Cryptocurrency has generated a lot of buzz—but that doesn’t mean it’s well understood. This emerging asset class inspires passionate opinions across the investment spectrum, from those who believe it’s transformative technology to those who worry it’s a fad. Here are some things to keep in mind as you consider whether cryptocurrency is right for you.
The basics
Cryptocurrencies are digital currencies that aren’t backed by governments or companies and can be used to make transactions online. Bitcoin is the best known example, but there are thousands of different cryptocurrencies. They all differ in the way they’re created, how they function and how they’re used.
Some cryptocurrencies are intended to be investments, while others are designed to be used as a medium of exchange or a store of value. Many cryptocurrencies are volatile, meaning their prices rise and fall dramatically. So, if you’re investing in them, it’s important to diversify your portfolio and only invest money that you’re willing to lose.
Blockchain technology underpins most cryptocurrencies. It’s a shared digital register that records transactions in a secure, encrypted form. The data is stored on computers across a network, rather than in a single location, so it can’t be altered. The blockchain is also public, so anyone can see the transaction history of any given unit of a specific cryptocurrency.
Another benefit of a blockchain-based cryptocurrency is that it can be sent quickly and without fees, even across borders. This makes it a good choice for businesses that deal with international customers or vendors. In addition, blockchain-based cryptocurrencies can be used to pay employees, although you’ll need to consult tax professionals about the implications of doing so.
Regulatory challenges
The legal status of cryptocurrency is unclear, and how regulators respond to it could have big effects on its price. For instance, if the Securities and Exchange Commission (SEC) classifies certain cryptocurrencies as securities, it may change how they’re traded. Moreover, because investors typically rely on third parties to store and manage their cryptocurrency investments, they’re exposed to the risk that these companies could be hacked or fail.
Cryptocurrency is a relatively new investment option, so you’ll want to do your homework before jumping in. That means learning as much as you can about the different types of cryptocurrencies, how they’re created and how they’re used. It’s also essential to understand the risks involved, including how volatile they are and that they don’t offer the same protections as registered securities, like those held in a bank account or an investment fund. You’ll also need to decide how much risk you’re comfortable taking in relation to your goals and overall investment portfolio.