Cryptocurrencies are a way to transfer value online without the need for a middleman, allowing people all over the world to send and receive money instantly, securely, 24/7, and for very low fees. Bitcoin is the best known cryptocurrency, but there are many others based on different technologies and doing interesting things. Some, like Bitcoin Cash, are a hard fork of Bitcoin, preserving the history of all previous transactions, while newer ones add features to make them useful in new ways.
Like other currencies, cryptocurrencies have economic value, which is determined by supply and demand. Some gain value by being backed by real-world assets, or by being designed to be a stable store of value. Others obtain their value through the blockchain, a decentralized record of all transactions, which is verified and updated by a network of computers running free software called miners. Still other cryptos try to create new ways of doing finance, from mutual funds-like investments to loan-lending mechanisms, without any central authority.
Many people buy and sell cryptocurrencies as an investment. They do so on a variety of exchanges, which are online platforms where users can buy and sell. The prices of cryptocurrencies can rise and fall dramatically, making them volatile investments. Some experts recommend not investing more than 1% to 5% of your portfolio in cryptocurrencies.
Unlike traditional currency, which is printed by governments and issued by banks, cryptocurrencies are produced by the Internet and run on blockchain technology. The blockchain records all transactions, and miner rigs around the world race to be the first to solve complex math problems to update the blockchain with new information. The first miner to do so earns a coin.
In addition to being a store of value, crypto also facilitates trade between people in different countries, overcoming obstacles such as high bank charges and long wait times for international wire transfers. It can also help people who are relocating from one country to another, enabling them to keep their financial independence, even in places where their new home’s government may not allow them to hold traditional assets.
The list of goods and services you can buy with crypto grows daily as more vendors and consumers become comfortable with virtual money. Some of the most popular purchases include insurance, consumer staples, luxury watches, and event tickets. Some of the largest crypto exchanges offer debit cards that you can use to spend your coins in stores and at online retailers.
Cryptocurrencies are not guaranteed by any central authority, so they’re at risk of losing value if the networks that support them suffer technical challenges or are hacked. Moreover, the exchanges where you buy and sell crypto are not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corp. This means you could lose some or all of your investment. So, before you invest in crypto, consider your tolerance for risk—both in financial terms and psychologically—and how diversified your other investments are.