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September 17, 2022

Cryptocurrency For Beginners: Is It the Future of Finance? 

Humans are notoriously resistant to embracing the future. We like what we like and are slow to adopt anything new or different. But change comes fast, and nothing stays the same. 

In finance, for instance, the advent of the internet, smartphones, and now blockchain technology and cryptocurrency all threaten the economic structure. Threaten is an intense word, but the utility and convenience of these technologies dwarf those of old systems. 

No one knows precisely what the future of finance looks like, but it's a promising bet that cryptocurrency will play a significant role.

What Is Cryptocurrency?

On a high level, cryptocurrency is a digital or virtual currency that uses cryptography for security. Cryptocurrencies are decentralized and not subject to government or financial institution control. Most cryptocurrencies are pseudonymous, meaning they are not tied to real-world identities.

Put simply, cryptocurrency is a type of money that is not physical, like cash or coins, and is not regulated by governments or banks. It lives on the internet and serves as a way to send or receive payments. Because it is digital and encrypted, many cryptocurrency users see it as more secure than regular money.

The world's largest and most famous cryptocurrency, Bitcoin strives to be a peer-to-peer electronic cash system that breaks people free from the monetary control of central authorities like banks or governments.

But cryptocurrencies' abilities reach further. Other types of cryptocurrency projects like Ethereum aim to do much more than act as digital cash. They want to create decentralized networks and economies where people can build new applications, create non-fungible tokens, and reinvent everything from data storage to voting systems.

This is just a small taste of what crypto can do, but it's already changing the world as we know it.

How Does Cryptocurrency Work?

You don't need to be an expert in computer science to understand cryptocurrency, but it requires some fundamental knowledge. Imagine a world without cash or coins. Instead of going to the bank to withdraw physical money, you go online and send digital currency to someone else. 

This digital money lives on the internet and uses encryption to secure transactions. When you want to buy something, you send cryptocurrency from your digital wallet to the seller's digital wallet. Then, a public ledger called a blockchain validates and records the transaction. 

A blockchain is a distributed database that stores a record of all transactions made on the network. Once transactions finalize, they can't be altered and live on the blockchain forever.

Who finalizes these transactions? Miners.

What Are Miners?

Miners are computers or groups of people that use their computational power to verify cryptocurrency transactions and add them to the blockchain. For their efforts, a blockchain's protocol rewards them with cryptocurrency.

Picture it like this:

Imagine Avery says "I love you" to Sam in Central Park.

How do we know Avery really said it? Well, because we have dozens of witnesses. To ensure no one is lying, we could ask a neutral third party, like a dog walker, to verify the event. But we can't trust the dog walker 100 percent, can we? So, we need even more people to verify that Avery said "I love you" to Sam.

When Avery says those words, we would ask every single person in Central Park to raise their hand if they heard Avery say, "I love you." The more people that raise their hands, the more confident we can be that Avery did say those words to Sam.

But what if some people lie and say Avery didn't say it? That's where incentive comes in. In this scenario, we would tell the entire group of people that we'd select one person at random to receive money. However, if that person votes and says Avery didn't say it, they won't get money.

Why?

Because most people would vote honestly, we can catch anyone who lies. This is called "consensus," and it's how cryptocurrency miners verify transactions. Consensus rewards honesty and punishes liars (because they won't get money if they lie), so everyone has an incentive to vote honestly.

That's mining in a nutshell, and it's the beating heart of every cryptocurrency.

Understanding Cryptocurrency’s Volatility

A significant concern with those new to cryptocurrency is volatility. Fluctuations in price are often extreme, as seemingly erratic and unpredictable as a weatherperson forecasting rain without an active radar. However, there are reasons for this volatility that may not be as obvious as they seem.

Many crypto experts suggest that this volatility is essential, indicative of the market slowly “maturing” as it comes to terms with what crypto assets are and their role in a digital future. Wild volatility bootstraps an ecosystem as investors speculate on what might be to come.

Volatility helps fuel attention and interest, both from individual investors and institutions. It also helps keep the ecosystem top of mind for those waiting on the sidelines, observing and evaluating the market. 

As more money flows in and the ecosystem matures, we can expect increased stability. In fact, Bitcoin's volatility index already shows a trend toward decreasing volatility as its ecosystem has grown. As an innovation, Bitcoin and other digital assets are still in their infancy, and their volatility indices will likely continue to decrease over time.

How a Diversified Crypto Portfolio Can Help

No matter what your investment goals are, experts generally agree it’s worth it to continuously diversify your portfolio. And that goes for cryptocurrency too. Why? Because no one can predict the future. 

As of 2022, there are over 20,000 different cryptocurrencies, with more added to the list every day. Diversifying your portfolio is by far one of the most commonly recommended moves in what has shown to be a fairly volatile space. 

