Since 2017, the interest in crypto has grown and has increased further since 2021 when the boom of the nonfungible token (NFT), and Bitcoin ‘s highest price, BTC, occurred.
What can a crypto investor say to family members and friends interested in cryptocurrency? These are some of the most important questions one could ask about crypto, along with some answers from industry experts.
What is cryptocurrency?
A crypto investor may be asked the most basic question: What is cryptocurrency? The cryptocurrency digital currency is designed to be used for exchange. This exchange can be in the form peer-to-peer payments (P2P), or retail purchases.
CEO of Affyn, a mobile-based metaverse platform, Lucaz Lee told Cointelegraph that a cryptocurrency is a digital currency or virtual currency, which can be used as a medium for exchange. It uses cryptography to verify transactions and make it hard for people to create counterfeit money or fake transactions.
Lee said, “Additionally cryptocurrencies use distributed ledger technology and are decentralized. They don’t have a central bank or government controlling them.”
The blockchain is where cryptocurrencies are stored. It’s a public ledger that records all transactions and allows anyone to see how money moves around the network. Anyone can see the amount of money that a user has and how it was spent. To send and receive crypto, users need a wallet. These wallets use alphanumerical identifiers that add an extra layer of anonymity.
What is the purpose of cryptocurrency?
The primary purpose of cryptocurrency is to allow anyone to send or receive money via a decentralized P2P network. This is a digital version to cash. Users can pay with cash directly, without the need to use a payment processor or bank.
Cryptocurrency allows anyone to send money to any person, entity, or organization on a digital basis. They can also retain control over their funds at all time. Lee agreed, saying that “cryptocurrencies can be used to exchange money or pay for services without intermediary or central control.” It eliminates the restrictions of traditional finance and allows the large number of unbanked or underbanked users around the world to have access to financial services.
Cryptocurrencies can also be used as investment vehicles. Users are able to make high returns because of their limited supply, high volatility, and high level speculation.
Lee said, “With every passing day, cryptocurrency are becoming more attractive investments options.” Some variations offer passive returns opportunities, which can help investors diversify and expand their portfolios.
How is crypto worth anything if it isn’t backed up by anything?
Many cryptocurrencies don’t have any traditional assets except for stablecoins such as USD Coin ( USDC ) and Tether( USDT ), which have large portions of their tokens backed with fiat money or bonds. Many people might wonder why cryptocurrency is worth anything if it’s not backed by any traditional assets.
First, the utility of cryptocurrency is a large part of its value. A cryptocurrency will have a higher demand if it is required for a specific task. You can use crypto to store value or for specific protocols in sub-industries such as decentralized finance (DeFi), and NFTs.
Igor Mikhalev is a partner at EY, head of emerging Tech, and chairman of Blueshift, a decentralized autonomous organization. He says that cryptocurrencies built well are more valuable because they have the same foundational functions as traditional currencies, namely scarcity, medium for exchange/account, and store of value. This is possible because of advances in technology, legislation, and people’s attitudes toward it.
It is also important to note that fiat currencies such as the United States Dollar, Euro and Great British Pound are not backed by any assets (hence the name “fiat currency”). Mikhalev said that the USD is not backed with real assets like gold and is only supported by the trust of the U.S. Why should we not support, own, and exchange currencies issued in other mission-driven collectives that are backed by their utility and value? This is the foundation for the new decentralized economy.
Lee expressed his opinion about the value of cryptocurrency. He said that although it was not backed by any financial institution, cryptocurrency is intrinsically valuable because people believe it to be worth something. The price of cryptocurrency is determined by market forces, supply and demand.
The value of cryptocurrency is also affected by speculation and investment. Investors who believe that a coin’s value will rise over time are more likely to invest in it and expect to make a profit.
Lee said, “The more people want to purchase a cryptocurrency, then the higher its price will be.” The price of a cryptocurrency will drop if more people are interested in selling it. Many people have invested in cryptocurrency because they believe blockchain technology is reliable and secure.
Is cryptocurrency able to replace real money?
No, in a broad sense. Because cryptocurrency isn’t regulated, there are many services, products, and commodities that will always require traditional cash. There are increasing uses for decentralized cryptocurrency tokens, and governments are exploring the possibility of creating their own digital tokens called central bank digital currencies.
“You cannot pay for your Starbucks order in America with Swiss Francs or pounds. Both of these currencies are real money. Context is important.” Rockwell Shah, cofounder of Invisible College, a Web3 learning community, told Cointelegraph that he added:
“Similarly, major cryptos are also native currencies of their respective digital nations. They are relevant within their own blockchain borders. It would be great if crypto was used in such compelling ways that they were preferred to traditional currencies, even if it is not within their digital borders. “Welcome to the free market!”
Lee believes that the context is key to answering this question. The answer to this question does not come down to a simple yes/no. It all depends on the country and the economic system. Many people have adopted cryptocurrency as a way to live in countries such as Venezuela, where the government has failed to manage the economy properly and has sparked hyperinflation.
“Compared to traditional money, cryptocurrency has a lot of novelty and the implications for society and larger society have yet to be tested and tried. He said that central banks are still exploring the possibility of digital currencies transitioning to them, which is known as central bank digital currency.
Experts believe that cryptocurrencies are more popular than traditional currencies in terms of adoption.
“Remarkably, crypto is already surpassing national currencies in foundational functions due to their democratic and transparent nature that people naturally lean towards. Mikhalev continued: “This, coupled with the decline of trust in government/official institution, presents fertile ground for accelerated adoption.”
This is the awkward situation for traditional money institutions. The debate about the introduction of CBDCs (nation level digital currencies) is stagnating. Institutions are central by nature and do not want to be decentralized. It will only lead to their destruction. There is no turning back. It will take only one major geopolitical event to make the technology mature enough for explosive adoption to occur.
Can cryptocurrency be hacked
Cyberattacks are almost impossible to penetrate blockchains. Lee referred to this point.
Blockchains are almost impossible to hack due to their decentralized nature and different security mechanisms. External variables, such as hot wallets or centralized wallets can be hacked, including bridges, smart contracts, and bridges.
This is the best way to protect users’ funds. It allows them to have access to their private keys and wallet seed. To access the funds, an attacker would need to have the private key and the wallet seed. Hackers use phishing to trick users into divulging passwords or login information to gain access to their funds.
Why do cryptocurrency prices rise?
The main drivers of cryptocurrency prices are speculation and demand. The supply of most cryptocurrencies is limited. When there is high demand (due to speculation about utility), the price will rise.
Lee believes that supply and demand are the main reasons cryptocurrencies’ prices rise. He stated that “all assets, including cryptocurrency, are determined by supply and demand.” A price rise occurs when the demand for an asset is greater than the supply. Sometimes, geopolitical and macroeconomic factors can also have an impact on crypto prices.