• Cryptocurrencies are digital assets that are created and run on a blockchain.
• Bitcoin and ether are two popular cryptocurrencies, but there are many others.
• Investing in cryptocurrency can be extremely risky, and the underlying technology is very new.
• Visit Personal Finance Insider for more stories.

Cryptocurrencies are digital assets that you can buy, trade, and use to purchase goods. People and organizations create cryptocurrencies for different reasons, but they generally share a few common characteristics.

Understanding how cryptocurrencies work, who creates and controls them, and why you might want to buy cryptocurrencies is important for investors. While there may be opportunities to build wealth, there's a lot of risk involved with crypto investing, and you need to be mindful of scams. 

How do cryptocurrencies work? 

While there are thousands of cryptocurrencies, many with unique traits, they all tend to work in similar ways. It's hard to avoid some jargon when discussing cryptos, but the concepts can be relatively easy to understand. 

They use blockchain technology 

A cryptocurrency's blockchain is a digital record of all the transactions involving that crypto. Copies of the blockchain are stored and maintained by computers around the world. They're often compared to general ledgers, part of traditional double-entry bookkeeping systems where each transaction leads to a debit and credit in different sections of the books. 

"It works like a general ledger — it's that simple," says David Donovan, executive vice president, financial services, at the digital consulting firm Publicis Sapient. Perhaps you start with two coins and send one to someone. "On the blockchain, it would say I'm sending you one coin, and I now have one coin, and you have one coin." 

Each grouping of transactions is turned into a block and chained to the existing ledger. Once a block is added it can't be reversed or altered — which is why people describe blockchains as "immutable." 

Some cryptos have their own blockchain. For example, there are Bitcoin and Ethereum blockchains. But there are also cryptos that are built on top of an existing blockchain rather than starting from zero. 

The blockchains are decentralized

Cryptocurrencies are distinguished from fiat currencies, such as the US dollar, because they're not issued or backed by a government. In fact, no single person, company, or government controls a crypto's blockchain. Instead, they're run by a decentralized network of computers around the world. 

The lack of a central authority can also make cryptocurrencies more secure. "It's hack-proof because there's no one central point of failure," explains Donovan. But who decides which transactions get added to each block?

Coming to consensus

Cryptocurrencies commonly use one of two mechanisms to create a system of trust and determine which transactions are valid and added to their blockchain:

• Proof of work. This relies on people around the world, known as miners, competing to be first to solve complex cryptographic puzzles and add the next block to the blockchain. The winners are paid after the other members of the network confirm that the required amount of computing power was used to find the solution. "The way you make sure all the participants are validating the transactions is the hard work, effort, and money they're spending solving the problem," says Donna Parisi, global head of financial services and FinTech at Shearman & Sterling. However, proof-of-work systems require a lot of energy to power. 
• Proof of stake. This is a newer and less energy-intensive mechanism. "Proof of stake is they validate transactions on the blockchain by people putting value on the line," explains Parisi. "They stake some of the currency they own to make sure they only validate true transactions."

Transactions are public but pseudonymous 

Cryptocurrencies also have another defining feature. The blockchains are public ledgers, which means anyone can see and review the transactions that occurred. However, they can also provide a degree of anonymity. 

"You have a private key, which is how you initiate transactions, and a public key, which is how someone identifies you in the market," says Donovan.

A blockchain's transactions are tied to a crypto wallet's public key, but nobody necessarily knows who controls that wallet. This is why cryptos are often described as pseudonymous — the public key is a person's pseudonym. 

How many cryptocurrencies are there? 

According to CoinMarketCap.com there were more than 8,000 different cryptocurrencies with a global market value of about $2.24 trillion as of Dec. 12, 2021. 

Bitcoin, the first cryptocurrency, was launched in 2009 as an alternative type of decentralized and digital money. Since then, people have also created cryptocurrencies that serve other functions or are designed for specific types of transactions. 

"Cryptocurrencies can have many different uses," says Parisi. "Some are used in gaming environments to earn rewards in a game, while others facilitate payments. Some are designed for cross-border remittances … some are designed for micro payments."

For example, stablecoins are a type of cryptocurrency that try to maintain a steady and fixed exchange rate with another asset, such as the US dollar. Governance tokens are another example of a specialized cryptocurrency. They give token holders voting power in a corresponding crypto project.

Are cryptocurrencies secure?

The blockchain technology behind cryptocurrencies can help ensure that the coins and systems remain secure. "What's never been refuted is the value of blockchain," says Donovan. "The way the ledger system is set up and every transaction is recorded. And the fact that it's immutable."

