Cryptocurrency is virtual money that exists only on a computer network. The most famous example is Bitcoin, which was launched in 2009. It’s used to buy goods and services online or in stores that accept it. People also invest in it because they hope the value will rise, netting them a profit. But it’s important to understand that cryptocurrency isn’t guaranteed to increase in value or remain stable.
Blockchain is the underlying technology behind cryptocurrency. It lets thousands of computers share and verify transactions without a central authority. That eliminates the need for centralized intermediaries, such as banks and notaries. And it cuts out the fees those intermediaries charge. That’s how cryptocurrency can have lower transaction costs and processing fees than traditional credit cards.
But it’s also a potential foundation for a whole new financial system. Many developers are aiming to recreate traditional finance, from mutual-fund-like investments to loan-lending mechanisms, using blockchains and other technologies. This is called decentralized finance, or DeFi. It’s too early to tell how successful these projects will be, but they offer the prospect of a more efficient global financial system and greater individual empowerment.
There are other uses for crypto, too. People use it to buy property in the virtual gaming world Second Life, for example. They can buy clothes and other items for their avatars in the Ethereum-based Decentraland, and they can even pay to enter virtual nightclubs or hang out at art galleries. The Ethereum blockchain has also enabled a whole new category of applications that run on the virtual currency, such as crowdsales that let you invest in companies or projects.
The digital coins are created and held in electronic wallets, or crypto wallets. These are like a cross between an online bank account and a physical wallet. You can store them on a computer or mobile phone, although they’re better stored in hardware wallets that aren’t linked to the Internet. You can also exchange them for other cryptocurrencies or cash at a crypto exchange. Some countries have regulations or ban the trading of crypto. But most of the time, buying or selling crypto is legal.
You can spend cryptocurrency in a growing number of shops and restaurants. Many online retailers, such as Overstock and Microsoft, now accept Bitcoin payments. So do many travel agencies and restaurants. And some people use it to donate to Wikipedia or other nonprofits.
People invest in crypto for the same reason they invest in anything else: They hope its price will go up, netting them a profit. However, it’s important to understand that the price of crypto can fluctuate wildly, and the laws around it are constantly changing. That means holding crypto can be riskier than keeping money in a bank or brokerage account, and investors should only buy as much as they’re willing to lose. And remember that any crypto you own isn’t insured, unlike money in a bank account or retirement account, and platforms that buy and sell crypto can be hacked or fail.