Cryptocurrency is a digital asset that can be exchanged for goods and services. It uses encryption to ensure the security of transactions. People buy and sell it using online exchange platforms. They can also store it in digital wallets, which are similar to online bank accounts. In contrast to traditional currency, which is printed by central banks and backed by the government, cryptocurrency has no centralized authority. Instead, it’s created and managed by a global network of computers. This network is known as a blockchain.
A blockchain is a public ledger of all cryptocurrency transactions. As each new transaction occurs, it’s added to the blockchain. The additions are verified by the blockchain’s community through verification techniques like proof of work or proof of stake. Verifiers are rewarded with cryptocurrency for their efforts.
Blockchains make it possible for people to transfer value without needing a trusted third party, such as a bank or credit card company. This decentralized model has many benefits. It can be faster and more secure than standard money transfers, and it can support decentralized applications such as flash loans.
There are more than 1,600 different cryptocurrencies, with more popping up every day. Some are more established than others, such as Bitcoin and Litecoin. Others have a smaller market cap but may be poised for growth, such as Ethereum and Zcash. A financial advisor can help clients assess which cryptocurrencies might be appropriate for their portfolios.
One of the most important considerations for anyone considering investing in cryptocurrency is its volatility. The price of a given cryptocurrency can change dramatically, even daily. That’s why a wealth manager should understand how to analyze and track a client’s portfolio on a regular basis, and discuss any significant changes with them.
While some investors are finding success with cryptocurrencies, they can pose significant risks. For example, a cryptocurrency can be used to fund illicit activities such as drug trafficking and terrorism. It’s also possible for hackers to steal cryptocurrencies. To mitigate these risks, advisors should be sure to thoroughly research any investment opportunity before recommending it to clients. This includes looking for reviews, scam reports and complaints.
Investors should also be aware that cryptocurrencies don’t typically come with the same legal protections as traditional investments, such as stocks and bonds. That means that if they invest in a cryptocurrency and the value of that investment declines, it’s likely that they won’t get their money back. Finally, consumers should be careful to avoid getting sucked into social media or other marketing scams that try to lure them into buying cryptocurrencies. If they think they’ve been targeted, they should contact national reporting centers like Action Fraud or the Federal Trade Commission as soon as possible.