However, that doesn't mean you don't need to worry about security. The crypto world is rife with scams. Of course, that's also true of traditional financial systems and currencies. Someone asking you to pay with a gift card or wire transfer is a red flag that you're dealing with a scammer. But several factors could make crypto scams especially worrisome. 

For example, cryptocurrency transactions can't be reversed. There's also less regulation of cryptocurrencies and platforms than of traditional financial services in the US. Plus, some people may feel pressure to act quickly and send or invest their money because they're worried about missing out on an opportunity. 

"One way to avoid a scam is to invest in more well-established cryptocurrencies, like Bitcoin or Ethereum," says Parisi. "You still may be subject to scams or fraud in terms of how you hold it, send it, or receive it." But you can have some certainty that the cryptocurrency itself isn't a scam.

Are cryptocurrencies a good investment? 

Cryptocurrencies may present a good investment opportunity, and there are many ways to invest in the crypto world. 

You could buy a coin (or coins) and hold onto them, hoping they'll increase in value. Or you could use your coins in a decentralized finance (DeFi) platform to earn interest through staking or lending. You also might take a more traditional route, such as an exchange-traded fund (ETF) that is tied to cryptocurrencies. There could even be opportunities to invest in projects or supporting industries rather than in the cryptocurrencies themselves. 

"From an investment perspective, crypto is rapidly evolving," says Parisi. "You shouldn't put an amount of assets you're not willing to lose. It should be, relatively speaking, a small portion of your portfolio." 

Before making any investment, consider the potential pros and cons: 

The financial takeaway

While cryptocurrency investing is a hotly debated topic, it's worth understanding what's going on so you can make an informed decision. If you decide to get started, you could fully jump in or just dip your toe. 

"Learn about crypto by opening up wallets, accounts, trading currencies, and learning more about the use cases," says Parisi. "But do it in a reasonable way. We're still in the early days, and regulation of crypto is still evolving."

Donovan suggests starting by opening an account with a regulated and publicly traded company like Coinbase. But, he says, "it's really about being smart and using the system to take baby steps."

Despite its well-known volatility, cryptocurrency is on fire and many investors are looking to profit on its white-hot rise. Cryptos such as Bitcoin and Ethereum ebb for a while and then climb higher, and many other popular digital currencies are doing so, too. Experienced traders have been speculating on crypto for years, but what if you’re new to the market and looking to get a piece of the action?

Here’s how to start investing in cryptocurrency and what you need to watch out for.

5 steps for investing in cryptocurrency

First things first, if you’re looking to invest in crypto, you need to have all your finances in order. That means having an emergency fund in place, a manageable level of debt and ideally a diversified portfolio of investments. Your crypto investments can become one more part of your portfolio, one that helps raise your total returns, hopefully.

Pay attention to these five other things as you’re starting to invest in cryptocurrencies.

1. Understand what you’re investing in

As you would for any investment, understand exactly what you’re investing in. If you’re buying stocks, it’s important to read the prospectus and analyze the companies thoroughly. Plan to do the same with any cryptocurrencies, since there are literally thousands of them, they all function differently and new ones are being created every day. You need to understand the investment case for each trade.

In the case of many cryptocurrencies, they’re backed by nothing at all, neither hard assets nor cash flow. That’s the case for Bitcoin, for example, where investors rely exclusively on someone paying more for the asset than they paid for it. In other words, unlike stock, where a company can grow its profits and drive returns for you that way, many crypto assets must rely on the market becoming more optimistic and bullish for you to profit.

Some of the most popular coins include Ethereum, Dogecoin, Cardano and XRP. Solana has been another massively successful coin as well. So before investing, understand the potential upside and downside. If your financial investment is not backed by an asset or cash flow, it could end up being worth nothing.

2. Remember, the past is past

A mistake that many new investors make is looking at the past and extrapolating that to the future. Yes, Bitcoin used to be worth pennies, but now is worth much more. The key question, however, is “Will that growth continue into the future, even if it’s not at quite that meteoric rate?”

Investors look to the future, not to what an asset has done in the past. What will drive future returns? Traders buying a cryptocurrency today need tomorrow’s gains, not yesterday’s.

3. Watch that volatility

The prices of cryptocurrencies are about as volatile as an asset can get. They could drop quickly in seconds on nothing more than a rumor that ends up proving baseless. That can be great for sophisticated investors who can execute trades rapidly or who have a solid grasp on the market’s fundamentals, how the market is trending and where it could go. For new investors without these skills – or the high-powered algorithms that direct these trades – it’s a minefield.

