A new form of money that’s based on an online database instead of a central authority. Also known as a digital currency or cryptocurrency, it’s often used to buy products and services, but it can also be invested. Crypto inspires passionate opinions – some believe it’s a transformational technology, while others worry it’s just a fad.
There are thousands of different cryptocurrencies, but most are based on the same idea: a public database called a blockchain. The blockchain is similar to a spreadsheet or a database, but instead of relying on one central server to store all data, it’s spread out across multiple computers, so that each computer has a copy that’s constantly updated. This makes the blockchain resistant to hacking and other cyber attacks.
When you invest in a cryptocurrency, it’s called buying “tokens.” The value of each token depends on how much people want to own it and how widely the coin is accepted. Tokens can be traded on exchanges, which are businesses that sell and buy cryptocurrencies for users. Investors can also hold onto their coins using digital wallet apps.
To start investing, find a reputable exchange and buy some of the cryptocurrency’s native tokens. Most cryptocurrencies have metrics available that show how many transactions they’re processing, and how much people are spending on them. It’s also a good idea to look at who’s behind the project. A well-known leader is a positive sign, but don’t just focus on the big names – smaller projects can have great long-term potential, too.
While the price of cryptocurrencies can fluctuate, they’re generally considered safe to hold. However, since there’s no government backing them, they’re not insured against losses like bank accounts are. Additionally, because regulators are still figuring out how to handle them, any crackdowns could cause their values to plummet.
The IRS taxes cryptocurrencies as either capital gains or ordinary income, depending on how they’re sold or traded. It’s important to understand how they work and what your tax obligations might be before investing.
If you use crypto to pay for goods and services, you may be able to save on fees by paying with your crypto instead of cash. Many places now accept crypto, including online retailers and some cafes. For more options, consider buying gift cards to spend at popular brands, or using a peer-to-peer (P2P) trading platform to make direct trades. You can also use crypto to pay for online services and subscriptions, though these may have extra costs. Finally, traveling with crypto can cut down on foreign exchange fees. There’s even a growing community of “crypto nomads” who primarily or exclusively use crypto when they travel.