Cryptocurrencies are digital assets that function as currencies, investment vehicles, and stores of value. They use cryptography to secure transactions, control the creation of new units, and verify transfers of ownership. They operate on a technology called blockchain, a distributed ledger that’s enforced by a global network of computers. Transactions are grouped into blocks and added to the blockchain in chronological order, making them immutable.
Crypto advocates say the technology enables people to transfer money globally, near-instantly, and for very low fees, without middlemen like banks and credit card companies. They also argue that digital currencies can enable new kinds of financial services, such as insurance and real estate titling, that would be difficult or impossible under traditional systems.
The most well-known cryptocurrencies are Bitcoin and Ethereum, but there are many others. Some are based on the same technology as Bitcoin, but some use different technologies or have features that set them apart. For example, some cryptocurrencies are designed to be used as a store of value, while others are designed to facilitate faster and more secure payments.
While the eye-popping returns of some cryptocurrencies may make them tempting investment options, it’s important to look before you leap. Cryptocurrencies aren’t backed by any government or central bank, and they can have wild price swings. In addition, the laws surrounding cryptocurrencies are still evolving and can change at any time.
Most governments take a hands-off approach to regulating cryptocurrencies, but some have started crafting rules. These rules could limit traditional financial risks or stifle innovation. For instance, the US tax code currently requires you to report any profits you earn when you sell or exchange cryptocurrencies for goods and services.
Cryptocurrency investments may be subject to hacking and theft. Cybercriminals have used ransomware, a tactic where they infiltrate and shut down computer networks, to demand payment in cryptocurrency to restore the systems. They’ve also used cryptocurrencies to buy and sell illegal goods and services, including drugs.
In addition, the technology behind cryptocurrencies may be used for illicit activities, such as money laundering and terrorist financing. Because cryptocurrencies are digital, they can be easily sent across borders, where authorities have difficulty tracking them.
Some people hold cryptocurrencies for the long term, hoping their price will rise. However, this can be a risky strategy if prices decline. Other investors trade cryptocurrencies, buying and selling them as they see fit. This can be a good way to make quick profits, but it can also lead to significant losses if you sell at the wrong time or just before a price crash. There’s no one-size-fits-all strategy when it comes to cryptocurrencies, but diversifying your portfolio can help reduce the risks.