Volatility is a game for high-powered Wall Street traders, each of whom is trying to outgun other deep-pocketed investors. A new investor can easily get crushed by the volatility.

That’s because volatility shakes out traders, especially beginners, who get scared. Meanwhile, other traders may step in and buy on the cheap. In short, volatility can help sophisticated traders “buy low and sell high” while inexperienced investors “buy high and sell low.”

4. Manage your risk

If you’re trading any asset on a short-term basis, you need to manage your risk, and that can be especially true with volatile assets such as cryptocurrency. So as a newer trader, you’ll need to understand how best to manage risk and develop a process that helps you mitigate losses. And that process can vary from individual to individual:

• Risk management for a long-term investor might simply be never selling, regardless of the price. The long-term mentality allows the investor to stick with the position.
• Risk management for a short-term trader, however, might be setting strict rules on when to sell, such as when an investment has fallen 10 percent. The trader then rotely follows the rule so that a relatively small decline doesn’t become a crushing loss later.

Newer traders should consider setting aside a certain amount of trading money and then using only a portion of it, at least at first. If a position moves against them, they’ll still have money in reserve to trade with later. The ultimate point is that you can’t trade if you don’t have any money. So keeping some money in reserve means you’ll always have a bankroll to fund your trading.

It’s important to manage risk, but that will come at an emotional cost. Selling a losing position hurts, but doing so can help you avoid worse losses later.

5. Don’t invest more than you can afford to lose

Finally, it’s important to avoid putting money that you need into speculative assets. If you can’t afford to lose it – all of it – you can’t afford to put it into risky assets such as cryptocurrency, or other market-based assets such as stocks or ETFs, for that matter.

Whether it’s a down payment for a house or an important upcoming purchase, money that you need in the next few years should be kept in safe accounts so that it’s there when you need it. And if you’re looking for an absolutely sure return, your best option is to pay off debt. You’re guaranteed to earn (or save) whatever interest rate you’re paying on the debt. You can’t lose there.

Finally, don’t overlook the security of any exchange or broker you’re using. You may own the assets legally, but someone still has to secure them, and their security needs to be tight. If they don’t think their cryptocurrency is properly secured, some traders choose to invest in a crypto wallet to hold their coins offline so they’re inaccessible to hackers or others.

Other ways to invest in cryptocurrency

While investing directly in cryptocurrency may be the most popular way to do so, traders have other ways to get into the crypto game, some more directly than others. These include:

• Crypto futures: Futures are another way to wager on the price swings in Bitcoin, and futures allow you to use the power of leverage to generate massive returns (or losses). Futures are a fast-moving market and exacerbate the already volatile moves in crypto.
• Crypto funds: A few crypto funds (such as the Grayscale Bitcoin Trust) also exist that allow you to wager on the price swings in Bitcoin, Ethereum as well as a few other altcoins. So they can be an easy way to buy crypto through a fund-like product.
• Crypto exchange or broker stocks: Buying stock in a company that’s poised to profit on the rise of cryptocurrency regardless of the winner could be an interesting option, too. And that’s the potential in an exchange such as Coinbase or a broker such as Robinhood, which derives a huge chunk of its revenues from crypto trading.
• Blockchain ETFs: A blockchain ETF allows you to invest in the companies that may profit from the emergence of blockchain technology. The top blockchain ETFs give you exposure to some of the key publicly traded companies in the space. But it’s important to note that these companies often do much more than crypto-related business, meaning your exposure to cryptocurrency is diluted, reducing your potential upside and downside.

Each of these methods varies in its riskiness and exposure to cryptocurrency, so you’ll want to understand exactly what you’re buying and whether it fits your needs.

Cryptocurrency investing FAQs

How much money do I need to start investing in cryptocurrency?

In theory it takes only a few dollars to invest in cryptocurrency. Most crypto exchanges, for example, have a minimum trade that might be $5 or $10. Other crypto trading apps might have a minimum that’s even lower.

However, it’s important to understand that some trading platforms will take a huge chunk of your investment as a fee if you’re trading small amounts of cryptocurrency. So it’s important to look for a broker or exchange that minimizes your fees. In fact, many so-called “free” brokers embed fees – called spread mark-ups – in the price you pay for your cryptocurrency.

How does a blockchain work?

