The crypto world is an endlessly fascinating and strange one. Sure, there are carnival barkers peddling dubious products and the jargon can be confusing, but if you have the time to delve into it, you’ll find a bottomless well of weird, interesting and thought-provoking projects. The crypto agenda spans a variety of disciplines — from economics and engineering to philosophy, law, energy policy and art. There’s a reason so many people have an opinion on it: It touches on a lot of important and complex issues.
Cryptocurrency, or crypto, is a digital form of money that uses encryption to verify transactions. In its early days, it was a natural fit for people who wanted to avoid the scrutiny of traditional banks, including criminals, tax evaders and sellers of illicit goods. It also became popular with dissidents and extremists, who could use it to make anonymous purchases or transfer funds without being tracked.
But as cryptocurrencies have gained popularity, the risks associated with them have grown, too. In addition to the usual concerns about volatility and hacking, newer cryptos have been linked to shady activities like money laundering and terrorism funding. And crypto can be difficult to regulate because it takes place outside the formal financial system.
A cryptocurrency’s value depends on its ability to attract investors and perform useful functions, but it doesn’t have the backing of a government or other institution that would ensure its stability. That makes it especially vulnerable to market manipulation, and it’s hard for regulators to police because the currency isn’t regulated as a security or a commodity.
There’s also a risk that the technology behind crypto will become obsolete or be rendered useless by advances in computing power. Most cryptocurrencies rely on blockchains, which can be used to create a permanent record of ownership or to verify transactions. But if the network becomes outdated or compromised, all the data it contains will be lost. That’s why it’s important to research a cryptocurrency’s technical development roadmap.
Another concern is the environmental impact of crypto. Creating and maintaining a blockchain requires significant amounts of electricity, since computers compete to solve complicated cryptographic puzzles in order to add new information to the database. This process has been compared to a global guessing game and can be wasteful of energy.
While there are ways to minimize this effect, it’s a factor to consider when choosing a coin. A more sustainable option is a stablecoin, which tracks the value of an existing currency and is backed by that currency’s reserves.
Before investing in a cryptocurrency, look for metrics like how widely it’s being used and whether its management team is ethical. And be sure to read the crypto’s white paper to learn how it plans to distribute its tokens. A good white paper will be transparent and explain what it’s designed to do, how it’ll work and why it might succeed or fail. But even if you’re careful, there are no guarantees.