Cryptocurrency is a digital asset that functions as a medium of exchange. It’s created, tracked and traded on decentralized computer networks between people with virtual wallets. These transactions are recorded on publicly-verified, tamper-proof ledgers called blockchains. Bitcoin, launched in 2009, is the most popular cryptocurrency; however, several others have emerged and proliferated in recent years. They’re often marketed as alternatives to traditional currencies, as they are designed to be secure and fast, and they avoid the fees associated with using credit cards or bank accounts.
The value of a cryptocurrency is determined by supply and demand. The more desirable a currency is, the higher its price. A cryptocurrency’s price can also rise or fall based on news, speculation, and investor confidence. In addition, like other investments, cryptocurrencies can be subject to fraud and theft.
While some cryptocurrencies have real-world applications, most of the activity is driven by speculation. People buy and sell them, hoping to turn a profit, just as they would do with any other commodity. As a result, the prices of many cryptocurrencies are extremely volatile.
Unlike traditional currency, which is backed by government-backed bank accounts, cryptocurrencies have no central authority. You store them in a digital wallet, similar to an online bank account. The wallets are protected by encryption, but they lack the protections of traditional bank accounts, such as deposit insurance.
When you want to spend your cryptocurrency, you find a broker or exchange that accepts your currency and converts it into cash you can use to make a purchase. This process is much like converting money to another international currency when you travel abroad. It can take a few days to complete the transaction and you may be charged a fee or tax.
Despite their popularity, many experts believe that cryptocurrencies are more a fad than a true replacement for traditional currency. For one thing, they aren’t widely accepted as payment for goods and services.
Another concern is that cryptocurrencies are being used for illicit activities, such as ransomware attacks (in which criminals infiltrate computers and then demand payment in cryptocurrency to unlock them) and drug cartel financing. In some cases, these operations are conducted on the darknet, a network that allows individuals to buy and sell illegal goods and services anonymously.
As the market for cryptocurrencies has expanded, regulators have been forced to craft rules for this emerging sector. While some governments have embraced cryptocurrencies, others are taking a hands-off approach. Still, their rapid rise and evolution, combined with the growth of DeFi, has heightened scrutiny of the sector. Regulators face the challenge of crafting rules that address traditional financial risks while not stifling innovation.