What is Cryptocurrency? What are the Risks of Investing in Cryptocurrency?
A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrency are decentralized networks based on blockchain technology—a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrency is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.
What is Cryptocurrency?
The Internet and widespread use of PCs in the 1970s and 1980s opened up the concept of decentralized, digital money to the public, or, as the saying goes, “to the people.” In 1994, early PC hardware pioneer and inventor of the World Wide Web Tim Berners-Lee introduced the concept of hypertext transfer protocol to control transactions on the World Wide Web. A few years later, the anonymous peer-to-peer (P2P) anonymous network file sharing service, Napster, came online, quickly escalating user interaction and file sharing. Along with peer-to-peer file sharing, around the same time, the first cryptocurrency was released. Called Peercoin, this currency is based on bitcoin and is used primarily for dark net markets (e.g., drug marketplaces) and games.
Why Invest in Cryptocurrency?
Cryptocurrency are generally seen as having many benefits over their paper-based counterparts. First, because cryptocurrencies are not held by any one person or institution, they can be transferred with little oversight. They are also highly customizable, meaning that users can customize their own digital currency and run it independently of any central bank or country. Other cryptocurrencies have been directly tied to the growth of several legitimate industries and become the basis for new financial tools, including:
Litecoin: Designed to be quicker and more power-efficient than Bitcoin, Litecoin is often used in microtransactions.
Bitcoin: First launched in 2009, Bitcoin is the most well-known cryptocurrency.
Types of Cryptocurrency
There are many different kinds of cryptocurrency and many are used for different purposes. Some of these, like Bitcoin, Ethereum, and Litecoin, are the most popular and well-known. Many are designed for use in the web-based marketplace. Many of these are geared towards cryptocurrencies investors and traders, while others are sold for use as investment vehicles.
Alternative cryptocurrencies
Some people choose to purchase or trade other cryptocurrencies, which have been issued by the pseudonymous Satoshi Nakamoto and which are not necessarily associated with cryptocurrencies currently being traded. These alternate cryptocurrencies are difficult to purchase or sell, and there is no public account of their total supply or ownership.
Risks of Investing in Cryptocurrency
As with any asset class, investing in cryptocurrency involves risk. There are three main types of risk:
Legal and regulatory
Technical
Liquidity
The legal and regulatory risk is the most acute and is why cryptocurrency exchanges are often regulated as money transmitters by state and federal governments, requiring them to comply with know-your-customer (KYC) requirements and reporting regulations, know-your-customer (KYC) rules for account holders and transaction disclosures, and anti-money laundering compliance. The need for ongoing compliance with these regulations makes opening a cryptocurrency exchange account on a mainstream exchange such as Coinbase extremely challenging. These regulation risk factors apply to all cryptocurrencies, not just cryptocurrencies like Bitcoin.
Conclusion
It is hard to know what the future holds in store for Bitcoin and other digital currency. But one thing is clear: they are here to stay.
UPDATE: March 29, 2018
Since this article was published, Bitcoin has experienced a correction, from over $20,000 in December 2017 to $6,000 today. Regardless, it is clear that cryptocurrencies are here to stay, and are changing the very nature of business and commerce.
This case study provided the background for the author’s recent report “Titan Merchant Acquires Bitcoin,” published in Juro and Associates’ 2018 Global Commerce Monitor Report. The report is intended to help readers understand the significant potential of cryptocurrency.