Crypto is a digital asset that functions like money. It’s designed to be secure, fast, and private. Many people believe it can transform the world, but others worry it’s just a fad. If you decide to invest in crypto, understand the risks and be sure to read all the research.
Cryptocurrency is a medium of exchange, a store of value, and a unit of account. It’s also an investment, and the eye-popping returns can make it tempting. But just as with stocks, you need to do your homework before buying.
A cryptocurrency’s value is determined by supply and demand. Supply refers to how much of a particular cryptocurrency is available to buy at any given time, and demand refers to how strongly people want to own it. For example, Bitcoin’s price is driven by how many people are willing to sell their own coins in order to buy something else they need, or how much they value being able to spend their bitcoin in stores and online with companies that accept it.
Most cryptocurrencies are not backed by any government or central bank, and they’re usually managed by peer-to-peer networks of computers running free, open-source software. This makes them decentralized, which means they’re not controlled by any entity and aren’t as susceptible to government interference or bankruptcy as traditional currencies are.
New cryptos are created daily, and the list of available ones is constantly growing. The most popular cryptocurrencies include Bitcoin and Ethereum, which have the highest market caps and are used to buy products and services in large amounts. Other popular cryptocurrencies include Ripple, Litecoin, and Bitcoin Cash.
The crypto ecosystem is full of different projects with unique goals and uses. Some focus on scalability and security, while others offer social interaction or brand-building opportunities. For example, Dogecoin’s meme-friendly branding helped it become a recognizable name in the space and attract attention from investors. More recently, developers have created stablecoins as a solution to the volatility that other cryptos experience. These tokens are designed to track and maintain their value relative to existing currencies, such as the US dollar.
You can directly purchase cryptocurrencies on exchanges, or you can buy shares in Bitcoin trusts and blockchain ETFs through your regular brokerage account. Then you can hold your crypto in wallets on the exchange where you bought it, or transfer it to a dedicated wallet for daily use. There are more and more shops that now accept crypto, so you can pay for items in person or use a debit card that converts your crypto into fiat when you shop.
While holding crypto as an investment can be profitable, it comes with significant risk and should only be considered if you have the financial capacity to lose it all. Keep in mind that the IRS considers crypto to be property, not currency, so you’ll need to properly record and report any gains on your tax return. Strategies like tax loss harvesting and using accounting methods like HIFO (highest in, first out) can help minimize your tax liability.