Cryptocurrency is a revolutionary technology that, on one level, offers new options for making payments and trading financial assets. On a deeper level, it challenges the economic, political and social underpinnings of society.
Unlike fiat currencies like the US dollar that are backstopped by government or monetary authorities, crypto is decentralized and has no central authority. Instead, it relies on blockchain technology to provide security and transparency.
When someone transfers cryptocurrency to another user, the transaction is recorded in a “block” of information that all users can view on a public network. If a hacker were to alter a single block, it would be instantly detected because it wouldn’t align with the rest of the blocks in the network.
A crypto wallet is a software or hardware vault where owners store the private keys to their cryptocurrency. Some cryptocurrencies are used to pay for goods and services with vendors that accept them; others can be traded on digital currency exchanges similar to stock markets. Other cryptocurrencies are utility tokens that serve specific functions on the blockchain, such as a means of paying for gaming or other software programs.
There are countless cryptocurrencies to choose from, and more are cropping up every day. This makes it difficult to know which ones are legitimate and safe to invest in. The fact that crypto is highly speculative and not closely regulated also presents risks. Hype and bubble mentalities have inflated the value of some digital coins, while volatility has scared off many investors.
In addition, if you lose money on a crypto investment, there’s no recourse like there is with a traditional stock or bond purchase. Additionally, a high-risk asset like crypto should be a relatively small part of your overall portfolio.
While some governments have moved to regulate crypto, the vast majority of regulatory efforts are happening on a global scale. As a result, the rules can vary widely. Investors should thoroughly research a cryptocurrency before investing in it. This includes reading independent articles about the currency and visiting its webpages to see how it works.
While the crypto space is developing rapidly, there’s still a lot to learn, especially about how different governments and individuals treat it. For example, the IRS instructs holders of crypto to treat it like property and report transactions when they sell for a profit. In contrast, the Japanese government classifies crypto as a tool for transactions and exempts it from the country’s 8% consumption tax. This may impact how people use crypto in the future, particularly if the governmental treatment of it changes. If you’re considering a crypto investment, be sure to consult with an advisor who is familiar with the space. They can help you understand the technology and how it might benefit your financial goals. They can also guide you in creating a diverse portfolio that minimizes risk.