Cryptocurrency, or “crypto,” sounds like the kind of fleeting tech trend you might safely ignore — if only it weren’t creating vast new fortunes at a rate never seen before in human history. You might have heard of Dogecoin millionaires and Lamborghini-driving Bitcoin bros, but that’s just the tip of the iceberg. This technology has already transformed billions into instant millionaires, and even if it eventually collapses, it could leave some of its biggest winners with assets that will last for decades.
The term cryptocurrency refers to a digital medium of exchange that uses encryption techniques to verify transactions and control the creation of monetary units. The best-known example is Bitcoin, which was launched in 2009 under the pseudonym Satoshi Nakamoto. It is designed to be decentralized, meaning that it is not backed by or controlled by any government, central bank, or corporation. Instead, it relies on computer software that verifies and monitors transactions to create the currency.
Like any traded item, the value of a given cryptocurrency depends on demand and supply: The more desirable it is, the higher the price potential buyers are willing to pay for it. The value of cryptocurrencies is also based on their perceived utility and future potential for growth.
Many people see cryptocurrency as a transformative technology with profound implications for our economic and political future. But it’s not without risks. As with any investment, it’s important to understand the potential downsides before you invest. For instance, cryptocurrencies are not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation, and platforms that buy and sell them can be hacked, lose data, or shut down. Moreover, the price of cryptocurrencies can fluctuate dramatically. So if you’re thinking about investing, make sure to diversify your portfolio across multiple currencies and only use money that you’re willing to lose.
Another risk is that the nascent cryptocurrency industry may be prone to fraud and scams. For example, fake cryptocurrencies often look and act like the real thing, making it difficult to tell which are genuine and which are just clones. Additionally, crypto investing can be a volatile business and some investors have lost significant amounts of money.
Finally, there are questions about how cryptocurrencies will be regulated in the future. In particular, it’s not clear whether they’ll be viewed as an asset class with the same protections as stocks and bonds. And if the US government decides to tax cryptocurrency profits, that could reduce its attractiveness as an investment.