Cryptocurrencies have earned a reputation as a new, alternative method of money. They are backed by blockchain technology that allows for the transfer of value in a peer-to-peer fashion, without centralized intermediaries like banks and monetary institutions. And they do so in a way that can be verified publicly by anyone with access to the internet.
Unlike the US dollar, which is backed by a central government and regulated by the Federal Reserve, most cryptocurrencies are decentralized. They are not backed by any national governments or central banks, but instead operate according to computer software that is open-source and free to use. This design makes them an attractive investment option for some people, especially those who believe that the future of money will increasingly move away from centralized entities.
The most well-known cryptocurrency is Bitcoin, but there are thousands of others that vary in price, market cap and features. Many, like Litecoin and Ethereum, have similar characteristics to Bitcoin, while others explore different ways to process transactions or offer added functionality. Some, such as Tezos and ZCash, are built on the blockchain but aim to offer even more advanced security measures.
As with any investment, whether you choose to invest in crypto depends on a number of factors, including your tolerance for risk (both financial and psychological) and your investing time horizon. In addition, the value of crypto can be very volatile and is not protected by the same regulatory protections as registered securities. So, you should only invest what you are willing to lose.
Crypto can be a great way to diversify your portfolio and boost returns by reducing correlations with other assets classes. But, just like with any other asset class, you should only invest in crypto with a long-term outlook and only a portion of your overall investing portfolio.
Many retailers and online marketplaces accept crypto, allowing consumers to purchase products or services using virtual money. These include everything from consumer staples to luxury watches to event tickets. And the list is growing daily as more people and businesses become comfortable with this new form of digital cash.
Buying and spending crypto is simple, but there are some important things to know before making this part of your portfolio. For one, cryptocurrency holdings are not insured by the FDIC or the Securities Investor Protection Corporation (SIPC), and the future regulatory environment remains uncertain. Also, some crypto exchanges and digital wallets can be hacked, and they may stop operating altogether.
Finally, it’s worth keeping in mind that current tax law considers cryptocurrency profits taxable when they are sold for a profit or exchanged for goods and services. You should consult a tax professional to discuss your individual situation before investing in crypto.