Cryptocurrency is based on blockchain technology. Blockchain is a kind of database that records and timestamps every entry into it. The best way to think of a blockchain is like a running receipt of transactions. When a blockchain database powers cryptocurrency, it records and verifies transactions in the currency, verifying the currency’s movements and who owns it.

Many crypto blockchain databases are run with decentralized computer networks. That is, many redundant computers operate the database, checking and rechecking the transactions to ensure that they’re accurate. If there’s a discrepancy, the networked computers have to resolve it.

How do you mine cryptocurrency?

Some cryptocurrencies reward those who verify the transactions on the blockchain database in a process called mining. For example, these miners involved with Bitcoin solve very complex mathematical problems as part of the verification process. If they’re successful, miners receive a predetermined award of bitcoins.

To mine bitcoins, miners need powerful processing units that consume huge amounts of energy. Many miners operate huge rooms full of such mining rigs in order to extract these rewards. As of early 2022, running the Bitcoin system burned as much energy as a medium-sized country.

How can I invest in Bitcoin?

If you’re looking to invest in Bitcoin, you have a variety of ways to do so, and you can work with a number of companies, including:

• Crypto exchanges: Exchanges have some of the widest selection of cryptocurrencies, and they tend to be the most competitive on price. Top players include Coinbase, Kraken and Binance, but there are literally dozens of others.
• Traditional brokers: Many traditional brokers also allow you to trade Bitcoin in addition to stocks and other financial assets, though they have a relatively limited selection of other cryptocurrencies. Top players here include Interactive Brokers, TradeStation and tastyworks.
• Financial apps: Many financial apps now allow you to trade Bitcoin and a few other cryptos. Top players here include Robinhood and Webull as well as payment apps such as PayPal, Venmo and Cash App.

If you’re looking to buy Bitcoin, pay particular attention to the fees that you’re paying. Here are other key things to watch out for as you’re buying Bitcoin.

What are altcoins?

An altcoin is an alternative to Bitcoin. Many years ago, traders would use the term pejoratively. Since Bitcoin was the largest and most popular cryptocurrency, everything else was defined in relation to it. So, whatever was not Bitcoin was lumped into a derisive category called altcoins.

While Bitcoin is still the largest cryptocurrency by market capitalization, it’s no longer as dominant as it was in the very early days of cryptocurrency. Other altcoins such as Ethereum and Solana have grown in popularity, making the term altcoin somewhat outmoded. Now with a reported 15,000 or more cryptocurrencies in existence, it makes less sense than ever to define the industry as “Bitcoin and then everything else.”

Bottom line

Cryptocurrency is a highly speculative area of the market, and many smart investors have decided to put their money elsewhere. For beginners who want to get started trading crypto, however, the best advice is to start small and only use money that you can afford to lose.

Learn more:

Enabling payments: “Hands-off”

Some companies use crypto just to facilitate payments. One avenue to facilitate payments is to simply convert in and out of crypto to fiat currency to receive or make payments without actually touching it. In other words, the company is taking a “hands-off” approach that keeps crypto off the books.

Enabling crypto payments, such as bitcoin, without bringing it onto the company’s balance sheet may be the easiest and fastest entry point into the use of digital assets. It may require the fewest adjustments across the spectrum of corporate functions and may serve immediate goals, such as reaching a new clientele and growing the volume of each sales transaction. Enterprises adopting this limited use of crypto typically rely on third-party vendors.

The third-party vendor, acting as an agent for the company, accepts or makes payments in crypto through conversion into and out of fiat currency. This may be the simplest option to pursue. And, in all likelihood, it may cause relatively few disruptions to a company’s internal functions, since the “hands-off” approach keeps crypto off the corporate balance sheet.

The third-party vendor, which will charge a fee for this service, handles the bulk of the technical questions and manages a number of risk, compliance, and controls issues on behalf of the company. That does not mean, however, that the company is necessarily absolved from all responsibility for risk, compliance, and internal controls issues. Companies still need to pay careful attention to issues such as anti-money laundering and know your customer (AML and KYC) requirements. And, of course, they also need to abide by any restrictions set by the Office of Foreign Assets Control (OFAC), the agency that administers and enforces economic and trade sanctions set by the US government.

Cryptocurrency – meaning and definition

Cryptocurrency, sometimes called crypto-currency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies don't have a central issuing or regulating authority, instead using a decentralized system to record transactions and issue new units.

What is cryptocurrency?

Cryptocurrency is a digital payment system that doesn't rely on banks to verify transactions. It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.

