Cryptocurrency is essentially decentralized digital money that exist online without the backing of any financial institution or government. The backing of the digital currency (over 2500 cryptocurrencies as of November 2018) comes from complex mathematical algorithms that go into the cryptographic side of transacting crypto. You see, every transaction across a given crypto exchange network is recorded into a public ledger that stores all the data from the transaction and can be viewed by anyone nosy enough. If a friend sends you $100 of bitcoin, that process is recorded into a restricted entry on the bitcoin network that shows the bitcoin addresses of the parties involved. The transaction is stored and verified by the networks crypto “miners” and “nodes” who then add the data into blocks which eventually form blockchains. Miners then use immense computing power to try and solve complicated math problems against other competing miners (or working together in mining pools) for newly mined bitcoin that incentives them to continue verifying and mining. And that only skims the surface.
What are the Risks?
For anyone interested in buying or selling cryptocurrency (bitcoin for example), there are potentially great risk involved. Because of its decentralized nature, bitcoin is outside the purview of most governments and has no real regulation to ground it. Any rules that marketeers follow, come mainly from the exchange companies (https://www.abra.com/cryptocurrency/bitcoin/ for instance) and their generally pretty lax for accredited investors and traders with an established history on the exchange. However, this can be a risk for retail investors or people new to crypto. Accredited investors with financial resources far above average and early adopters of bitcoin (who have accumulated more crypto than any latecomers probably ever will) are in a position to basically do pump-and-dump schemes on unsuspecting speculators. The very bullish 2017 boom of many prominent cryptocurrencies was possibly due to market manipulation and afterwards, a massive sell-off contracted the market for most of 2018. In addition to pump-and-dump schemes, other risks are: Theft and Hacking: As of December 2017, about 980,000 bitcoins have been stolen ($15 billion usd) from cryptocurrency exchange hacks and $1.1 billion in the first half of 2018.
Volatility: While most tradable assets and commodities experience price fluctuations, cryptocurrency has seen unprecedented volatility which ultimately creates more barriers to widespread adaptability. Bitcoin saw a 2700% increase from January to December of 2017 but had lost 80% of its peak price by January 2018. The price gradually declined throughout the rest of the year and dipped to under $100 billion market cap by November for the first time in 13 months.
Cryptocurrency in general has a lot of potential behind it with its blockchain technology. And as usability and adoption continue to grow, there is an auspicious future that’s foreseeable with more oversight involved. However, any person not already holding either large amounts of bitcoin or capital (to provide institutional backing for legitimizing crypto as a valuable currency) should probably avoid the market at the moment. More supervision is needed to protect customers and limit the power of those looking to scam people.