cryptocurrency is required for a selected job, the extra demand there will probably be for that cryptocurrency. Examples embrace utilizing crypto as a retailer of worth and makes use of for explicit protocols inside sub-industries like decentralized finance (DeFi) and NFTs.

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Igor Mikhalev, associate and head of rising Tech at EY and decentralized autonomous group chairman of Blueshift — a decentralized alternate — weighs in on this query, telling Cointelegraph, “cryptocurrencies constructed effectively are price more and more extra as a result of they exhibit the foundational features of conventional currencies: shortage, medium of alternate/account and retailer of worth. It’s doable attributable to advances within the underlying tech, laws and folks’s common angle towards it.”

It’s additionally price noting that fiat currencies like america greenback, euro and Nice British pound aren’t backed by something (therefore the time period “fiat” foreign money). Mikhalev spoke on this, including, “the USD is just not backed by actual property equivalent to gold and is barely backed by individuals’s belief within the U.S. because the issuer. So, why ought to we not need to assist, personal and alternate currencies issued by different mission-driven collectives backed by their worth and utilities? That is the muse of the brand new decentralized financial system.”

Lee gave his opinion on the worth of cryptocurrency, including, “cryptocurrency is just not backed by something, however it’s intrinsically price one thing as a result of individuals consider it has worth. Market forces of provide and demand decide the value of a cryptocurrency.”

Hypothesis and funding additionally play a job within the worth of cryptocurrency. If traders consider the worth of a coin will improve over time, they’re extra probably to purchase and maintain that coin, anticipating to show a revenue sooner or later.

Lee added, “the extra individuals need to purchase a cryptocurrency, the upper the value will probably be. The extra individuals need to promote the cryptocurrency, the decrease the value. Blockchain expertise has confirmed dependable and safe; accordingly, many individuals consider in its longevity and due to this fact put money into cryptocurrencies.”

Can cryptocurrency exchange actual cash?

In a broad sense, no, as cryptocurrency isn’t regulated, and there are a whole lot of providers, merchandise and commodities that may all the time want conventional money. Nonetheless, governments are trying into creating their very own digital tokens often called central financial institution digital currencies (CBDCs) and there are rising makes use of for decentralized cryptocurrencies.

“You possibly can’t stroll right into a Starbucks in America and pay with Swiss francs or kilos. But, each of those are actual cash. Context issues.” Rockwell Shah, co-founder at Invisible Faculty — a Web3 studying neighborhood — advised Cointelegraph, including:

“Equally, the most important cryptos are native currencies of their very own digital nations. They’ve relevancy in their very own blockchain borders. If the use circumstances of crypto are so compelling that folks use them as a substitute of conventional currencies even outdoors of their digital borders, then nice. Welcome to the free market.”

Lee additionally believes the reply to this query is context-based. “The reply to this query is just not a easy sure or no. It depends upon the nation and the corresponding financial system. In international locations like Venezuela, the place the federal government has mismanaged the financial system and sparked excessive hyperinflation, cryptocurrency has change into a lifestyle for many individuals.”

“In contrast with conventional cash, cryptocurrency may be very new and its implications on the bigger society are but to be tried and examined. Nonetheless, central banks are exploring the thought of transition to digital currencies, often called central financial institution digital currencies,” he added.

Some consultants consider that the underlying ideas behind cryptocurrencies truly put them forward of conventional currencies in relation to adoption.

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“Remarkably, crypto has already began surpassing nationwide currencies on the foundational features due to their democratic and clear nature individuals intrinsically lean towards. Coupled with the decline in belief in authorities/official establishments, this presents fertile grounds for accelerated adoption,” Mikhalev mentioned, persevering with:

“One can see this awkward (for conventional cash establishments) scenario already right now: The controversy across the introduction of CBDCs (nation-level digital currencies) is stalling. Central, by nature, establishments are not looking for decentralization, as it can result in their demise. Nonetheless, there is no such thing as a turning again. As soon as the expertise is mature sufficient (and one can argue that it has already occurred), it can solely take one main geopolitical occasion for the explosive adoption to start.”

Can cryptocurrency be hacked?

Blockchains themselves are largely impervious to cyberattacks. Lee spoke up to now:

“Blockchains, by design, are practically unattainable to hack as a result of they’re decentralized and depend on completely different safety mechanisms. Nonetheless, exterior variables equivalent to sizzling wallets, centralized wallets, bridges and even sensible contracts could be hacked.”

Subsequently, one of the simplest ways to safe customers can safe their funds is by storing them in a noncustodial wallet, which is a pockets that permits them to personal the personal keys and pockets seed. This fashion, an attacker would wish to know the personal key and pockets seed to entry their funds. Relating to platforms, hackers normally resort to phishing assaults to attempt to trick customers into freely giving info equivalent to passwords and login data so the hackers can entry their funds.

What causes cryptocurrency costs to extend?

Hypothesis and supply and demand are among the primary components driving cryptocurrency costs. Most cryptocurrencies have a restricted provide, and when there may be a whole lot of demand for that coin (attributable to hypothesis of utility), the value normally surges in response to this.

Lee additionally believes provide and demand is the principle cause a cryptocurrency’s value will increase, stating that “the value of all property, together with cryptocurrencies, are decided by demand and provide. When the demand for an asset exceeds the provision, it creates a value surge. At instances, macroeconomic and geopolitical components additionally affect crypto costs.”