Cryptocurrency received its name because it uses encryption to verify transactions. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers. The aim of encryption is to provide security and safety.

The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today. Much of the interest in cryptocurrencies is to trade for profit, with speculators at times driving prices skyward.

How does cryptocurrency work?

Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders.

Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.

If you own cryptocurrency, you don’t own anything tangible. What you own is a key that allows you to move a record or a unit of measure from one person to another without a trusted third party.

Although Bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging in financial terms, and more uses are expected in the future. Transactions including bonds, stocks, and other financial assets could eventually be traded using the technology.

Cryptocurrency examples

There are thousands of cryptocurrencies. Some of the best known include:

Bitcoin:

Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded. The currency was developed by Satoshi Nakamoto – widely believed to be a pseudonym for an individual or group of people whose precise identity remains unknown.

Ethereum:

Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.

Litecoin:

This currency is most similar to bitcoin but has moved more quickly to develop new innovations, including faster payments and processes to allow more transactions.

Ripple:

Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track different kinds of transactions, not just cryptocurrency. The company behind it has worked with various banks and financial institutions.

Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them from the original.

How to buy cryptocurrency

You may be wondering how to buy cryptocurrency safely. There are typically three steps involved. These are:

Step 1: Choosing a platform

The first step is deciding which platform to use. Generally, you can choose between a traditional broker or dedicated cryptocurrency exchange:

• Traditional brokers. These are online brokers who offer ways to buy and sell cryptocurrency, as well as other financial assets like stocks, bonds, and ETFs. These platforms tend to offer lower trading costs but fewer crypto features.
• Cryptocurrency exchanges. There are many cryptocurrency exchanges to choose from, each offering different cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge asset-based fees.

When comparing different platforms, consider which cryptocurrencies are on offer, what fees they charge, their security features, storage and withdrawal options, and any educational resources.

Step 2: Funding your account

Once you have chosen your platform, the next step is to fund your account so you can begin trading. Most crypto exchanges allow users to purchase crypto using fiat (i.e., government-issued) currencies such as the US Dollar, the British Pound, or the Euro using their debit or credit cards – although this varies by platform.

Crypto purchases with credit cards are considered risky, and some exchanges don't support them. Some credit card companies don't allow crypto transactions either. This is because cryptocurrencies are highly volatile, and it is not advisable to risk going into debt — or potentially paying high credit card transaction fees — for certain assets.

Some platforms will also accept ACH transfers and wire transfers. The accepted payment methods and time taken for deposits or withdrawals differ per platform. Equally, the time taken for deposits to clear varies by payment method.

An important factor to consider is fees. These include potential deposit and withdrawal transaction fees plus trading fees. Fees will vary by payment method and platform, which is something to research at the outset.

Step 3: Placing an order

You can place an order via your broker's or exchange's web or mobile platform. If you are planning to buy cryptocurrencies, you can do so by selecting "buy," choosing the order type, entering the amount of cryptocurrencies you want to purchase, and confirming the order. The same process applies to "sell" orders.

There are also other ways to invest in crypto. These include payment services like PayPal, Cash App, and Venmo, which allow users to buy, sell, or hold cryptocurrencies. In addition, there are the following investment vehicles:

• Bitcoin trusts: You can buy shares of Bitcoin trusts with a regular brokerage account. These vehicles give retail investors exposure to crypto through the stock market. 
• Bitcoin mutual funds: There are Bitcoin ETFs and Bitcoin mutual funds to choose from. 
• Blockchain stocks or ETFs: You can also indirectly invest in crypto through blockchain companies that specialize in the technology behind crypto and crypto transactions. Alternatively, you can buy stocks or ETFs of companies that use blockchain technology.

The best option for you will depend on your investment goals and risk appetite.

How to store cryptocurrency

Once you have purchased cryptocurrency, you need to store it safely to protect it from hacks or theft. Usually, cryptocurrency is stored in crypto wallets, which are physical devices or online software used to store the private keys to your cryptocurrencies securely. Some exchanges provide wallet services, making it easy for you to store directly through the platform. However, not all exchanges or brokers automatically provide wallet services for you.

There are different wallet providers to choose from. The terms “hot wallet” and “cold wallet” are used:

• Hot wallet storage: "hot wallets" refer to crypto storage that uses online software to protect the private keys to your assets.
• Cold wallet storage: Unlike hot wallets, cold wallets (also known as hardware wallets) rely on offline electronic devices to securely store your private keys.

Typically, cold wallets tend to charge fees, while hot wallets don't.

What can you buy with cryptocurrency?

When it was first launched, Bitcoin was intended to be a medium for daily transactions, making it possible to buy everything from a cup of coffee to a computer or even big-ticket items like real estate. That hasn’t quite materialized and, while the number of institutions accepting cryptocurrencies is growing, large transactions involving it are rare. Even so, it is possible to buy a wide variety of products from e-commerce websites using crypto. Here are some examples:

Technology and e-commerce sites:

Several companies that sell tech products accept crypto on their websites, such as newegg.com, AT&T, and Microsoft. Overstock, an e-commerce platform, was among the first sites to accept Bitcoin. Shopify, Rakuten, and Home Depot also accept it.

Luxury goods:

Some luxury retailers accept crypto as a form of payment. For example, online luxury retailer Bitdials offers Rolex, Patek Philippe, and other high-end watches in return for Bitcoin.

Cars:

Some car dealers – from mass-market brands to high-end luxury dealers – already accept cryptocurrency as payment.

Insurance:

In April 2021, Swiss insurer AXA announced that it had begun accepting Bitcoin as a mode of payment for all its lines of insurance except life insurance (due to regulatory issues). Premier Shield Insurance, which sells home and auto insurance policies in the US, also accepts Bitcoin for premium payments.

If you want to spend cryptocurrency at a retailer that doesn’t accept it directly, you can use a cryptocurrency debit card, such as BitPay in the US.

Cryptocurrency fraud and cryptocurrency scams

Unfortunately, cryptocurrency crime is on the rise. Cryptocurrency scams include:

Fake websites: Bogus sites which feature fake testimonials and crypto jargon promising massive, guaranteed returns, provided you keep investing.

Virtual Ponzi schemes: Cryptocurrency criminals promote non-existent opportunities to invest in digital currencies and create the illusion of huge returns by paying off old investors with new investors’ money. One scam operation, BitClub Network, raised more than $700 million before its perpetrators were indicted in December 2019.

"Celebrity" endorsements: Scammers pose online as billionaires or well-known names who promise to multiply your investment in a virtual currency but instead steal what you send. They may also use messaging apps or chat rooms to start rumours that a famous businessperson is backing a specific cryptocurrency. Once they have encouraged investors to buy and driven up the price, the scammers sell their stake, and the currency reduces in value.

Romance scams: The FBI warns of a trend in online dating scams, where tricksters persuade people they meet on dating apps or social media to invest or trade in virtual currencies. The FBI’s Internet Crime Complaint Centre fielded more than 1,800 reports of crypto-focused romance scams in the first seven months of 2021, with losses reaching $133 million.

Otherwise, fraudsters may pose as legitimate virtual currency traders or set up bogus exchanges to trick people into giving them money. Another crypto scam involves fraudulent sales pitches for individual retirement accounts in cryptocurrencies. Then there is straightforward cryptocurrency hacking, where criminals break into the digital wallets where people store their virtual currency to steal it.

Is cryptocurrency safe?

Cryptocurrencies are usually built using blockchain technology. Blockchain describes the way transactions are recorded into "blocks" and time stamped. It's a fairly complex, technical process, but the result is a digital ledger of cryptocurrency transactions that's hard for hackers to tamper with.

In addition, transactions require a two-factor authentication process. For instance, you might be asked to enter a username and password to start a transaction. Then, you might have to enter an authentication code sent via text to your personal cell phone.

While securities are in place, that does not mean cryptocurrencies are un-hackable. Several high-dollar hacks have cost cryptocurrency start-ups heavily. Hackers hit Coincheck to the tune of $534 million and BitGrail for $195 million, making them two of the biggest cryptocurrency hacks of 2018.

Unlike government-backed money, the value of virtual currencies is driven entirely by supply and demand. This can create wild swings that produce significant gains for investors or big losses. And cryptocurrency investments are subject to far less regulatory protection than traditional financial products like stocks, bonds, and mutual funds.

Four tips to invest in cryptocurrency safely

According to Consumer Reports, all investments carry risk, but some experts consider cryptocurrency to be one of the riskier investment choices out there. If you are planning to invest in cryptocurrencies, these tips can help you make educated choices.

Research exchanges:

Before you invest, learn about cryptocurrency exchanges. It’s estimated that there are over 500 exchanges to choose from. Do your research, read reviews, and talk with more experienced investors before moving forward.

Know how to store your digital currency:

If you buy cryptocurrency, you have to store it. You can keep it on an exchange or in a digital wallet. While there are different kinds of wallets, each has its benefits, technical requirements, and security. As with exchanges, you should investigate your storage choices before investing.

Diversify your investments:

Diversification is key to any good investment strategy, and this holds true when you are investing in cryptocurrency. Don't put all your money in Bitcoin, for example, just because that's the name you know. There are thousands of options, and it's better to spread your investment across several currencies.

Prepare for volatility:

The cryptocurrency market is highly volatile, so be prepared for ups and downs. You will see dramatic swings in prices. If your investment portfolio or mental wellbeing can't handle that, cryptocurrency might not be a wise choice for you.

Cryptocurrency is all the rage right now, but remember, it is still in its relative infancy and is considered highly speculative. Investing in something new comes with challenges, so be prepared. If you plan to participate, do your research, and invest conservatively to start.

One of the best ways you can stay safe online is by using a comprehensive antivirus. Kaspersky Internet Security defends you from malware infections, spyware, data theft and protects your online payments using bank-grade encryption.

Related articles:

What is cryptocurrency and how does it work?

Cryptocurrency is a digital currency using cryptography to secure transactions. Learn about buying cryptocurrency and cryptocurrency scams to look out for.

What Is Cryptocurrency?

Cryptocurrency is digital money. This type of currency uses blockchain technology, which is considered secure because it is capable of establishing distributed consensus even among untrustworthy parties. Cryptocurrency blockchains resemble old-fashioned bookkeepers' ledgers, except that the ledger is electronic, and everyone with access to the ledger can also be the bookkeeper.

Investors worldwide have invested and are starting to invest in cryptocurrency. Though Bitcoin is likely the best-known digital money, thousands of cryptocurrencies already exist. Cryptocurrency can be considered one of the newest and most exciting asset classes available to investors.

Understanding Cryptocurrency Investing

When you think of investing in cryptocurrency, you might think about buying and holding one or more crypto coins. Buying cryptocurrency directly is probably the most common way to add crypto exposure to your portfolio, but when it comes to investing in cryptocurrency, you have a few different options:

• Buy cryptocurrency directly: You can choose to directly purchase and store one or more cryptocurrencies. Your options range from the most established digital currencies like Ethereum and Bitcoin to virtually unknown coins that are newly released in an initial coin offering (ICO).
• Invest in cryptocurrency companies: You can invest in companies with a partial or total focus on cryptocurrency. Your options include cryptocurrency mining companies, mining hardware makers, companies like Robinhood Markets, Inc. (HOOD) and PayPal Holdings, Inc. (PYPL) that support cryptocurrency, and many others with varying levels of crypto exposure. You can also invest in companies like MicroStrategy Incorporated (MSTR), which hold large amounts of cryptocurrency on their balance sheets.
• Invest in cryptocurrency-focused funds: If you don't want to choose among individual cryptocurrency companies, then you can decide to invest in a cryptocurrency-focused fund instead. You have a choice of exchange-traded funds (ETFs), such as index funds and futures funds, in addition to a range of cryptocurrency investment trusts. Some crypto-focused funds invest in cryptocurrency directly, while others invest in crypto-focused companies or derivative securities such as futures contracts.
• Invest in a cryptocurrency IRA: If you want to invest in cryptocurrency and also garner the tax advantages afforded by an individual retirement account (IRA), then you can consider investing in a cryptocurrency IRA. Using the services of a crypto IRA provider can also facilitate more secure storage for your cryptocurrency holdings.
• Become a crypto miner or validator: Perhaps the most direct way to invest in cryptocurrency is to mine it or act as a validator in a crypto network. Cryptocurrency miners and validators earn rewards in crypto, which they can either hold as investments or exchange for another currency.
  

How Cryptocurrency Investing Works

If you want to invest in cryptocurrency directly, then you can use a cryptocurrency exchange. Here's how to buy cryptocurrency through an exchange:

1. Choose which cryptocurrency exchange you want to use. Your best bet is a reputable, well-known exchange with a large selection of currencies.
2. Establish an account with the cryptocurrency exchange. You will need to provide your personal information and verify your identity to complete the registration process.
3. Fund your account with fiat money. Before you can buy any crypto, you need to fund your exchange account with another currency such as U.S. dollars.
4. Decide which cryptocurrency you want to buy. You can choose to invest in one or many cryptocurrencies. Research your options to help you decide.
5. Place a buy order for your chosen cryptocurrency. Follow the steps required by the exchange to submit and complete a buy order for one or more cryptocurrencies.
6. Store your cryptocurrency in a digital wallet. After your purchase is complete, the information you need to access your cryptocurrency is held in a digital wallet. That crypto wallet can be hosted either by the cryptocurrency exchange or an independent wallet provider.

