Cryptocurrency has grown in popularity as a means of payment, making it easier to buy products and services without leaving your home. It’s also becoming a popular investment, although it’s important to keep in mind that you could lose some or all of your initial investment.
Crypto is digital, and it exists in blockchain networks. These systems are decentralized, meaning there’s no central authority that oversees and maintains them. Instead, blockchain networks are maintained by the community at large, who verify transactions and add new blocks to the chain. This process is called mining.
The value of a cryptocurrency is determined by supply and demand, much like stocks or other assets. In the case of Bitcoin, its limited supply (21 million units) and high demand have fueled its rise in price over time. While there’s no guarantee that cryptocurrencies will increase in value, their decentralized structure and ability to solve real-world problems are attractive to many investors.
However, a number of factors can affect the price of a cryptocurrency, including regulatory changes, hacks, market volatility and competition. Investors should always research a cryptocurrency’s background and use case before buying. Traders can use technical analysis, which evaluates the price movement of a coin based on market data such as trading volumes and chart patterns, to make short-term trading decisions. Fundamental analysis is a more in-depth evaluation of a cryptocurrency’s intrinsic value, focusing on things such as its development team, practical uses and technology.
Many cryptocurrencies are designed to be decentralized, with developers giving part of their control to the public through the creation of tokens that represent ownership or value on the blockchain network. Security tokens, for example, allow investors to gain partial ownership of a company by transferring their value to the blockchain. Others, such as stablecoins, are designed to track the value of existing currencies, such as the US dollar.
One of the biggest differences between traditional currency and crypto is that it’s not backed by a government or financial institution, and therefore it’s not insured against loss. While most people store their money in banks, which are required to protect depositors up to a certain amount, crypto is held in digital wallets, and these don’t offer any protection in the event of a theft.
The Internal Revenue Service (IRS) treats cryptocurrencies as financial assets and property for tax purposes, which means they can be subject to capital gains and ordinary income taxes depending on how long you’ve held them and how they’re used. If you’re considering investing in crypto, consult a tax professional to learn more about how this can affect your bottom line.