Cryptocurrencies have exploded in popularity over the past decade, growing from digital novelty toys to trillion-dollar technologies that have fundamentally altered how people invest and trade money. Proponents say cryptocurrencies are a democratizing force, wresting power away from Wall Street and central banks and making it accessible to ordinary people. Critics, however, warn that cryptocurrencies are a tool for criminals and pose substantial financial risks. They say the largely unregulated markets are being leveraged by bad actors, while their energy-guzzling mining operations are harmful to the environment. As a result, governments around the world are grappling with how to regulate and oversee this new form of money.
Most cryptocurrencies have no physical existence, but exist instead as virtual transactions on a public ledger called a blockchain. When someone transfers a unit of the currency from Alice to Bob, the transaction sits with a group of other recent transactions on the ledger. This information is then turned into a cryptographic code that miners can use to solve. As they do so, they earn a small amount of the cryptocurrency. Miners compete to add these transactions to the blockchain, and as they do so, the value of a single cryptocurrency can increase dramatically.
Many goods and services can be purchased with cryptocurrencies, from consumer staples to car insurance to luxury watches. But the most common use of cryptocurrencies is to invest and speculate. Investors buy coins hoping they will increase in value, and then sell them for a profit. Cryptocurrencies are often highly volatile, meaning their prices can fluctuate widely and quickly.
This is because cryptocurrencies are not tied to any physical commodity, like gold or silver. They are also not backed by any government and don’t track the performance of enterprises the way stocks do. For this reason, many investors see them as speculative assets that are less stable than traditional investments, and may have large price fluctuations.
Some cryptocurrencies have fixed numbers of units, such as Bitcoin, which can only ever have 21 million coins in circulation. Proponents of this system argue that it prevents the currency from being devalued by centralized banks, and gives people confidence that the value of their holdings is stable.
The popularity of cryptocurrencies has also raised questions about how people store their investments and money. Some companies, such as Coinbase and Binance, offer cryptocurrency exchanges where users can purchase, sell, or trade cryptocurrencies for U.S. dollars or other national currencies. These companies are required to adhere to strict know-your-customer and anti-money laundering rules.
People can also store their cryptocurrencies in digital wallets, which are stored on their computers or smartphones. When storing on their devices, users must keep their private keys secure, and must also be mindful of malware that can compromise wallets. It is recommended that users backup their wallets regularly, in case of a loss or theft of their cryptocurrency. This can be done by transferring them to another crypto wallet or a hard drive, or by using a third-party service.