From Dogecoin to NFTs, we answer crypto queriesRich
Cryptocurrency, also known as virtual currency or digital currency, took the world by storm in 2017. Four years later, we’re seeing bitcoin reaching record highs – before tumbling back down.
Beyond all the hype around digital currencies, are they a good investment? That depends on your tolerance for risk when building your portfolio and your long-term investment goals. We can start by learning more about what you’re looking to invest in.
Question: What is cryptocurrency?
Answer: Cryptocurrency is a form of payment that can be exchanged online for goods and services. Many companies have issued their own currencies, often called tokens, and these can be traded specifically for the good or service that the company provides. Think of them as you would arcade tokens or casino chips. You’ll need to exchange real currency for the cryptocurrency to access the good or service.
Cryptocurrencies work using blockchain, a decentralized technology spread across many computers that manages and records transactions. Part of the appeal of this technology is its security.
Q: How does blockchain work?
A: A blockchain is a decentralized and distributed ledger that can be accessed by many different parties simultaneously. When a transaction is completed, it is recorded on a “block.” When a block’s memory is full, it is added to the end of the blockchain, always in successive order. It then becomes part of the permanent database of transactions of the blockchain. For the purposes of bitcoin, the blockchain records transaction details, such as the amount and time, but not personal details of the parties involved.
Q: What is Dogecoin?
A: The “memecoin” was created in 2013 as a joke poking fun at the surge in digital coins such as bitcoin, says cryptocurrency news site Coindesk. Dogecoin was inspired by the popular Doge meme, which offers
the image of a Shiba Inu staring sideways at the camera with raised eyebrows, according to the website Know Your Meme.
Dogecoin has skyrocketed by more than 5,000% since the start of the year. Its market value is $51 billion, according to CoinGecko, a cryptomarket data site. That’s more than the market capitalization of auto giant Ford, which sits at nearly $48 billion.
Q: What is Bitcoin?
A: Bitcoin, the world’s most popular digital coin, is a type of cryptocurrency. It can be used to complete a transaction between two parties without involving a middleman. It enables direct, private transactions between users, with virtually no transaction costs; something it can accomplish because it is powered by blockchain technology.
Q: Should you buy Bitcoin or Dogecoin?
A: It depends on how much risk you’re willing to take with your investments. If you had invested in Bitcoin when it was introduced in 2009, your returns could be in the millions or even billions since it was initially valued at $0.
More businesses and investors are likely to buy Bitcoin in the coming year, which could help to drive the cryptocurrency’s price sharply higher.
It hasn’t always been smooth sailing.
Bitcoin has been highly volatile. In late 2017, the digital token rose to nearly $20,000, before crashing to almost $3,000 the following year.
The sharp rise in the value of Bitcoin and Dogecoin has led to analysts’ worries of a potential bubble in the cryptocurrency market. Bitcoin has more than doubled in value since the start of 2021.
Q: How do you buy cryptocurrency?
A: There are several ways to buy Bitcoin. One of the most popular is through a Bitcoin wallet. One of the most popular of these wallets is Coinbase, which lets users link a bank account to deposit and withdraw funds for the purpose of purchasing and selling Bitcoin. Another wallet featuring a nifty feature is Wirex, which comes with a payment card that converts Bitcoin into the local currency when making a purchase.
Another way to purchase Bitcoin is through Bitcoin Depot, which allows users to make cash deposits at select ATMs in several
For investors, the easiest way to gain exposure to Bitcoin is probably through their brokerage. Funds such as the Grayscale Bitcoin Trustwere created for this purpose, but beware: Often shares in this and similar ETFs trade far above the underlying Bitcoin exposure.
Venmo, the digital payments app owned by PayPal, announced a crypto option, which would allow its users to buy, sell and hold cryptocurrency. Customers will get to choose between four types of cryptocurrency: Bitcoin, Ethereum, Litecoin and Bitcoin Cash.
Q: What is an NFT?
A: NFT is short for nonfungible token. Fungible items are easily interchangeable. Take money as an example. If we each have a $20 bill, we could swap them without any change to their value. In the case of a nonfungible token, each one is unique and cannot be directly exchanged for another. An NFT is essentially a piece of data that verifies you maintain ownership of a digital item, from a piece of artwork to a clip of a game-winning shot in an NBA game.
Contributing: Brett Molina, USA TODAY; Matthew Cochrane and Joe Tenebruso, The Motley Fool; James Royal, NerdWallet.com