Cryptocurrencies are digital assets that use encryption techniques to verify transactions and control the creation of monetary units. They are usually based on the blockchain, which is a decentralized, public ledger of transactions. The best-known cryptocurrency is Bitcoin, which was launched in 2009 and developed by a person or group known as Satoshi Nakamoto.
The main function of cryptocurrency is to allow people to make transactions securely, quickly and without an intermediary (such as a bank). The value of a cryptocurrency depends on whether other people think it will increase or decrease in price. This makes it more speculative than stocks, which are linked to the performance of companies that have well-defined business models.
Most cryptocurrencies require large amounts of energy to verify and store transactions because they are based on “proof-of-work” systems that involve computers competing to solve cryptographic puzzles in order to add new information to the blockchain. This process has been compared to a global guessing game and uses huge amounts of computer resources.
As a result, the value of many cryptocurrencies can fluctuate wildly over short periods of time, which critics say makes them more speculative investments than viable forms of currency. But supporters argue that the underlying technology behind most cryptocurrencies is actually quite valuable, and that the recent volatility is just a symptom of early investors betting on the success of future innovations in the space.
The cryptocurrency market is also more vulnerable to fraud because it lacks the consumer protections built into most other financial products, such as credit cards. Some experts have argued that the crypto industry should be heavily regulated.
A survey published in 2021 by the Pew Research Center found that Black and Latino adults were more likely to have used crypto than white Americans. Other research suggests that cryptocurrencies could become popular with marginalized populations, such as refugees who may have been forced to leave their homes in search of work. Crypto can help them transfer funds to relatives abroad without the need for local currency conversions and international wire fees.
In addition, the privacy features of crypto can be attractive to people who have been harassed online or may have been victimized by discriminatory laws. And the censorship-resistant nature of crypto could be useful for people fleeing government repression in countries like Iran or Turkey.
Despite the hype, however, there are still significant hurdles for cryptocurrencies to overcome before they can be widely accepted as payment methods. And even then, they probably won’t replace traditional currencies completely. If you’re considering investing in cryptocurrencies, it is important to do your homework and consult a trusted financial advisor who is familiar with the space. Money is not a client of any investment adviser featured on this page.