Cryptocurrency is a digital medium of exchange that uses cryptographic techniques to verify transfers and control the creation of new monetary units. It is traded on decentralized computer networks between people with virtual wallets, and the transactions are recorded publicly on distributed, tamper-proof ledgers called blockchains. Bitcoin, which was launched in 2009 by the pseudonymous software engineer Satoshi Nakamoto, is the most prominent cryptocurrency, but numerous others have proliferated in recent years.
One reason for the popularity of cryptocurrencies is that they allow individuals to send money quickly and inexpensively across borders, without the involvement of a central authority such as a bank. This can reduce transaction fees, and it may also reduce the risk of fraud. However, the volatility of cryptocurrencies can make them challenging to hold as an investment. A cryptocurrency that is worth thousands of dollars today could be worth only hundreds tomorrow, and there is no guarantee that it will increase in value.
Another drawback of cryptocurrencies is that they are often less regulated than traditional financial products. This can create opportunities for scams and phishing attacks. For example, ransomware attackers often demand payment for their services in cryptocurrency, and criminals use cryptocurrencies to evade sanctions and buy illicit goods and services.
In addition, cryptocurrencies lack the consumer protections offered by credit cards, such as chargebacks. Cryptocurrency users are typically responsible for their own security, including keeping track of their private keys and ensuring that they have enough liquidity to make timely withdrawals.
If you’re interested in purchasing cryptocurrencies, the first step is to open an account with a broker or exchange. Many brokers require verification of identity before you can fund your account, and you’ll need to keep a form of identification close by in case of a loss or theft. Once you have an account, you’ll need to select a method for funding and depositing your funds. After that, you’ll need to choose a “wallet” where to store your coins. Most brokers and exchanges offer both hot and cold wallets.
Finally, the Internal Revenue Service considers cryptocurrencies to be property or financial assets, and you’ll have to pay taxes on any profits if you sell or trade them. The tax treatment depends on how long you held the currency and how it was used.
Companies should weigh the pros and cons of adopting cryptocurrencies carefully, particularly if they are considering using them as a payment method or investment. Engagement with them will likely require new processes and controls that span departments, so it’s important to involve all stakeholders and have strong leadership from the C-suite. Moreover, the emergence of crypto and other digital assets will require companies to adjust their thinking about what constitutes “real money.” To be successful in this new environment, executives need a clear point of view and a substantiated roadmap for moving forward.