Investing in Cryptocurrencies

Cryptocurrencies have exploded in popularity since they were created as digital novelties in 2009. Collectively, they’re worth more than $1 trillion. Proponents claim they empower people to reject central banks and Wall Street. Critics point to their links to criminal activity and multibillion-dollar fraud schemes, extreme price volatility, environmental harms, and a lack of regulatory oversight.

The main attraction of cryptocurrencies is their ability to move relatively quickly and anonymously, even across borders, without needing a bank that might block the transaction or charge a fee. They also can be used to purchase goods and services at retail outlets that accept them, including some restaurants, hotels, and online retailers. Proponents also tout the decentralized nature of crypto, which means that no central authority controls it or regulates it. Instead, users run network computers—called nodes—that support the currency’s system by relaying transactions, validating them with various timestamping schemes, and hosting a copy of its ledger, called a blockchain.

In return for their work, miners receive crypto coins—called tokens—that can be sold or exchanged for other assets. The more valuable the coin, the greater the reward. Mining requires significant computing resources and consumes vast amounts of electricity. To mitigate the energy costs, some miners join mining pools to pool their computing power and share the rewards.

Investors can buy and sell cryptocurrencies on exchanges, trading apps, brokers, and some ATMs. When you sell, keep in mind any fees and taxes you might owe. For example, if you bought Bitcoin for $10,000 and later sold it for $13,000, you’d owe $3,000.

A key element of investing is understanding the asset you’re buying or selling, including how it works and its risks. When investing in cryptocurrencies, you’re essentially betting that the asset will rise in value over time. But it’s important to understand that prices can drop as quickly as they rise, sometimes on nothing more than a rumor or news story.

When you decide whether to invest in a cryptocurrency, consider your financial situation and the time horizon for meeting your goals. For most people, this means limiting their exposure to high-risk assets like crypto to no more than 10% of their portfolio.

As with any investment, research the companies in which you’re interested. With stocks, this typically involves reading annual reports and other SEC filings. But with cryptocurrencies, researching them can be more challenging given their relative newness and looser regulation. Consider seeking input from a financial advisor who’s familiar with the space.