The origins of cryptocurrency are the subject of much debate, but the technology first made headlines with the publishing of a whitepaper entitled “Bitcoin: A Peer-to-Peer Cash System” in 2008. Using the outline provided in the whitepaper, the cryptocurrency system has been built on a decentralized, globally distributed, ledger which uses cryptography (encrypted code) to validate transactions. Currently banks and financial institutions operate their own centralized private ledger system. Getting these private ledgers to communicate with each other is time consuming and expensive.
In a decentralized system, all transactions are submitted to the ledger and then, after verification, are added to an existing chain of verified transactions. The process of authenticating each block of transactions involves using supercomputers to solve a challenging mathematical (cryptographic) puzzle. Those who solve the puzzle and validate the blocks of transactions are known as miners, and the first miner to solve a problem earns Bitcoin as a reward.
A crucial point with Bitcoin is the maximum number of coins that will ever be mined is just 21 million. This capped supply of issuance, when compared to fiat currencies like the US dollar, has led many to invest in Bitcoin as a store of value (its value cannot be diluted). It is also quite common to hear Bitcoin referred to as digital gold.
There are literally thousands of different cryptos, but Bitcoin gets all the headlines. It's the most popular and first major cryptocurrency to hit the market. Some other common digital currencies include Ethereum, Litecoin, Ripple, Terra, Cardano, Solana, and Avalanche.
Since only miners can earn (or get rewarded) crypto or digital currencies and given the substantial computing power required, mining is beyond the reach of most. Anyone, however, can purchase a cryptocurrency on an exchange.
The digital currency world remains largely unregulated. There are thousands of digital currencies and presently no cohesive regulatory framework in place to protect assets , transactions or investors. A Presidential directive was issued recently calling for US exchange regulators to work together to establish a set of guidelines and regulations. This is welcome news as these virtual currencies have become more widely accepted in society and regulation should help all participants.
Bitcoin, Ethereum, and Litecoin are currently the most active crypto currencies.
Bitcoin, and most crypto currencies, are extremely volatile and therefore carry significant risk. Recent back-testing using Bitcoin as an addition to a portfolio indicates it can, in low concentrations, help diversify risk and improve returns over longer periods of time.
Digital currencies can be bought and sold on an exchange, in publicly traded trusts, in mutual funds, as futures or you can invest in companies like miners who facilitate blockchains and their related cryptocurrencies.
Stablecoin is a cryptocurrency whose value tracks the movements of a stable currency such as the US dollar or gold. The idea of stable coins is to reduce volatility compared to unpegged cryptocurrencies. All cryptocurrencies are unregulated and should be viewed as risky.
You should consult a trusted financial professional before investing in any risky asset like Bitcoin or another digital asset. We recommend you consider consulting advisors with experience in cryptocurrency and blockchain.
Need a professional opinion on crypto and/or Bitcoin? Contact our team or call 732-345-1533.
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