The interest in cryptocurrencies has been on the rise since the bull market of 2017 and even more so since 2021, which saw the non-perishable token (NFT) boom and Bitcoin (BTC) reaching its highest price yet.
So, what can a cryptocurrency investor tell family and friends who are interested in cryptocurrency? Below are some of the common and important questions one can encounter regarding cryptocurrencies and some appropriate responses with expert opinions in the industry.
What is cryptocurrency?
One of the most common questions a cryptocurrency investor might ask is what is cryptocurrency in the first place. Cryptocurrency is a digital currency designed to be used as a medium of exchange. This exchange can come in the form of peer-to-peer (P2P) payments and retail purchases.
Lucaz Lee, CEO of Affyn — a mobile-based Metaverse platform — told Cointelegraph, “A cryptocurrency is a digital or virtual currency designed to function as a medium of exchange. It uses cryptography to secure and verify transactions, making it difficult for anyone to create transactions. counterfeit or counterfeit money.”
“In addition, cryptocurrencies are decentralized and use distributed ledger technology, which means that no central bank or government controls them,” Lee continued.
Cryptocurrencies are located on the blockchain, a public ledger that records all transactions that occur, making it possible for anyone to see how money moves across the network. While anyone can know how much money a user has and how it is spent. Users need a wallet to send and receive cryptocurrency, and these wallets use alpha-numeric identifiers, which add a layer of anonymity to users.
What purpose does cryptocurrency serve?
The main purpose of cryptocurrency is the ability for anyone to send and receive money through a decentralized P2P network. This acts as a digital version of the cash. For example, when users pay with cash, they pay directly to someone else without having to go through an intermediary such as a bank or payment processor.
Cryptocurrency does this on a digital level, allowing anyone to transfer funds directly to another person, entity or institution while retaining control of their funds at all times. Lee agreed, noting that “Cryptocurrencies can be used as a medium of exchange or payment for certain services without any intermediary or central control. It removes the limitations of traditional finance, enabling large numbers of unbanked and unbanked users in world’s access to financial services”.
Cryptocurrencies are also used as investment tools, where users are able to achieve high returns due to limited supply, high volatility and a high level of speculation.
Lee added, “With each passing day, cryptocurrencies are becoming more and more attractive investment options. Some of the differences also support opportunities to generate negative returns, which helps investors expand and diversify portfolios.”
If encryption isn’t backed by anything, how is it worth anything?
Most cryptocurrencies are not backed by any traditional assets other than stablecoins like USD Coin (USDC) and Tether (USDT), which have a large portion of their tokens backed by cash and bond reserves. Some people may wonder why cryptocurrency has any value if it is not backed by anything.
First, a large part of the value comes from the utility of the cryptocurrency. The greater the need for a cryptocurrency for a particular task, the greater the demand for that cryptocurrency. Examples include the use of cryptography as a store of value and uses of certain protocols within sub-industries such as Decentralized Finance (DeFi) and NFTs.
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Igor Mikhalev, Partner and Head of Emerging Technology at EY and Head of Decentralized Autonomous Organization at Blueshift – a decentralized exchange – ponders this question, telling Cointelegraph, “A well-built cryptocurrency is increasingly worth more because it showcases the core functions of traditional currencies: scarcity and medium of exchange/ Computation and store of value. It is possible due to advances in basic technology, legislation and the general attitude of people towards it.”
It is also worth noting that fiat currencies such as the US dollar, the euro and the British pound are not backed by anything (hence the term “fiat” currency). Mikhalev spoke about this, adding that “the US dollar is not backed by real assets like gold and is only backed by the trust of the people in the United States as the source. So, why not want to support, own and exchange currencies issued by other mission-driven groups backed by their value and facilities? This is the basis The new decentralized economy.
Lee gave his opinion on the value of cryptocurrency, adding: “A cryptocurrency is not backed by anything, but it is worth something intrinsically because people think it has value. The forces of supply and demand in the market determine the price of the cryptocurrency.”
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