Cryptocurrencies (Crypto) are digital assets that allow people to transfer value globally at near-instant speed and for low fees. They’re not backed by any government or central bank, and they are managed by peer-to-peer networks of computers running free software. Some are intended to be units of exchange for goods and services, others are meant as stores of value, and still others are used to participate in specific software programs.
The most widely known cryptocurrency is Bitcoin, which has soared in value since its inception in 2009. Some investors buy and hold the coins with the hope that their price will continue rising, while others use them to make transactions. There are also many companies that offer apps and services that help people acquire and trade crypto. Some function like brokerages with an emphasis on charting and trading crypto prices, while others operate more like payment services that enable you to purchase goods and services using your crypto.
Most cryptocurrencies are created through a process called mining, in which computers use powerful computer hardware to solve complex puzzles to verify and confirm transactions on the network. As a reward for their work, these computer owners receive new cryptocurrency. Other cryptocurrencies are created through other methods, some of which are more environmentally friendly than mining. Many of these cryptocurrencies have a price that fluctuates up and down, in part because they are not backed by any real-world asset and are not issued or controlled by any central authority. The price of some is also influenced by expectations about how companies will use them, world events, and how governments decide to legislate and regulate the space.
One of the most compelling reasons to own and use a cryptocurrency is its ability to facilitate international transfers at very low cost and near-instant speed. For example, a recent $99 million Litecoin transaction took only two and a half minutes to complete and cost the sender less than $0.40 in transaction fees. By contrast, the same transaction would have taken several days to process if it had gone through a traditional financial intermediary.
Cryptocurrencies can also be used to move money between accounts at different banks or investment firms. This allows individuals to avoid paying high foreign-exchange fees when sending large amounts of money abroad. This can also be helpful for people living in countries with unstable or repressive currencies, as they can take advantage of the digital currency’s essential borderlessness to transfer funds without worrying about government interference.
Despite these advantages, there are also significant risks to owning and using cryptocurrency. For example, cryptocurrencies are not insured like cash in a bank account, and platforms that buy and sell them can be hacked or shut down, sometimes permanently. Additionally, holding cryptocurrencies can have unexpected tax consequences, so it’s important to consult with a professional before investing in them. For these reasons, most financial experts recommend treating them as speculative investments and not using them to fund daily expenses.