Cryptocurrencies are digital currencies that don’t have a centralized authority and can be used to make purchases across borders. They can also be used as investments. However, cryptocurrencies come with high risks and unique tax implications.
The first cryptocurrency, Bitcoin, was launched in 2009. Since then, dozens of new cryptocurrencies have emerged, each one promising something different. Some focus on specific problems, like criminal activity or online gambling, while others have more general applications.
Many cryptocurrencies are created through a process called mining, which involves computers solving complex puzzles to verify transactions. This process requires energy, but it can be profitable for the owners of the winning computers.
These computers compete to be the first to solve a particular puzzle, which is then recorded on a distributed ledger, or blockchain. This keeps a record of all transactions in a crypto currency and makes it difficult for hackers to hack.
Another major advantage of cryptocurrencies is that they don’t have to be backed by a government, so people in unstable countries can use them. But they can still be a source of fraud, so governments have been trying to regulate them as securities and currencies.
In the United States, regulators have taken a more aggressive approach to crypto. They’ve cracked down on initial coin offerings, or ICOs, after the craze of 2017 and 2018. The Commodity Futures Trading Commission (CFTC) has also made a number of moves to ensure that cryptocurrencies are not abused.
For example, US investors must report a gain when they sell their coins for a profit, which can be taxed. This can make it challenging for people to buy everyday items using crypto at large scale.
Prices of cryptocurrencies can fluctuate significantly over time. The price of bitcoin, for example, has climbed to $20,000 in late 2017, then crashed more than 60% in early 2018.
While the price volatility is appealing for some short-term traders, it can also make long-term investing in crypto more difficult. It’s hard to predict how an asset will perform in the long term, so investors must rely on fundamentals and how they could drive future returns instead of looking at a past performance.
Scams are a common issue with cryptocurrencies, and they range from scammers posing as well-known companies to fake investment websites that lure unsuspecting consumers. These fraudulent sites promise a high payout or guarantee a certain return in a short amount of time.
If you’re unsure about a site, check it out by visiting the Better Business Bureau or local law enforcement. Scammers are a real threat to your money, so it’s important to be on guard against them.
Cryptocurrency payments are not reversible, so you can’t get your money back if a seller is crooked. But if you do need to dispute an offer, credit cards and debit cards have legal protections that can help.
The best way to protect yourself is to only use reputable and secure services to buy and sell your coins, and never share your passwords or personal information with anyone. If you’re unsure about the security of an app, exchange or stock broker, ask them for more information before you start using their services.