Cryptocurrency
Cryptocurrencies such as Bitcoin are digital currencies not backed by real assets or tangible securities. They are traded between consenting parties with no broker and tracked on digital ledgers.
Cryptocurrency Essentials
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Any investor can purchase cryptocurrency from popular crypto exchanges such as Coinbase, apps such as Cash App, or through brokers. Another popular way to invest in cryptocurrencies is through financial derivatives, such as CME's Bitcoin futures, or through other instruments, such as Bitcoin trusts and Bitcoin ETFs.
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Bitcoin is the most well-known digital currency created in January 2009, after the concept was published in a white paper by the mysterious and pseudonymous Satoshi Nakamoto. Bitcoin and cryptocurrencies at large are touted to lower transaction fees when compared to traditional online payment methods, and unlike traditional government-issued currencies, it is operated by a decentralized authority.
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Ethereum is a blockchain-based crypto platform that is best known for its digital currency called Ether, or ETH. Ethereum is second in market value only to Bitcoin, according to CoinMarketCap data. While the maximum number of bitcoins in circulation is limited at 21 million, the amount of Ether that can be created is unlimited, which is one of the main differences that investors should know.
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One of the first steps to buying cryptocurrencies such as Ethereum or Bitcoin is to identify a platform for trading the digital currencies. Some of the top platforms including Coinbase, Kraken, Bitstamp, Gemini, Binance, and Bitfinex, which all offer Ethereum to buy and sell. Ether is also backed by many Fortune 500 companies, spurring investor interest.
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Investors looking to add new cryptocurrencies to their portfolios often look for an initial coin offering (ICO), the crypto variation on an initial public offering (IPO). Like an IPO, a company seeking to raise money can create a new coin or service to launch an ICO as a way to raise funds. Investors in turn can buy the initial coin offering to own the new token, but should be aware of potential fraud within the industry, which is monitored by the SEC for potential abuse.
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Key Terms
- Cryptocurrency ETF
A cryptocurrency exchange traded fund is an ETF that tracks a single cryptocurrency or a basket of different digital currencies, and has similar benefits to a traditional ETF—including lower cost of ownership and greater diversification. The first cryptocurrency ETF, the ProShares Bitcoin Strategy ETF, started trading in October 2021.
- Blockchain
A blockchain is a distributed database that is shared and verified via a computer network. That database makes up the underlying infrastructure of cryptocurrency systems, such as Bitcoin and Ethereum, for a decentralized record of transactions.
- Bitcoin mining
Bitcoin mining is the process of creating new bitcoin by using computers with specialized chips to solve complicated mathematical puzzles. The first so-called miner to solve the puzzle can earn bitcoin rewards by running such programs using systems that use massive amounts of electricity to mine the cryptocurrencies—a process that has come under criticism because the mining process is not considered environmentally friendly.
- Digital currency
Digital currency is a form of currency that is also popularly known as digital money, electronic money, electronic currency, or cybercash, because they only exist in electronic form, versus a physical form such as paper cash or metal coins.
- Altcoins
Altcoins generally speaking are cryptocurrencies other than Bitcoin. They share characteristics with Bitcoin but are also different in terms of how they are created and verified. According to CoinMarketCap, Bitcoin and Ether alone accounted for nearly two thirds of the total cryptocurrency market, with altcoins making up the rest.
- Hot wallet
A hot wallet is a cryptocurrency storage application that is always connected to your computer and cryptocurrency network, and as such they tend to be more vulnerable to cybersecurity breaches and theft than so-called cold storage methods. Hot wallets are used to send and receive cryptocurrency, and manage tokens you possess. Hot wallets are linked with public and private keys that serve as security measures.
- Decentralized Finance (DeFi)
Decentralized finance, also known as DeFi, uses new technology to remove third parties such as banks and other traditional financial institutions in financial transactions. By removing centralized control by banks and other institutions over money, financial products, and financial services, the new financial applications may lower related maintenance costs and fees charged by banks—and also increase the speed of such services.
- Virtual currency
A virtual currency is a digital representation of value only available in electronic form, and is also known as digital currency. Such cryptocurrencies can be issued by private organizations or companies and its benefits over hard currencies include fast transaction speeds and ease of use.