Cryptocurrencies have been around since Satoshi Nakamoto launched Bitcoin in 2009. Bitcoin initially made a small murmur in the financial landscape, but this game-changer gradually gained a strong following. More people rallied behind decentralized finance, and crypto exchanges made Bitcoin more accessible to retail investors.
Bitcoin is a store of value and a payment method similar to normal currencies. However, the purpose of some cryptocurrencies gets murky, especially with thousands of initial coin offerings each year. Seeing Dogecoin and Shiba Inu steal the news can make people wonder why cryptos exist in the first place. We will dispel the confusion and share some of the purposes of cryptocurrency.
Cryptocurrency and Blockchain Technology
All cryptocurrencies rely on open-source blockchain technology to operate in a decentralized format. Blockchain technology makes it easier to authorize transactions between individuals without requiring a third party. This public ledger uses code to record transactions, making them nearly confidential. Transactions get reported on a block, and the platform has a chain of blocks, hence the term “blockchain.”
Should You Invest in Cryptocurrency?
Investors have to consider personal factors before getting into any asset. You should consider the following factors before buying any asset:
- How close you are to retirement
- Your financial goals
- Your personal spending
- How your money is currently allocated across assets
- Your risk tolerance
You may have other considerations for any investment, but there are a few things to know about a crypto investment. Volatility defines the crypto investing journey, and it’s filled with risks. The recent Bitcoin price movement highlights this trend, as the popular cryptocurrency is down over 50%. Bitcoin has endured many crashes and cycles in the global economy long before becoming a household name. Bitcoin’s crash, which started in late 2017 and dragged into 2018, was another high-profile event that made people question the digital currency. A tremendous spike followed that crash and helped Bitcoin reach all-time highs.
So far, Bitcoin, Ethereum, and most cryptocurrencies around during those eras recovered from their crashes. The current market conditions will test long-term holders. This amount of volatility isn’t for everyone, but these digital assets have a high potential payoff.
What is the Purpose of Cryptocurrency?
Cryptocurrencies have been around for over a decade. They have become mainstream assets, but some are wary of these virtual currencies. Cryptos have several purposes that can help consumers make money and access certain utilities.
Wealth Accumulation
Crypto has provided some of the largest opportunities for early investors, and the asset’s past performance continues to draw new investors. Some people bought Bitcoin when it was under $1 per coin and have become prosperous. Bitcoin does not present the same opportunity as it did in 2011, but crypto assets have demonstrated resilience during bust cycles. Bitcoin has returned to all-time highs after each crash. While it’s not guaranteed that Bitcoin will return to its all-time high, the historical record is on the cryptocurrency’s side. Bitcoin is one piece of the wealth accumulation puzzle.
It’s important to note that crypto won’t help with tax evasion. The Internal Revenue Service taxes crypto capital gains just like any other asset. You can accumulate wealth with crypto, but you will still owe taxes unless you put your crypto in a Roth IRA.
Earn Interest
Cryptocurrencies can appreciate significantly, but some investors worry about the lack of cash flow. Some platforms address this issue by offering interest for your crypto. Long-term investors can stake their crypto on other platforms, receive interest (paid in crypto), and take out their crypto after the deadline. This structure is similar to a certificate of deposit. You agree to lock away your money for several months or years in exchange for interest payments.
Crypto interest payments can reach double digits depending on the platform and which cryptos you stake. Established cryptos like Bitcoin and Ethereum command lower interest rates than riskier, alternative currencies.
Money Transfers
People transfer cryptocurrencies to each other just like money transfers. However, cryptocurrencies help consumers save money during these transfers, especially when sending money overseas. Cryptocurrencies lack the fees you’ll find when financial institutions act as the middleman for money transfers. Fees from major banking institutions will reduce the money transfer. You may have to transfer more money than expected or have the receiver accept a lower amount. Crypto solves these problems with its decentralized structure.
Cryptocurrencies are also easier to trade than money. You only need an internet connection to create a distal wallet. However, you would need several legal documents and other information to create your own bank account. This ease of use has contributed to crypto’s growth over the last couple of years.
Private Transactions
Some people want to make private transactions and remain anonymous. Cryptocurrencies help people make private, confirmed transactions without a central authority. You can set up a new private key for each transaction and use multiple digital wallets to make your transactions private. Some people want to privatize more areas of their lives because they don’t know who’s watching. Recent privacy blunders, cyberattacks, and data selling have fueled people’s desire to lead more private lives. Cryptocurrencies enable private transactions, protecting the identities of coin owners.
Purchase Goods and Services
You can use fiat currencies to purchase millions of goods and services. Unfortunately, these fiat currencies have central authorities that can manipulate the money supply and create other inconveniences. Mobile banking apps offer greater flexibility for investors who don’t want to rely on fiat currencies. Virtual currencies are free from those disadvantages, and you can purchase goods and services with them. As a result, more companies are opening up to Bitcoin and offering it as a payment method.
Whole Foods, Microsoft, Home Depot, PayPal, and Etsy are some of the increasing number of companies that accept Bitcoin. As more corporations and small businesses join them, crypto will become a more established way to pay for goods and services. This development would also help crypto appreciate as it gains more acceptance. Not every company accepts crypto as a form of payment, but consumers have found a loophole. Some sites let you purchase gift cards using crypto. You can buy a gift card with crypto on one of these sites and then use the gift card as your payment method to the company.
Invest in Startups and Businesses
Startups and businesses rely on capital and other resources to maintain and grow their operations. Some of these entities will accept your crypto as a form of investment. These startups may sell your crypto for cash upon receipt or hold onto the crypto in one of their accounts. This investment gives you a share of the company’s success.
You can hold onto crypto and wait for it to appreciate. This appreciation will provide you with a higher percentage of the company’s growth if you buy and hold crypto.