Still, most beginner investors don't want to have to do heavy research to determine which assets to choose. 

That’s where a tool like the Ember Fund App comes in handy.

Ember Fund is one of the best ways to get started with cryptocurrency because it provides instant diversification. With just one tap, you can own a basket of hand-picked cryptocurrencies put together by Ember Fund's crypto veterans. And as the market changes, so does your portfolio through its automatic rebalancing feature. 

Ember Fund has several indexes to choose from:

  • The Originals: Bitcoin and Ethereum

  • Bitcoin Defense: An algorithmic trading portfolio designed to trade between Bitcoin and into the USDC yield-bearing stablecoin to protect against downturns in markets.

  • Ember DeFi: A portfolio of the most promising 15 DeFi protocols.

  • Metaverse Index: The top 18 metaverse projects in sports, entertainment, and business.

  • Top NFT Index: A fractionalized portfolio of Bored Ape Yacht Club, Cryptopunks, Doodles, and World of Women. 

Five Coins To Know

Bitcoin: The first and largest cryptocurrency by market capitalization. Bitcoin is peer-to-peer electronic cash and the most robust blockchain.

Binance: Binance Coin is the native cryptocurrency of the Binance Chain blockchain, a decentralized exchange launched by Binance. Initially based on Ethereum's blockchain, Binance Coin now lives on Binance Chain, where it interplays with transaction fees, yield-bearing assets, and staking.

Ethereum: A platform that runs smart contracts. With Ethereum, developers can deploy decentralized applications ranging from games and finance to prediction markets and social media.

Tether: A stablecoin pegged to the US dollar. Tether is meant to provide stability and minimize volatility in the cryptocurrency market. Tether once purported to be backed 1:1 by USD reserves but is no longer transparent about its holdings.

USD Coin: Another stablecoin pegged to the US dollar. Reputable financial institutions audit USDC regularly to ensure that USDC has a 1:1 reserve of USD.

The Future of Crypto: What To Keep in Mind

Regulation 

Government agencies have grown more involved with cryptocurrency over the past few years. The IRS now requires Americans to report their cryptocurrency holdings on their taxes. The SEC has also brought several enforcement actions against cryptocurrency projects and exchanges. 

These trends are likely to continue as cryptocurrency becomes more mainstream. However, regulation is inevitable and will benefit the industry in the long run by increasing legitimacy and adoption.

Regulation will ensure everyone plays by the rules and that investors have more excellent protection. It will also help prevent fraud and manipulation, which are too common in the crypto world. There's no shortage of stories about people who've lost their life savings in crypto scams, exchanges running away with user funds or projects that turned out to be complete Ponzi schemes. Regulation will help remedy these problems and make crypto a safer investment.

Institutionalization

So far, most cryptocurrency trading volume is from retail investors. Big institutional investors have made waves in the industry and will continue to do so. Star-studded investments from hedge funds like Galaxy Digital, Andreessen Horowitz, and Polychain have brought legitimacy to the space. Even traditional companies like Goldman Sachs, Alphabet, Morgan Stanley, and more have dipped their toes in the water investing in crypto and blockchain projects.

Institutional investment will bring more stability and predictability to the market and increase overall adoption. And while there may be a zealous aversion to “the establishment” in cryptocurrency, it’s important to remember that institutions bring the deep pockets needed to sustain long-term growth.

NFTs

2021 was all about NFTs. From Bored Ape Yacht Club to CryptoPunks and Beeple, everyone was talking about NFTs. Even traditional artists and celebrities like Grimes, Snoop Dogg, and Justin Bieber got in on the action. And though the hype has died down since the peak in early 2021, NFTs are here to stay.

As we move past NFTs as hype machines and more as tools to verify ownership and digital identity, we’ll see them become more integrated into our lives. That could mean using NFTs for things like ticketing, land registration, or even voting. The possibilities are endless, and the potential for mass adoption is enormous. 

NFTs like Bored Apes and Cryptopunks may cost hundreds of thousands of dollars and are financially out of reach for most people. As such, the Ember Fund has created a fractionalized Top NFT Index to allow anyone with a smartphone to invest in a blue-chip NFT for $5 and participate in the price action. 

Bottom Line

The future looks bright for cryptocurrency, even if we don't yet know what form it will take. With increasing institutionalization, legitimization, and adoption, cryptocurrency is poised to change the financial landscape as we know it. 

If you're thinking about investing in cryptocurrency, be sure to do your research and understand the risks involved.

Ember Fund is a great place to start your investment journey. With our easy-to-use app, you can get started investing in a broad range of digital assets with just a few clicks and just $5.

Download the Ember Fund App today and start building your future.

Sources:

Bitcoin

Ethereum

BNB Chain

USD Coin (USDC) | Circle

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