Cryptocurrencies have captured the imagination of investors and non-investors alike. Some believe the technology will transform our financial system and others worry it’s just a flash in the pan. While it’s impossible to say whether cryptocurrencies will become the dominant form of money, there are some things you should know before you invest.
Crypto is a digital asset that exists online and allows people to transfer value globally, near-instantly and for low fees. It uses a technology called blockchain, which verifies and records transactions. This eliminates the need for third parties, such as banks or payment-processing companies, reducing or eliminating their fees.
The blockchain is stored on computers around the world, making it inherently secure. Unlike other online services, blockchain is decentralized and is not hosted by any central authority. Instead, it is a distributed network of computers run by volunteer participants. Anyone can participate by downloading the software and connecting to the network.
To verify and record cryptocurrency transactions, the blockchain’s participants use computers to solve complex puzzles. This process is called mining, and it rewards the owners of those computers with newly created cryptocurrency. Different cryptocurrencies use different methods for mining, and some have a lower energy footprint than Bitcoin.
Because cryptocurrencies are not issued or controlled by any government or financial institution, they’re not subject to the same rules and regulations as traditional currencies. This means that they’re not federally backed, and their value is determined by supply and demand rather than the perceived worth of the currency itself.
As with any investment, cryptocurrency can go up and down in price, so you should only use it as part of a diversified portfolio that includes stocks, bonds and other assets. Make sure you understand how a particular cryptocurrency works and where it’s used before investing, and always do your own research.
Some cryptocurrencies are more stable than others, so they’re better suited for long-term investments. But you should still monitor their prices to see if they’re worth holding. Before you start investing in cryptocurrencies, make sure your other finances are in order, such as an emergency fund and a manageable level of debt.
There are several ways to purchase crypto, including through brokerages and exchanges. But you should be aware that some exchanges have security breaches, so you should be cautious and read reviews before investing.
Once you have your crypto, you can spend it by sending it directly to merchants from your wallet. Many shops and services are starting to accept crypto, ranging from health care to home services. This offers convenience for customers and helps them support an innovative new way to pay.
Finally, remember that the IRS taxes cryptocurrencies as either capital gains or ordinary income depending on how you buy and sell them. Also, regulatory changes and crackdowns could affect the market in unpredictable ways.