Cryptocurrency is an umbrella term that encompasses the many digital currencies that have emerged since Bitcoin was created in 2009. It uses complex cryptography principles to mint virtual coins that can be exchanged between people with digital wallets. Transactions are recorded on public, tamper-proof ledgers called blockchains. Bitcoin is by far the most famous cryptocurrency, with a market capitalization that at times has exceeded $1 trillion. But there are dozens of other options, including Ethereum, Ripple and Zcash. To their proponents, cryptocurrencies are a revolutionary technology that is decentralizing the power of money away from central banks and Wall Street. To critics, they are a dangerous tool for criminals and terrorists, are highly volatile and can be used to buy illegal goods and services and launder money.
Investors must understand the risks before they buy any cryptocurrency. For starters, it’s important to know that cryptocurrencies are not insured by the Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corp. In addition, cryptocurrency values are constantly changing, often by the hour. An investment that’s worth thousands of dollars today may be worth hundreds tomorrow, and there’s no guarantee it will ever go back up.
Another risk is that cryptocurrency investments can be targeted by hackers. Cybercriminals have been known to steal large sums of the coins by infiltrating computer systems or shutting down networks and demanding payment for repairs. And some of the currencies are widely used on darknet markets, where people can buy and sell illicit goods, such as narcotics or weapons.
There are also concerns that cryptocurrency investments could be manipulated by unethical managers or other players in the marketplace. It’s not uncommon for a scammer to create an official-looking website and lure unsuspecting victims in with promises of big returns. And because cryptocurrencies are not regulated, there’s little government oversight to protect investors from deceptive practices or fraud.
The final risk is that cryptocurrency payments are not reversible. Credit cards and other traditional methods of payment offer legal protections if something goes wrong, but most cryptocurrency transactions are not refundable once they’ve been confirmed on the blockchain. So, before you spend your hard-earned cryptocurrency, be sure to read the company’s webpage and independent articles that describe how the currency works.
When you’re ready to invest, look for a cryptocurrency that is already well-established on the market. A reputable cryptocurrency will have lots of active users and good metrics available, such as how quickly its transactions are processed and how often it’s being traded on various exchanges. And it should have a transparent management team that’s easy to identify and contact. A good place to start is CoinMarketCap, which tracks the prices of many of the most popular cryptocurrencies and provides basic information about each one.