Cryptocurrency is a form of digital cash that doesn’t rely on central banks or trusted third parties to verify transactions and create new currency units. Instead, a network of computers confirms these activities on a public ledger known as a blockchain.
Incentives are built into the cryptocurrency system to encourage participation and maintain a robust record of who owns what. For example, Bitcoin rewards users who contribute to the ledger by collecting and submitting blocks of recent transactions. This process is called mining.
Despite their varying claims to fame, most cryptocurrencies share similar core building blocks: borderless: You can send and receive crypto anywhere in the world without fees; decentralized: There is no central authority that controls or oversees the network; immutable: Once recorded on the blockchain, the transaction cannot be changed or erased; and secure: Transactions are encrypted with your password (or “seed words”) and stored in a wallet that requires both the seed words and a password to unlock.
There are more than 1,600 cryptocurrencies in existence today, with a new one appearing almost daily. But that doesn’t mean all of them are legitimate or safe to invest in. Before investing, make sure the company or individual is trustworthy and provides a thorough prospectus that describes the coin in detail.
It’s also worth looking at how well a cryptocurrency has performed in the past. For instance, look at its price history over time and how quickly the tokens have been circulating on the market. It can also be helpful to check out the cryptocurrency’s community and leadership. A well-known leader is a positive sign, as is evidence of support from other major investors.
In addition, it’s important to understand that cryptocurrencies are highly volatile and may lose value over time. This can be frustrating for investors who buy too much, then see their investments decline in value, or even crash. In general, it’s best to treat cryptocurrencies like any other investment and weigh the potential gains against your risk tolerance.
Another important consideration is that most cryptocurrencies don’t come with the same legal protections that you get when you pay with a credit card or other traditional payment method. This means that if you lose money invested in a cryptocurrency, it’s unlikely that you will be able to recover the funds.
Finally, don’t trust anyone who calls you or texts you out of the blue demanding that you pay them with cryptocurrency or transfer funds to an online wallet. A legitimate business or government will never ask for money in this way. And never click on a link from an unexpected text, email, or social media message that requests you to pay with cryptocurrency.
