Cryptocurrencies are digital assets that resemble money in some ways but have many differences from the cash and other traditional investments you may hold. They are typically not backed or controlled by any government, central bank, or corporation and are instead run on computer software that anyone can download and use. While cryptocurrencies have generated substantial interest from investors, they are still volatile assets that could lose value rapidly or be made obsolete by advances in technology or new regulations.
While it is easy to find a variety of opinions about how much crypto is worth, most experts agree that its prices are driven by supply and demand. For example, bitcoin’s supply is limited and dwindling as people buy it, which drives demand. This is similar to how corn prices rise when harvests are reduced over time, which causes demand to increase.
The underlying technology of crypto is often described as blockchain, a database that records all transactions in chronological order with each entry linked to the previous one. It is not only a store of value, but can be used as a platform for other applications such as digital payments and lending. Many of these uses are still in the experimental stage, and investors should be aware that not all blockchain innovations will become mainstream.
While a number of governments are beginning to legislate and regulate crypto activities, it’s important for investors to remember that most of the time when you invest in crypto, you are holding it speculatively and not as a way to pay for goods or services. Currently, the IRS taxes cryptocurrencies as financial assets or property for tax purposes when you sell them or exchange them for other assets or money.
As a result, most experts recommend that you treat crypto as a highly speculative asset and not place too much of your portfolio in it. Whenever possible, we suggest that you buy and sell cryptocurrencies through an exchange that is regulated in the US or another country where the activity is supervised. This will help to ensure that you have a secure and trustworthy trading partner in the event of problems with the marketplace. You should always read the terms and conditions carefully before using a platform to purchase or sell crypto, as they can change at any time. These platforms also may not be insured, like your money in a bank account, which could mean that you might lose some or all of your investment. Also, it’s important to understand that most cryptos are not liquid assets and can be very difficult to sell. For these reasons, Schwab does not offer direct investments in cryptos.