Crypto is a new kind of digital asset that uses blockchain technology to verify and process transactions. It is a highly volatile investment and its price can go up or down significantly in short periods. Investors should only invest with money they can afford to lose.
Bitcoin was the first cryptocurrency and remains the most well known. However, there are thousands of other cryptocurrencies with different uses and growth potential. Researching the technology, purpose, team, and community behind a specific coin is important before making an investment. A good place to start is by visiting forums like Reddit’s r/CryptoCurrency and reading whitepapers. It is also helpful to determine your risk tolerance and understand how you plan to use crypto in your portfolio.
Some cryptocurrencies are backed by real-world assets or have utility, making them easier to spend or hold than others. Some obtain their value through what is called “mining,” where powerful computers verify and process transactions on the ledger and are rewarded with units of currency. This system is a bit like old-fashioned gold or silver mining but without the need for third parties such as banks or notaries.
The blockchain is a public record of all transactions, allowing anyone to view and validate them at any time. It eliminates the need for third parties in many scenarios, such as transferring funds between bank accounts or buying goods online. This can reduce fees for consumers and businesses, and speed up processing times. For example, it can take up to three days for a stock trade to be completed and settled, which adds costs and risks for both sides.
In addition, the blockchain can allow for more transparent and secure financial transactions. For instance, it can cut out intermediaries such as middlemen or bank clearinghouses that add fees to credit card payments. It can also reduce the time it takes for money to move between banks, which can be a major headache in global financial markets.
There is still a lot to be determined with crypto, including how it will be used in the future and how governments will regulate it. Some analysts believe it could replace some existing currencies, while others see it as a fad that will eventually fade away.
Schwab continues to monitor crypto as regulations and technology evolve. While some traders have made money by trading bitcoin and other cryptocurrencies, we recommend treating it as a speculative asset that should be traded with money outside of your long-term portfolio. Cryptocurrencies are not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation, and are subject to substantial risks including hacking, security breaches, and price volatility. We suggest investors only buy crypto with money they can afford to lose, and consider using a reputable exchange that offers tools to help manage risk and protect your digital wallet. You should also consider your tax situation as current US regulations treat crypto as property rather than cash, meaning you may have to report any gains if you sell or exchange it for other items.