Cryptocurrency has gone mainstream, and if you haven’t been paying attention, the crypto market is now worth trillions. Its underlying technology, blockchain, is also spawning mind-blowing applications that are changing the way we exchange value.
Crypto has become the fastest, easiest, cheapest and safest way to transfer value online. And although it’s not yet legal to use for most purchases, many merchants now accept it. But, before you buy your first cryptocurrency, you’ll want to understand what this new form of money is and how it works.
Unlike traditional currency, which is printed by governments and stored in banks and financial institutions, cryptocurrencies have no central authority. Instead, they are managed by networks of computers running free, open-source software. This is why they are often referred to as decentralized currencies.
Each cryptocurrency has a digital ledger, called a blockchain, which records all transactions and shows who owns each unit of the coin. The blockchain is constantly re-verified, and no one company or government controls it. The blockchain is so secure that to date, Bitcoin’s network has never been hacked.
Because they are decentralized, cryptocurrencies can be transferred between users instantly, around the world, for extremely low fees. The blockchain also means that transactions are permanent, irreversible, and transparent. This is why they are considered the future of money, offering powerful advantages over previous payment methods and traditional classes of assets.
However, while the crypto market is volatile and has seen eye-popping returns, the laws surrounding it are still developing, so it’s important to research your investments carefully before investing in crypto. In addition, if you’re trading or spending crypto for profit, the IRS requires that you report this as income.
While some people purchase cryptocurrencies with the hope that they will eventually be adopted as a form of money, others invest in them because they are an alternative asset class that can appreciate in value. In either case, it’s important to diversify your portfolio to reduce the risk of losing all of your money.