Bottom Line Up Front
- Cryptocurrency is an electronic money system based on blockchain technology and secured by encryption.
- The value of cryptocurrency changes rapidly, making it much riskier than other types of investments.
- Before you make any final decisions, learn all you can about the subject and/or talk to an investment advisor.
You’ve probably heard the word “cryptocurrency” or “crypto” over the past few years. But, what exactly is it? Cryptocurrency is a virtual money system protected by encryption that makes it nearly impossible to steal or counterfeit. Read these 5 facts to understand the basics of how it works.
- Cryptocurrency is 100% electronic. Most money systems produce physical coins or paper money and are backed by or attached to a government. Cryptocurrency is electronic, and it isn’t attached to a government. It’s decentralized, which means it’s not owned or controlled by any person, government or other organization. Instead, all the users together are in control.
- Many cryptocurrencies are based on blockchain technology. Essentially, blockchain is a database that stores information differently from the way a typical database does. It collects information in sets, or “blocks.” When the blocks are filled, they’re connected, or “chained”, to the previous blocks and can’t be changed.
The transaction and verification processes use mathematical algorithms, which makes them more secure. All this information is duplicated and stored electronically across a number of computers. The system makes it nearly impossible to change or hack. So, when you purchase crypto, your coin ownership records are stored electronically.
- You can buy, sell and use cryptocurrency to buy services or goods. Anyone can purchase crypto through dedicated exchanges. These exchanges typically charge a fee based on the size of your transaction. To hold your purchases, you’ll create a “wallet” (an app that holds your currency). So far, only a few retailers, mostly online, accept certain forms of crypto for purchases. And, you may be able to use crypto to buy gift cards for a select number of merchants.
- The value of various cryptocurrencies can change rapidly. Unlike the U.S. dollar, there’s no central authority that maintains the crypto’s value. As a result, the value can go up and down very quickly. For that reason, buying crypto as an investment can be much riskier than others.
If you’re thinking of using cryptocurrency to diversify your investment portfolio, consider investing in large companies that are investing in the technology instead. First, learn about the company that developed it. Then, check how far along the coin is and if any other well-known investors are investing in it. If you’re still uncertain or aren’t sure you understand, talk to an investment advisor.
- There are thousands of cryptocurrencies being traded. Although in the early days, there was only one type of coin available (Bitcoin) today, you’ll find thousands of other alternate coins or “altcoins.” New coins are brought to market all the time, often raising money through initial coin offerings, or ICOs.