Cryptocurrency inspires passionate opinions—some believe it’s a transformative technology, while others worry it’s a fad. While you can invest in crypto as part of a broader investment strategy, it’s important to do your homework before buying. As with stocks, you’ll want to research the companies behind these products. Often, they’ll have websites where you can find publicly available information about their financial performance and business plans. It’s also a good idea to speak with your financial advisor about crypto and how it might fit into your overall investing plan.
Unlike traditional currencies, which are printed on paper and stored in banks and financial institutions, crypto is digital and typically stored in “wallets” that you install on your computer or mobile device. Many crypto wallets offer multi-factor authentication to protect your account. Some use blockchain tech to make it difficult to fake transactions and keep your identity private.
In general, cryptocurrencies are not backed or controlled by any government or central bank and operate according to their own rules and computer software. This allows them to transfer value worldwide, near-instantly and at very low fees. Some cryptocurrencies, such as Bitcoin (BTC), are more established than others. It is not clear whether any of them will survive.
One big downside of cryptocurrencies is their volatility. Because of this, you could lose more money than you invested if the price goes down. Some cryptocurrencies are designed to be less volatile, however, and these are called stablecoins. To create a stablecoin, developers build an underlying blockchain that tracks a specific currency or commodity like gold, silver or the US dollar. They then use a “stable” algorithm that limits how much the coin can fluctuate. Some stablecoins are audited by reputable third parties to increase confidence in their stability.
Another concern is that tax law doesn’t yet fully reckon with cryptocurrencies. Currently, when you sell your crypto for profit or exchange it to receive goods or services, you must report that transaction to the IRS. This may change as the sector matures and regulators begin crafting clearer rules for it.
While governments have generally taken a hands-off approach to crypto, the industry’s rapid growth and evolving capabilities have forced them to consider how best to handle it. Regulatory changes and crackdowns can have ripple effects that are hard to predict.
Digital currencies expand people’s economic freedom around the world by allowing them to send money to anyone with internet access, without worrying about business hours or traditional currency conversions or international wire fees. This feature is particularly useful in places where inflation is an issue and can help refugees retain easy access to their money. They can also reduce costs in areas where credit cards aren’t widely accepted or have high fees. Some cryptocurrencies even combine money and technology to provide new ways to make and save. For example, Orchid combines a privacy-focused VPN with the OXT cryptocurrency to enable users to secure their data while traveling and cut down on fees.