Fascination with crypto has been growing because the 2017 bull market and contains increased even more since 2021, which saw the nonfungible token (NFT) boom and Bitcoin (BTC) hitting its highest price up to now.
So, so what can a crypto investor tell friends and family who are thinking about cryptocurrency? Here are a few common and important questions that one may run into regarding crypto plus some appropriate responses with opinions from experts in the market.
Probably the most common questions a crypto investor could easily get asked is what cryptocurrency is to begin with. Cryptocurrency is really a digital currency that’s designed to be utilized as a medium of exchange. This exchange will come by means of peer-to-peer (P2P) payments and retail purchases.
Lucaz Lee, CEO of Affyn a mobile-based metaverse platform told Cointelegraph, A cryptocurrency is really a digital or virtual currency made to are a medium of exchange. It uses cryptography to secure and verify transactions, rendering it difficult for one to create fake transactions or counterfeit money.
Lee continued, Additionally, cryptocurrencies are decentralized and use distributed ledger technology, meaning no central bank or government is controlling them.
Cryptocurrencies exist on the blockchain, that is a public ledger that records all transactions that happen, allowing for one to observe how money moves through the network. While anyone can easily see how much cash a user owns and how it really is spent. Users require a wallet to receive and send crypto, and these wallets use alpha-numerical identifiers, which put in a layer of anonymity to the users.
What purpose does cryptocurrency serve?
The primary purpose behind cryptocurrency may be the ability for anybody to receive and send money by way of a decentralized P2P network. This works as an electronic version of cash. For instance, when users pay with cash, they pay right to another person without needing to proceed through an intermediary like a bank or payment processor.
Cryptocurrency does this on an electronic level, allowing one to transfer money right to someone else, entity or organization while retaining control of these funds all the time. Lee agreed with this particular take, stating, cryptocurrencies may be used as a medium of exchange or payment for specific services without the intermediary or centralized control. It removes the limitations of traditional finance, enabling the globe’s many unbanked and underbanked users to gain access to financial services.
Cryptocurrencies may also be used as investment vehicles, with users having the ability to make high returns because of their limited supply, high volatility and higher level of speculation.
Lee added, With each passing day, cryptocurrencies have become more appealing investment options. Certain variations also support opportunities to create passive returns, helping investors expand and diversify portfolios.
If crypto isnt backed by anything, how could it be worth anything?
Most cryptocurrencies arent backed by any traditional assets aside from stablecoins like USD Coin (USDC) and Tether (USDT), that have a large part of their tokens backed by reserves of fiat money and bonds. Some individuals may wonder why cryptocurrency has any value should they arent backed by anything.
First, most of the value originates from the utility of a cryptocurrency. The more a cryptocurrency is necessary for a specific task, the more demand you will see for that cryptocurrency. For example using crypto as a store of value and uses for particular protocols within sub-industries like decentralized finance (DeFi) and NFTs.
Igor Mikhalev, partner and head of emerging Tech at EY and decentralized autonomous organization chairman of Blueshift a decentralized exchange weighs in with this question, telling Cointelegraph, cryptocurrencies built well are worth a lot more since they exhibit the foundational functions of traditional currencies: scarcity, medium of exchange/account and store of value. It’s possible because of advances in the underlying tech, legislation and peoples general attitude toward it.
Its also worth noting that fiat currencies just like the USA dollar, euro and Great British pound arent backed by anything (hence the word fiat currency). Mikhalev spoke with this, adding, the USD isn’t backed by real assets such as for example gold and is backed by peoples rely upon the U.S. because the issuer. So, why should we not need to aid, own and exchange currencies issued by other mission-driven collectives backed by their value and utilities? This is actually the foundation of the brand new decentralized economy.
Lee gave his opinion on the worthiness of cryptocurrency, adding, cryptocurrency isn’t backed by anything, nonetheless it is intrinsically worth something because people believe it has value. Market forces of supply and demand determine the cost of a cryptocurrency.
Speculation and investment also are likely involved in the worthiness of cryptocurrency. If investors believe the worthiness of a coin increase as time passes, theyre more prone to buy and hold that coin, looking to make money later on.
Lee added, the more folks need it a cryptocurrency, the bigger the price will undoubtedly be. The more folks desire to sell the cryptocurrency, the low the purchase price. Blockchain technology has proven reliable and secure; accordingly, lots of people have confidence in its longevity and for that reason spend money on cryptocurrencies.
Can cryptocurrency replace real cash?
In an easy sense, no, as cryptocurrency isnt regulated, and you can find plenty of services, products and commodities which will always need traditional cash. However, governments want into creating their very own digital tokens referred to as central bank digital currencies (CBDCs) and you can find growing uses for decentralized cryptocurrencies.
You cant head into a Starbucks in the us and pay with Swiss francs or pounds. Yet, both these are real cash. Context matters. Rockwell Shah, co-founder at Invisible College a Web3 learning community told Cointelegraph, adding:
Similarly, the major cryptos are native currencies of these own digital nations. They will have relevancy within their own blockchain borders. If the utilization cases of crypto are so compelling that folks use them rather than traditional currencies even beyond their digital borders, then great. Welcome to the free market.
Lee also believes the solution to the question is context-based. The solution to the question isn’t a straightforward yes or no. This will depend on the united states and the corresponding economic climate. In countries like Venezuela, where in fact the government has mismanaged the economy and sparked high hyperinflation, cryptocurrency has turned into a life-style for most people.
Weighed against traditional money, cryptocurrency is quite new and its own implications on the bigger society are yet to be proven. Nevertheless, central banks are exploring the thought of transition to digital currencies, referred to as central bank digital currencies, he added.
Some experts think that the underlying principles behind cryptocurrencies actually put them before traditional currencies with regards to adoption.
Remarkably, crypto has recently started surpassing national currencies on the foundational functions because of the democratic and transparent nature people intrinsically lean toward. In conjunction with the decline in rely upon government/official institutions, this presents fertile grounds for accelerated adoption, Mikhalev said, continuing:
You can see this awkward (for traditional money institutions) situation already today: The debate round the introduction of CBDCs (nation-level digital currencies) is stalling. Central, naturally, institutions usually do not want decentralization, since it will result in their demise. However, there is absolutely no turning back. After the technology is mature enough (and something can argue that it has recently happened), it’ll only take one major geopolitical event for the explosive adoption to begin with.
Can cryptocurrency be hacked?
Blockchains themselves are largely impervious to cyberattacks. Lee spoke up to now:
Blockchains, by design, are extremely difficult to hack because they’re decentralized and depend on different security mechanisms. However, external variables such as for example hot wallets, centralized wallets, bridges and also smart contracts could be hacked.
Therefore, the easiest method to secure users can secure their funds is by storing them in a noncustodial wallet, that is a wallet which allows them to possess the private keys and wallet seed. In this manner, an attacker would have to know the private key and wallet seed to gain access to their funds. Regarding platforms, hackers usually resort to phishing attacks to trick users into offering information such as for example passwords and login info therefore the hackers can access their funds.
What can cause cryptocurrency prices to improve?
Speculation and supply and demand are a number of the main factors driving cryptocurrency prices. Most cryptocurrencies have a restricted supply, so when there exists a large amount of demand for that coin (because of speculation of utility), the purchase price usually surges in reaction to this.
Lee also believes supply and demand may be the major reason a cryptocurrencys price increases, stating that the price tag on all assets, including cryptocurrencies, are dependant on demand and offer. Once the demand for a secured asset exceeds the supply, it generates a cost surge. Sometimes, macroeconomic and geopolitical factors also influence crypto prices.