Is Cryptocurrency Fake Money?

If you’re wondering why cryptocurrencies have become so popular and what they’re used to buy, this is why they have real value.

With the massive increase in the popularity of the cryptocurrency industry lately, it makes sense to want to learn what all the hype is about.

Cryptocurrencies aren’t necessarily a new concept. For example, Bitcoin, the original cryptocurrency, was launched in 2009. But it wasn’t until recently that so many people have started to take the industry seriously.

Nevertheless, it can be pretty complicated to understand what they are about at first. And it can also be worrisome that the industry can be quite volatile. So, if you want to learn about the high-potential cryptocurrency industry and what all the hype is about, here are some of the most important things to know.

Is cryptocurrency fake money?

Cryptocurrencies tend to be thought of as a substitute for fiat currencies because Bitcoin, the first and most popular cryptocurrency created, was invented to be a digital ledger for making payments. The blockchain handles the payments, and the coin is the medium of exchange used. And now Bitcoin is even legal tender in El Salvador, giving it even more credibility.

However, even though Bitcoin is accepted in thousands of locations worldwide, not every cryptocurrency is; in fact, most haven’t been created to be primarily used as payments. Many other cryptocurrencies have a tonne of high-potential use cases, which is why there is so much hype around the blockchain industry these days.

For example, the second most popular cryptocurrency, Ether, is needed to pay for transactions on Ethereum’s blockchain network. You can still buy things with Ether, Shopify accepts cryptocurrencies such as Ether, and you can use Ether to buy NFTs. But that’s not the sole purpose.

While Bitcoin’s blockchain is only used for payments, Ethereum can run what’s called smart contracts. So, developers can create projects and launch them on the blockchain, where they can essentially run autonomously, which is why decentralized finance (DeFi) has become so popular. DeFi apps are already starting to eliminate the need for middlemen like banks. It’s also why Ether has gained so much value, as users need to buy it to pay for their transactions on the network.

So, thinking about cryptocurrencies as a substitute for fiat currencies is one way to look at it. But, in my view, the better way to look at cryptocurrencies is to view them as an asset like a stock.

How do you decide which coins to invest in?

Most cryptocurrencies are associated with a project. Just as stocks offer exposure to the success of a company, most coins or tokens will be designed to increase in value as a project becomes more successful.

So, as more projects are launched on Ethereum’s network, more users eventually join the cryptocurrency industry and use them. And as more users need Ether to pay for their transactions on these apps, naturally, the price will rise. So, as Ethereum’s network becomes more successful, holders of Ether will see their investment appreciate.

Ethereum is an entire blockchain, though. There are also projects built on top of the blockchain which have tokens that offer exposure to the project. For example, the token UNI is the 18th most valuable cryptocurrency and is the native token of Uniswap, a decentralized exchange built on Ethereum’s blockchain.

So, it’s up to investors to decide which projects they think have the most potential in addition to understanding the tokenomics involved. Unlike stocks, the exposure and benefits you gain by holdings tokens are much different for each project. This is why it’s crucial to do a tonne of research. It’s also well worth it, though, as we’ve already seen the impressive gains investors have made from cryptocurrencies in recent years.

So, although the industry is still quite volatile, and there are certainly a fair share of coins or tokens that will end up worthless, if you find a project that solves real-world problems and has a tonne of potential to become mainstream, it could be one of the best investments you ever make.

Fool contributor Daniel Da Costa owns Ethereum. The Motley Fool owns and recommends Bitcoin, Ethereum, and Shopify.

More on Investing

workers walk through an office building
Stocks for Beginners

2 Global Financial Giants That Add Geographic Diversification

UBS and HSBC can help Canadians diversify beyond domestic banks by adding global wealth management and Asia-linked trade finance exposure.

Read more »

Blocks conceptualizing Canada's Tax Free Savings Account
Dividend Stocks

How to Use a TFSA to Earn $500 a Month — Completely Tax-Free

Earn $500 a month tax‑free by using a TFSA and three monthly paying REITs that deliver reliable, diversified passive income…

Read more »

Hourglass projecting a dollar sign as shadow
Dividend Stocks

My Top Canadian Dividend Stocks You’ll Want to Own Forever

CN Rail (TSX:CNR) and Enbridge (TSX:ENB) are great blue chips worth holding forever for all that dividend growth.

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Tuesday, April 7

The TSX extended its gains to a fourth session, while today’s trade could stay cautious amid surging oil prices and…

Read more »

Stocks for Beginners

1 Cheap Canadian Stock Down 66% to Buy and Hold

Air Canada is down hard from its highs, but the business is still throwing off cash and guiding to higher…

Read more »

Piggy bank and Canadian coins
Dividend Stocks

When Does a Taxable Account Actually Beat a TFSA? Here’s the Answer

Here’s a surprising scenario wherein a taxable account could beat your TFSA.

Read more »

dancer in front of lights brings excitement and heat
Dividend Stocks

2 Canadian Stocks That Look Ready to Break Out This Year

Alimentation Couche-Tard (TSX:ATD) stock is a good one to hold in a volatile market.

Read more »

Nurse uses stethoscope to listen to a girl's heartbeat
Dividend Stocks

A 7% Dividend Stock Paying Out Monthly

Diversified Royalty turns a basket of consumer brands into a steady monthly cheque, and that’s exactly what income investors crave.

Read more »