Cryptocurrency is revolutionizing the way we invest, bank and use money. But the concept is still pretty new, so it’s important to understand all of the nuances before investing your hard-earned dollars in this new asset class.
A cryptocurrency is digital money created and used over the internet. Bitcoin launched in 2008 and is by far the most popular, but many others have been developed since. They are typically marketed as alternatives to money issued by governments and can be traded on platforms called exchanges.
Blockchain technology underpins most cryptocurrencies. It’s a shared digital register that records transactions in “blocks.” Each block contains a record of previous transactions, and the chain grows as more data is added. The blocks are stored on multiple computers throughout the network, making it very difficult to hack or change the record. The system also allows for quick, cheap international transactions.
Some of the biggest names in business support cryptocurrencies, including Bill Gates and Richard Branson. But many financial experts, including Nobel Prize winners Paul Krugman and Robert Shiller, have warned that they are a bad idea. And there are concerns that cryptocurrencies could be used for illegal activities, such as drug trafficking and money laundering.
A key concern is that cryptocurrencies are not backed by any government or precious metal, and their value can fluctuate wildly. That volatility makes them riskier to hold than traditional investments. And some cryptocurrencies offer anonymity, which could make them attractive to criminals.
One of the most intriguing uses of cryptocurrency is that it can enable people from around the world to trade with each other, even if their governments don’t allow them to. That could give small businesses and individuals in places like Vietnam and India the freedom to grow and expand their operations. And it’s a particularly attractive option for marginalized groups, such as women and minorities, who may have had their property stolen by corrupt governments in the past.
Because of the lack of a central authority, cryptocurrency is impossible to manipulate by any single government or company. That makes it a powerful tool in a globalized economy, where borders and other barriers to free movement of goods and services are disappearing.
While it’s possible that some cryptocurrencies will become mainstream, others may never gain widespread acceptance. For now, it’s best to think of them as an investment that’s unlikely to pay off unless you’re willing to take on substantial risk and be patient. And remember that cryptocurrencies are not insured, like funds in a bank account, and can be lost if the platform where they’re held is hacked or fails. So invest only in them with money you can afford to lose.