Cryptocurrency is digital money that doesn’t require banks or financial institutions to verify transactions. Instead, these transactions are verified and recorded on a “blockchain,” which is an unchangeable ledger that tracks assets and trades. It is one of many innovations that are reshaping modern finance systems. Some people dismiss it as a scam; others think it’s the key to a new age of financial freedom.
Some of the most popular uses for crypto are payments and buying goods and services directly from sellers. Other uses are more advanced, such as decentralized finance (DeFi), which replicates banking, lending and trading on a blockchain using self-executing computer code. Finally, crypto is also a tool for investment, with investors buying and selling cryptocurrencies in the hopes that they will increase in value.
Despite the excitement, it’s important to remember that crypto is not a replacement for your savings or investments. Like any asset class, it can be very volatile. Investing in crypto requires careful research and planning, including understanding how the asset works and what drives its return. Investors should also ensure that they have all their other finances in order, including an emergency fund, a manageable level of debt and a well-diversified portfolio of investments.
Paying for Goods and Services
Some people use crypto to buy online products and services, from gadgets to handmade items. This is possible because some websites, such as Overstock and Etsy, now accept Bitcoin. It’s also possible to book travel and hotels with Bitcoin, as sites like Expedia and CheapAir do. And a growing number of places in the real world now accept crypto as payment, from restaurants to shops that sell coffee and car services.
It’s also possible to store crypto in a wallet, which is a physical or virtual device that allows you to send and receive the currency. There are a variety of wallets available, from dedicated devices to software applications. Some users choose to use hardware wallets, which are far more secure than other options and can be taken offline to prevent theft.
Investing in Crypto
The IRS considers cryptocurrencies as financial assets or property, so anyone who reaps capital gains from buying and selling them must report those profits. The exact way that the IRS taxes these digital assets depends on how long the taxpayer held the cryptocurrency and how it was used.
While cryptocurrencies have many uses and are growing in popularity, they still face major challenges. Some of these include: