Cryptocurrencies, often called coins or tokens, are virtual currencies that use blockchain technology to record transactions. They are not backed by any physical asset, but can be valued based on how useful people expect them to be in the future or how much demand exists for them now. Other factors that influence coin value include how companies plan to use them, world events and how governments decide to legislate or regulate them.
A cryptocurrency’s value can also rise or fall based on rumors that aren’t confirmed, which is similar to how stock prices sometimes move on a whim. This is why it’s important for investors to understand a currency’s fundamentals and how it’s expected to perform in the future before they invest.
Some cryptocurrencies are designed to be used as a medium of exchange for goods and services, while others act as a store of value or can be used to participate in specific software programs. The most famous of these is bitcoin, which was created in 2009 by Satoshi Nakamoto (a pseudonymous person or group).
Bitcoin and other cryptocurrencies are becoming increasingly accepted for purchases, though the range of products and services that accept them is still limited. For example, a few luxury retailers like Bitdial offer Rolex watches and other high-end merchandise in exchange for bitcoin. Some car dealers and home insurance providers also accept the virtual money, as do some ticketing agencies for events like music festivals.
To use a cryptocurrency, you must create an account with an exchange that supports it. You’ll then link your digital wallet to the exchange so that you can buy and sell coins. Once you have a stable amount of crypto, you can spend it at retailers that accept it or convert it to cash at a bank. The most popular exchanges include Coinbase and Bittrex.
Cryptocurrency investments can be risky, and the market for them is volatile. For this reason, it’s a good idea to limit your exposure by investing only a small percentage of your overall investable assets in them.
When researching a cryptocurrency, it’s important to look at how widely it’s being used. Many reputable projects make public metrics available that show how many transactions are being conducted on their platforms and other data. It’s also helpful to know how long the project has been in existence. Longer-term stability is often a sign of greater legitimacy.
If you’re considering making a cryptocurrency investment, be sure to have all your other financial house in order, including an emergency fund and a debt load that’s manageable for your budget. Additionally, remember that your crypto holdings are not insured, like money in a bank account, and can be lost to hackers or other factors beyond your control. It’s also important to keep in mind that any gains you realize from trading in the crypto market will be taxed as capital gains, rather than as ordinary income. This can add a significant layer of complexity to your tax return come April.
