Your Biggest Crypto Questions, Answered

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  • Cryptocurrencies don't need to be backed by central banks or governments; they use cryptography to secure themselves.
  • Not all crypto projects are forms of payments. Cryptocurrencies can also be used to track supply chains and pay in the metaverse.
  • Cryptocurrency investing can carry risks, so make sure you understand them before diving in, and only invest money you can afford to lose.

A two-minute guide to cryptocurrency and blockchain.

Cryptocurrency hit the mainstream last year, attracting millions of new investors. But there are still many crypto-curious people who aren't sure how to get to grips with cryptocurrency and blockchain technology. If you're among them, our crypto primer will answer all your questions.

What is cryptocurrency?

Cryptocurrencies are a type of digital currency secured by cryptography, which is where the word came from -- it combines "cryptography" and "currency." One of the reasons people are so excited about cryptocurrencies is that they don’t need a middleman, such as a government or central bank. Instead they use a series of encryption algorithms and other cryptographic techniques to secure themselves.

Many cryptocurrencies are built on blockchains. A blockchain is a system of interconnected blocks that form one huge database. There are over 18,000 cryptocurrencies in existence right now. Some act as a form of payment, but others utilize blockchain technology in different ways. For example, one top cryptocurrency tracks products as they progress through the supply chain. Another helps companies render video content. Others are forms of payment in metaverses.

So is it actually a currency?

Bitcoin (BTC), the first and biggest crypto, was designed as a digital form of payment. However, many cryptocurrencies are trying to solve different problems and don't even try to be similar to traditional currencies like dollars. Think of them as tokens that perform a function -- in some cases, they are more like the rewards points you might earn at the grocery store.

In terms of Bitcoin, some people believe it might become the currency of the internet. Others argue that Bitcoin is more like digital gold, and some people don't see any value in it at all. It does tick some boxes in terms of acting as a form of payment or store of value, but it is very early days and the jury's still out.

One of the big reasons people don't think Bitcoin works as a currency is its volatility. Trying to pay wages or rent using something that could lose half its value in six months is not ideal. Plus, the transaction costs are relatively high, and Bitcoin doesn't have a high transaction speed. However, it's still very early to know for sure.

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OK, I've also heard about smart contracts and decentralized applications. What are they?

Smart contracts are small pieces of code that live on the blockchain. If you think about the blockchain as a sophisticated ledger that records transactions, smart contracts take it to the next level. They let you record triggerable actions on the blockchain. For example, a farmer might be able to take out a decentralized insurance policy against certain weather conditions. If the policy is written in a smart contract, it would automatically pay out in the event of those conditions.

Decentralized applications are built using smart contracts. Ethereum (ETH) -- the second-biggest crypto -- is the leading smart contract platform and hosts the majority of applications. The best way to think about decentralized applications (or dApps) is that they replace traditional businesses with computer code. There are varying opinions on whether that’s a good thing or not.

Is crypto as bad for the environment as everybody says it is?

Some cryptocurrencies are extraordinarily bad for the environment. For example, Bitcoin uses as much electrical energy as Sweden each year. According to a Digiconomist, which tracks the environmental impact of crypto, Ethereum consumes as much as Iraq. Bitcoin and Ethereum account for almost 60% of the crypto market. If each continues to consume as much energy as a medium-size country, crypto will continue to be bad for the environment.

However, Ethereum is in the process of switching to a more environmentally friendly model, which will reduce its energy consumption by 99%. And many newer cryptocurrencies don’t consume anywhere near as much energy. For example, several Ethereum alternatives such as Cardano, Solana, and Avalanche are significantly more energy-efficient.

Is it safe?

There are a number of risks associated with buying cryptocurrency. The first is that this is a high risk and volatile investment and there’s a lot we don’t know about how it will evolve. Bitcoin has lost about 70% of its value since reaching an all time high in November. While many crypto investors hope it will regain its highs eventually, there are no guarantees.

Another danger is that crypto is relatively new and unregulated, meaning there are not many safeguards in place. For example, we don't know what risks some of the decentralized finance platforms take with the money deposited on their platforms. In recent weeks, one prominent platform froze withdrawals, and it isn’t clear whether investors will get their money back.

Finally, there are a number of scams in the crypto industry. The combination of high potential returns and a new technology that many people don’t fully understand is like a Petri dish for fraudsters. Crypto investments aren't inherently unsafe, but investors need to tread carefully.

I’m in. How do I buy crypto?

There are several ways to buy cryptocurrency. The most common is to use a crypto exchange or broker. Cryptocurrency brokers sell both crypto and other investments such as equities and exchange traded funds (ETFs). Exchanges tend to only sell crypto, though some may offer other products, too. Some aspects to consider when choosing a crypto platform are fees, security, useability, and range of cryptos. Check out our list of top crypto exchanges for more info.

If you do want to buy crypto, make sure you understand what you're getting into and only invest money you can afford to lose. There are a lot of things we don't know about how this industry will evolve, so make sure a crypto failure won't derail your financial goals.

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