Cryptocurrency is a digital asset that operates independently of central banks and governments. It relies on peer-to-peer software and cryptography to create a public ledger called a blockchain. Each computer that supports a cryptocurrency’s network (“nodes”) has a copy of the blockchain, which is used to verify transactions and reach consensus on who owns which coins. By using a public blockchain, anyone can validate or timestamp new transaction records without the need for a trusted third party such as a bank. Bitcoin and many other cryptocurrencies use a variety of different validation techniques (proof of work, proof of stake) to prevent fraud or theft.
A major advantage of cryptocurrencies is that they allow for quick and cheap international money transfers. While wire transfers can take a day or more, cryptocurrency transactions can be completed in minutes or even seconds. They can also be done anonymously, which makes them popular with people who want to avoid government-imposed restrictions. For example, dissidents in authoritarian countries have raised funds in Bitcoin to bypass state controls. Terrorist groups and drug dealers also traffic in cryptocurrencies to avoid detection.
However, it’s important to note that cryptocurrencies are volatile and can lose value quickly. They are also not insured like money in a bank account. Investors should choose a reliable exchange and protect their wallets at a level appropriate to the amount of money they’re investing. Some exchanges require a photo ID or other documents to sign up, and may require that you have two-factor authentication enabled so you can log in securely.
When choosing an exchange, it’s best to look for one that charges low fees. Higher fees don’t necessarily correlate with better service or more protection. You should also find out whether the exchange offers the cryptocurrency you’re interested in, and how the fee structure works. Typically, you will deposit funds into your crypto exchange account using a bank transfer or other methods. Then, you’ll use your crypto to buy or sell at the exchange. The exchange will usually send you a code via text or email to verify your identity as part of the know-your-customer process.
Once you have your cryptocurrency, you’ll store it in a wallet that’s protected by the security measures the exchange uses. Some wallets are mobile-only, while others are a combination of a software application on your computer or smartphone and an offline “hard wallet” that you keep in a safe location. It’s best to make sure you keep your hard wallet’s seed words (a long string of characters) somewhere safe, in case something happens to your hardware.
While some wealth managers, including New York-based Ian Harvey, are starting to invest in cryptocurrencies for their clients, it’s important to do your research. If you’re considering putting any of your own money into crypto, search online for the cryptocurrency name and words such as “scam” or “review.” And always remember that there are no guarantees when it comes to investments.