If you are unclear on the facets of digital currency, you’re not alone. Let us help decode the confusion around cryptocurrency.
What is Cryptocurrency?
Tracing its origins to 2009, cryptocurrency has evolved as a new form of virtual money. This form of currency is digitally-encrypted, similar to PayPal or a bank debit or credit card. Like conventional currency it can be traded electronically for goods and services. Cryptocurrencies are bought and sold on internet exchange platforms, which allow you to trade flat currency for crypto. Today many cryptocurrencies have been established, the most well-know of which is Bitcoin. Others include Ethereum, Tether, Cardano and Solana.
Unlike traditional currency, cryptocurrency is created by mining—using complex software to solve complicated mathematical computations, often contracted with a specialized mining company.
Solving a math problem creates a block, and the computer that solved the equation is rewarded with a set number of digital currency, which has a unique public and private cryptographic key.
How Does It Work?
Cryptocurrency users buy, sell and store using digital wallets. Unlike traditional pocket wallets, digital wallets don’t store currency—cryptocurrency wallets are software programs used to store public and private information that interfaces with public ledgers known as blockchains. Blockchains track all cryptocurrency transactions and balances.
In cryptocurrency’s infancy, double spending and transaction tracking were the biggest pain points. Using private key cryptography, a distributed network with a decentralized (shared) ledger and an incentive to service the networks transactions, record-keeping and security, blockchain technology was created.
Benefits of Cryptocurrency
Cryptocurrency collectors argue there are many advantages to this digital exchange, the most popular point being it is a decentralized entity not controlled by any financial institution or government entity, like the U.S. Department of the Treasury, FDIC or the IRS.
Further, fans of cryptocurrency believe the currency facilitates global commercial transactions because it is commonly used in international markets and the exchange rates are often lower than traditional currency. Additionally, every cryptocurrency transaction is recorded and the payer and payee can remain anonymous, much like a cash transaction.
Pitfalls of Cryptocurrency
The cryptocurrency exchanges themselves are not risk free and have been plagued by attacks from malicious actors, resulting in the theft of hundreds of millions of dollars. The major downside of cryptocurrency is that it is not centrally regulated—therefore there are no legal protections in place to allow you to dispute a purchase or reverse payments.
Protecting your wallet and the password used to secure your wallet is essential:
- There is no path to recovering or resetting a forgotten password—meaning a lost password is lost cryptocurrency holdings.
- Attackers are constantly looking for ways to gain access to digital assets, and there is no way to recover those assets once they are gone. Use proper password management practices and don’t share this information through untrusted channels.
Only invest money you can afford to lose—dramatic price swings and security issues cause a high degree of uncertainty and risk. If you’re considering exploring the world of virtual currency, for transactions or as a speculative investment, you should do extensive research.
With more than 150 years of trusted experience, innovative tools and helpful advice, Busey associates are here to help you preserve and protect your financial investments. Visit busey.com or call 1.800.67 l Busey to speak with an associate today.