Cryptocurrency is an alternative to traditional money, and it has gained significant traction in the last decade. Its proponents claim that it’s a revolutionary technology that will transform the global economy; critics say it empowers criminal groups and rogue states, is prone to dramatic market volatility, and consumes massive amounts of electricity to verify transactions.
Crypto is digital, peer-to-peer and decentralized. The currency’s popularity stems from its ability to conduct transactions quickly and easily without the need for centralized intermediaries like banks and monetary authorities. It is also praised for its transparency, divisibility, and inflation resistance.
To use cryptocurrency, users must first buy the coins through an exchange. Then they store the coins in a device called a wallet, which secures the keys that validate all transactions. Depending on the type of wallet, it can be hot (connected to the internet) or cold (offline). The storage method can impact the price of a coin.
A key component of cryptocurrency is a blockchain, which records every transaction in chronological order. When a new transaction is initiated, it’s broadcast to a network of computers or nodes. These nodes use algorithms to verify the transaction’s legitimacy. Once verified, the transaction is recorded in a block and added to the blockchain. Once a block is full, it becomes permanent and immutable.
Investors can purchase cryptocurrencies on exchanges, similar to the way that investors buy stocks on a stock market. The value of a cryptocurrency is determined by demand. The more people want to buy and hold the currency, the higher its value.
Another factor that impacts demand is the supply of the currency. As more coins are produced, their value will decrease. Conversely, if the coin is scarce, its value will increase. Finally, the rate of inflation in the world’s major economies can also impact the value of a cryptocurrency. If the rate of inflation is high, a cryptocurrency may see its value rise as it becomes more expensive to purchase goods and services with it.
Unlike stocks or bonds, cryptocurrencies are not heavily regulated. They’re also a relatively new investment, with Bitcoin only being around for less than 20 years. The Commodity Futures Trading Commission and the Securities and Exchange Commission have both signaled that they consider cryptocurrencies to be commodities, while some lawmakers have proposed legislation that would treat them as securities. The lack of regulations leaves cryptocurrency prone to manipulation and fraud, such as Ponzi schemes and pump-and-dump schemes. It also exposes investors to the risk of losing their entire investment. To mitigate these risks, consumers should research the cryptocurrency thoroughly before investing and choose a reputable exchange. They should also learn about how and where to store their cryptocurrency. In addition, they should familiarize themselves with the tax treatment of cryptocurrency investments. The IRS taxes cryptocurrencies as capital gains or property, depending on how long they’re held and how they’re used.