Cryptocurrency is one of the hottest financial topics in the world, but it’s also complex, with its own digital features, distinctive underlying technology, and a specialized vocabulary. Even if you don’t plan to invest in it, you may be curious about how it works and what its advantages might be compared to traditional currencies.
At its core, cryptocurrency is a digital protocol that allows people to send and receive value without using intermediaries like banks or other traditional financial institutions. In theory, this means lower costs and faster transfers. It can also be more secure, as there’s no central authority that can be hacked or otherwise compromised. The value of a cryptocurrency depends on what other people are willing to pay for it, and can fluctuate wildly from day to day.
Some people buy and sell cryptocurrency as a way to make money, just like stocks or other investments. Others use it as a medium of exchange for goods or services, or to store their wealth. Some companies and retailers, from luxury retailers to online gaming platforms, accept it as payment.
To buy cryptocurrency, you’ll need to find a place to do so, such as a crypto exchange, an app or website, or a bitcoin ATM. Some people earn cryptocurrency through a process called mining, which requires advanced computer equipment to solve complex math puzzles. Once you have some, you’ll need a place to store it, and most exchanges provide options for this.
Many people use a cryptocurrency wallet, which is a combination of software and hardware that stores the private keys required to identify and protect your coins. These wallets can be downloaded and installed on your computer or smartphone, or you can use a service that provides them for free.
When you make a transaction, the information is recorded on a public ledger, called a blockchain. This records the amount of currency paid, the receiving address, and other details. It’s often possible to link these transactions to real-world identities, although the details are often obscured and difficult to verify. The blockchain is also a popular tool with criminals for nefarious activities, from money laundering to drug deals and ransomware.
Proponents of cryptocurrencies say they offer a new paradigm for money that’s decentralized, fast, and safe. They also say they eliminate the possibility of a single institution failing, which could cause a global economic crisis like the one that began in 2008. However, if you’re thinking about investing in them, be aware that the IRS considers them to be taxable assets, so any profits or losses will need to be reported on your tax return. That’s particularly true if you sell them for a profit. Some states also have their own regulations on how to report cryptocurrency earnings.