Crypto is money that’s digitally encrypted, enabling it to offer secure and fast transactions. Unlike traditional currency, which is backed by central banks and overseen by financial institutions like credit card companies, cryptos are developed and run by groups or individuals with little public information. As a result, it can be difficult to know who you are dealing with, and there’s no safety net if things go wrong.
One of the biggest risks is volatility – the wild shifts in price that can happen when people buy and sell crypto. If you’re investing, it’s important to diversify your portfolio to reduce risk.
Another risk is theft. You should always keep your private keys (your wallet address) safe, and protect your device from malware or phishing sites. You should also only use trusted exchanges, and never transfer crypto to a wallet on an unsecure Wi-Fi network or a site that uses outdated software. You should also consider buying a hardware wallet, which offers the highest levels of security.
Spending crypto is gaining popularity, with many shops and services now accepting it. When you make a purchase with crypto, the seller will give you a code or an address to scan with your phone. Your wallet then uses your private key to digitally sign the transaction. Your money is then sent to the blockchain, where it’s recorded and visible to anyone with a crypto explorer and your transaction ID.
A growing number of apps and websites let you pay with crypto, including travel booking sites, food delivery services and gaming platforms. Some also offer the option to convert crypto back into fiat currency.
Using crypto to buy property, goods and services is subject to tax in the same way as any other investment. You may have to report it as a capital gain or income depending on how long you’ve held it and when you sell it.
The IRS considers crypto to be property, rather than currency, so it’s taxable when you buy or sell it for more than its original purchase price. Then you’ll need to report it as a capital gain or ordinary income, depending on how long you hold it.
Many governments around the world have yet to figure out how to regulate or control cryptocurrencies, so they could change their policies and rules at any time. This could affect the value of your crypto, so it’s a good idea to only invest what you can afford to lose. This is especially true as crypto prices are extremely volatile.