Cryptocurrency is digital money that doesn’t rely on central banks or financial institutions to verify transactions and records. Instead, it relies on a database technology called blockchain that’s transparent and very difficult to alter. This makes it a great tool for tracking and verifying ownership of assets or currencies, but it’s also sparked interest as a way to make payments online.
While some investors see long-term potential in the underlying technology, crypto’s price swings have made it a volatile investment for many. The value of individual coins can rise and fall rapidly, and the platforms that sell them can be hacked or fail. In addition, they aren’t insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corp. as are most traditional investments, so consider using them only with money you’re willing to lose.
There are several kinds of crypto, but most are designed to be decentralized, meaning that they’re not backed or controlled by any government or central bank. Bitcoin is one example, and its popularity has driven a huge increase in mining, which uses computers to solve complex puzzles in order to verify transactions on the Bitcoin network and earn rewards for their efforts. This has also required massive amounts of energy, and critics have questioned whether it’s a good idea to have all these computers waste so much electricity (often used to cool the machines).
Blockchain is a different way of storing data, essentially creating an encrypted chain of records that’s very difficult to alter without permission. To create a record in the blockchain, someone types information into a program that generates a unique string of numbers and letters. This is then added to the end of the previous record, creating a chain of encoded documents that can be verified by computer programs. Each new document has a hash that’s based on the information typed into the program, and computers in a network compare each hash to the others they have stored to confirm they are identical.
The blockchain can speed up the processing of financial transactions, too. It can take up to three days for stock traders to clear and settle a trade, but blockchain may reduce that time significantly and improve security at the same time.
Crypto prices are influenced by a variety of factors, including how much people want to own or use a particular coin, its supply and expectations for future utility. Some cryptocurrencies are backed by real-world assets, while others try to peg their value to a currency or other benchmark like the US dollar. Prices can also be pushed up or down by new legislation and the way governments plan to regulate or use crypto.
Crypto is a relatively risky investment, so you should only buy with money you’re willing to lose. You should also diversify your holdings, investing in a few different products to help reduce the impact if any one falls significantly in value. Some experts recommend a ratio of 10% or less for crypto in your overall portfolio.
