Cryptocurrency, or digital currency, is a new system for money that eliminates the need for centralized intermediaries like banks and monetary institutions. But while it’s gained tremendous popularity among speculators, the underlying technology is complex and can be difficult to understand. To help, Simplilearn’s latest video — Cryptocurrency Explained — takes viewers through the basics of blockchain transactions and offers clear explanations of key terms.
The cryptocurrency market is volatile, and a single coin’s value can rise or fall dramatically. But there are ways to reduce risk, including diversifying the range of coins you invest in, and keeping an eye on your investments.
A cryptocurrency’s value depends on the strength of its community, and you can get a sense for that by studying how widely it’s used. Fortunately, most reputable crypto projects publish publicly available metrics that show this information.
In addition, look at the cryptocurrency’s history, and how it’s been used. For example, Bitcoin’s development was largely motivated by the desire to be a form of payment that isn’t controlled or distributed by a central authority. Other cryptocurrencies have been designed for more specific purposes, such as Ethereum’s platform for building automated applications, and Tether, a stablecoin that seeks to stabilize the volatility of other cryptocurrencies by pegging its value to the U.S. dollar.
Cryptocurrency transactions are logged and verified on a public ledger called a blockchain. These blockchains are maintained by a network of computers known as miners. They operate based on either proof-of-work or proof-of-stake verification systems, each of which has its own unique structure. Both have security benefits, but it’s important to understand the differences because they affect how a blockchain is used.
Because cryptocurrencies are so volatile, they’re generally considered high-risk investments. As a general rule, experts recommend that you keep a small percentage of your total portfolio in them. You can diversify the coins you invest in by purchasing them in multiple markets, or you can buy a basket of cryptocurrencies through an exchange. Diversifying your holdings will help you protect yourself from the possibility of a significant loss in any one cryptocurrency, and it may also offer more potential for gains. This is why it’s important to research a cryptocurrency before buying it. There are a number of scams out there, from people posing as billionaires or well-known businesspeople to promise a big return on your investment, to those who steal cryptocurrencies from investors or store them with third parties who then sell them. These kinds of schemes often rely on social media or messaging apps to spread their message and create buzz. In some cases, they may even involve bogus celebrity endorsements. These are all examples of what’s sometimes called “pump-and-dump” strategies. This kind of scheme can be hard to detect, but it’s essential that you take the time to do your homework.