Cryptocurrencies are a way to transfer value between people without centralized intermediaries like banks or payment processors. Instead, a blockchain—which is like a spreadsheet or database in how it stores data and information—is used to record transactions. It’s a decentralized system that eliminates the risk of a large financial institution failing and sparking a global crisis.
Many companies use blockchain technology to help make it easier for you to shop and pay. The company behind the Bitcoin digital currency, for example, offers a mobile app that allows you to purchase, sell and store your cryptocurrency. Many online services and brick-and-mortar businesses now accept payments in crypto, including schools, health care providers, personal coaches and the art world. This can be more convenient, offer increased privacy or lower fees than traditional methods.
While there are real-world uses for crypto, the market is dominated by speculators. These investors drive prices up and down, often betting on the future potential of an asset rather than a specific product or service. Speculation creates a high level of volatility, and the risk of losing your entire investment is significant.
Some financial professionals view cryptocurrencies as an investable asset, and you can use them to fund retirement accounts. But it’s important to understand the risks and rewards of cryptocurrencies, as well as the tax implications.
You can buy cryptocurrencies on an exchange, which is a website or app that allows you to trade one type of currency for another. These sites typically require you to verify your identity before you can trade, with most U.S. exchanges asking for your Social Security number and address, as well as a photo of your ID. Then, you’ll need to find a wallet provider that can securely store your crypto.
There are different types of wallets, from simple apps to hardware devices that offer greater security. You can then use your wallet to spend crypto, either by sending money to friends and family or by buying items directly from companies that accept it. If you want to make frequent, daily purchases, you might consider a cryptocurrency debit card.
While some experts recommend holding crypto as a hedge against inflation, others warn that it’s too risky to be considered a long-term investment. It’s important to research each crypto you’re considering carefully, and keep in mind that if the market crashes, you may lose all of your investment. In addition, there are significant transaction fees and taxes to consider, including those that apply to trading, transferring and selling your crypto. Accurate record-keeping is crucial, and you should use tax strategies like capital loss harvesting or accounting methods such as HIFO (highest in, first out) to minimize your taxable gains. For these reasons, you should consult a licensed financial advisor before making any crypto investments.