Cryptocurrencies are a new form of money that uses advanced computer technology to enable peer-to-peer payments and transactions without the need for central authority like a bank or government. Cryptocurrencies have many potential use cases, ranging from digital assets that can be traded for investment purposes to ways to pay for goods and services.
The most well-known cryptocurrency is Bitcoin, which was launched in 2009.
Blockchain technology (developed through decades of computer science and mathematical innovation) enables crypto transactions to occur safely and securely. Each cryptocurrency has its own ledger, called a blockchain, that records and verifies every transaction that takes place on the network. These ledgers are not controlled by any company or government, and they’re constantly re-verified by the crypto community.
This means that if you buy something with crypto, the purchase is recorded in the blockchain and your ownership of the coin is increased or decreased accordingly. This is how cryptocurrencies gain value, which is the primary reason people hold them.
Another important aspect of crypto is its transferability, which enables people to send funds over long distances quickly and cost-effectively. In fact, crypto has opened up unique opportunities for people who live around the world, including in countries with restrictive financial systems.
Crypto can make it easier to send remittances to relatives in Africa, for example. A blockchain startup, SureRemit, lets people from the US and elsewhere make non-cash remittances for things like mobile data top-ups and utility bill payments to relatives in select African nations.
Other uses for crypto include trading them on exchanges and using them to shop at retailers that accept them. For instance, some luxury retailers such as Bitdials and Premier Shield Insurance in the US offer Rolex and Patek Philippe watches for Bitcoin. There are also online stores for cars, furniture and other household items that will take crypto as payment.
In addition, some cryptocurrency holders enjoy the perks that come with holding their coins, which can include tax advantages. For example, current US law states that any time you sell a cryptocurrency for a profit, the proceeds are considered income and must be reported to the IRS. Likewise, if you exchange your crypto for a good or service and then later sell it at a higher price, that is a capital gain and must be reported to the IRS as well.
Keep in mind that cryptocurrencies are very risky investments and should be a small part of your overall portfolio. If you’re considering investing in them, be sure to research them thoroughly and seek professional advice before making any decisions. To mitigate the risks of volatility, you can diversify your holdings by buying a variety of different cryptocurrencies. You can also reduce the risk of losing your entire portfolio by keeping your crypto in a secure wallet that’s only accessible to you, such as a paper backup of your seed words that you write down on a piece of paper and store somewhere safe where it can’t be wet, stolen or burned.
