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What is Cryptocurrency?

The cryptocurrency craze has proved resilient and is intensifying. If you’re new to crypto, you’re probably wondering why investors and financial institutions are now so eager to jump onto the crypto bandwagon. Everywhere you turn, so it seems, the proverbial “bitcoin buzz” abounds. You hear about it on financial media, mainstream news, and just about every social media channel you can think of.

Before you get tempted to jump in, hopefully not out of FOMO (fear of missing out), you’re probably wondering what it’s all about. So, here it is.

What is Cryptocurrency?

Cryptocurrency is basically a type of virtual currency. It’s encoded in cryptography and supported by a decentralized network called a “blockchain.”

Blockchain technology is a huge digital network that’s sort of like a public ledger. Additions to the blockchain are verified by all or a select number of computers participating in the network. In other words, the entire blockchain process is not controlled by any one individual, group of individuals, or institutions. Hence, crypto and their blockchain network are “decentralized.”

Cryptocurrency decentralization also means that “coins” are neither issued nor managed by a central authority, making crypto immune to central banks or government intervention. This is a key feature of a cryptocurrency and one of the reasons why crypto was founded.

But It’s Not Just About Creating an Alternative to Fiat Money

Not every crypto investor thinks that it might one day replace the dollar or other fiat (government-issued) currency. Some find value in the underlying blockchain technology.

For instance, Bitcoin is the first “minted” crypto that remains in use. While it’s blockchain was designed to support its coin, other crypto blockchains, like Ethereum, were designed not only to support and transmit coins but to support other forms of digital data, like “smart contracts” (computer programs that function like contracts), decentralized apps (Dapps), and other forms of digital data.

In other words, crypto investing is not just about buying virtual coins that may someday be worth more, it’s also about speculating on their proprietary blockchain innovations which may impact the future of industries if they’re adopted.

Traders and HODLers

If you’ve spent enough time in the crypto media space, you’ve likely come across the term HODL. HODL, a misspelling of “hold” that somehow went viral and caught mainstream adoption, simply means “to hold for the long term.”

HODLers are often characterized as diehard and long-term holders of crypto. If you’re not HODLing, then you’re probably just interested in “trading” crypto for the short- to intermediate-term.

Trying to decide whether to trade or HODL crypto can be tough, especially considering that there are tens of thousands of crypto in the market.

Trade or HODL? It ultimately boils down to how you define and understand crypto.

Crypto in a Nutshell

Let’s go over it again. What is cryptocurrency? Aside from being a kind of virtual currency, crypto is essentially one or all of three things:

  • Crypto is a potential future currency system—something that might one day be used as a medium of exchange and (hopefully) a more stable store of value.
  • Crypto is a speculative asset—one that might rise in value like stocks, real estate, or collectables (like Pokemon cards, NFTs, or antique music boxes).
  • Crypto is a technological disruptor by virtue of its blockchain—a network that can change digital finance or any industry that relies on the transmission of dapps, smart contracts, or any digital data.

How you see crypto will likely determine how you’ll approach trading or investing in it.

Be sure you have a clear understanding of what you mean by crypto. Not everyone using the term “cryptocurrency” may be talking about the same thing.

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