Cryptocurrency is a hot topic — but many people have a lot of questions about it. This series aims to answer them.
Crypto is a digital currency that uses computer code to confirm transactions. Unlike paper money, which is printed by governments or central banks, crypto is decentralized and doesn’t have any single authority that controls it. Instead, the cryptocurrency network keeps track of all transactions via a computer program called a blockchain. This program is similar to a spreadsheet or database, except that it’s designed to be secure and transparent.
Bitcoin is the best-known example of a cryptocurrency, but there are thousands of others. Some, like stablecoins, try to reduce volatility by pegging their value to existing currencies or commodities. Others are designed to be a store of value or to act as a payment method. And some are designed to be used as an investment, with prices driven by supply and demand and by how useful people expect them to be in the future.
As with any financial investment, you should do your homework before investing in crypto. Research the companies behind the coins you’re considering and understand how they function. And remember that crypto is not regulated by the federal government, although there are some signs that this may change in the near future. In 2021, the US Treasury Department’s FinCEN began requiring exchanges to verify customers’ identities and to report any significant increases in value to the IRS.
Purchasing cryptocurrencies can be done through cryptocurrency exchanges, online brokers or through some financial apps. Exchanges tend to offer the widest selection of cryptocurrencies, while brokers and apps that also trade stocks and other financial assets typically have a more limited selection.
When buying cryptocurrencies, be sure to choose a trusted seller. Check whether the seller has a good reputation, offers reasonable prices and protects your privacy. You should also be wary of sites that ask you to provide your private information, as this could lead to identity theft.
Once you’ve purchased crypto, you can use it to buy goods and services from companies that accept it. The list of available products and services is growing as more people and businesses get comfortable with using cryptos. Some of the most popular items include consumer staples, luxury watches and event tickets.
Crypto can be held in a digital wallet, which is similar to an online bank account. Unlike traditional bank accounts, however, which are insured against loss by the federal government, cryptocurrency wallets are not. So be careful not to lose your crypto!
One big advantage of crypto is its portability. Because they’re not tied to a financial institution or a government, you can take your crypto with you no matter where you go in the world. This can be a benefit if you travel or relocate and want to keep your investments safe from political or economic turmoil. It can also open up unique opportunities for free trade in places with tightly controlled fiat currencies.