A best practice among investors is to periodically review your entire portfolio to perhaps rebalance your holdings. That might mean increasing or scaling back your crypto exposure, depending on your investment goals and other financial needs.

What to Know Before Investing in Cryptocurrency

Investing in cryptocurrency is considered risky. The prices of cryptocurrencies, even the most established cryptocurrencies, are much more volatile than the prices of other assets like stocks. The prices of cryptocurrencies in the future could also be affected by regulatory changes, with the possibility that cryptocurrency becomes illegal and therefore worthless.

Many investors are nonetheless attracted to the potential upside of investing in crypto. If you decide to invest in cryptocurrency, it's important to carefully research any digital coin before buying it. Pay attention to transaction fees when making crypto purchases because these fees can vary widely among currencies.

The cryptocurrency space is evolving rapidly, so it's also important to pay attention to new developments that may affect your crypto holdings. Cryptocurrency investors need to understand the tax consequences of using crypto, especially if they purchase something or sell their crypto investments.

Given the riskiness of cryptocurrency as an asset class, it's especially important not to invest more money in crypto than you can afford to lose.

Frequently Asked Questions

Encrypted medium of digital exchange

Not to be confused with Virtual currency.

A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it.

Individual coin ownership records are stored in a digital ledger, which is a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins, and to verify the transfer of coin ownership.^[1][2][3] Despite their name, cryptocurrencies are not necessarily considered to be currencies in the traditional sense and while varying categorical treatments have been applied to them, including classification as commodities, securities, as well as currencies, cryptocurrencies are generally viewed as a distinct asset class in practice.^[4][5][6] Some crypto schemes use validators to maintain the cryptocurrency. In a proof-of-stake model, owners put up their tokens as collateral. In return, they get authority over the token in proportion to the amount they stake. Generally, these token stakers get additional ownership in the token over time via network fees, newly minted tokens or other such reward mechanisms.^[7]

Cryptocurrency does not exist in physical form (like paper money) and is typically not issued by a central authority. Cryptocurrencies typically use decentralized control as opposed to a central bank digital currency (CBDC).^[8] When a cryptocurrency is minted or created prior to issuance or issued by a single issuer, it is generally considered centralized. When implemented with decentralized control, each cryptocurrency works through distributed ledger technology, typically a blockchain, that serves as a public financial transaction database.^[9]

A cryptocurrency is a tradable digital asset or digital form of money, built on blockchain technology that only exists online. Cryptocurrencies use encryption to authenticate and protect transactions, hence their name. There are currently over a thousand different cryptocurrencies in the world.^[10]

Bitcoin, first released as open-source software in 2009, is the first decentralized cryptocurrency. Since the release of bitcoin, many other cryptocurrencies have been created.

History

See also: History of bitcoin

In 1983, the American cryptographer David Chaum conceived an anonymous cryptographic electronic money called ecash.^[11][12] Later, in 1995, he implemented it through Digicash,^[13] an early form of cryptographic electronic payments which required user software in order to withdraw notes from a bank and designate specific encrypted keys before it can be sent to a recipient. This allowed the digital currency to be untraceable by the issuing bank, the government, or any third party.

In 1996, the National Security Agency published a paper entitled How to Make a Mint: the Cryptography of Anonymous Electronic Cash, describing a Cryptocurrency system, first publishing it in an MIT mailing list^[14] and later in 1997, in The American Law Review (Vol. 46, Issue 4).^[15]

In 1998, Wei Dai published a description of "b-money", characterized as an anonymous, distributed electronic cash system.^[16] Shortly thereafter, Nick Szabo described bit gold.^[17] Like bitcoin and other cryptocurrencies that would follow it, bit gold (not to be confused with the later gold-based exchange, BitGold) was described as an electronic currency system which required users to complete a proof of work function with solutions being cryptographically put together and published.

In 2009, the first decentralized cryptocurrency, bitcoin, was created by presumably pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, in its proof-of-work scheme.^[18][19] In April 2011, Namecoin was created as an attempt at forming a decentralized DNS, which would make internet censorship very difficult. Soon after, in October 2011, Litecoin was released. It used scrypt as its hash function instead of SHA-256. Another notable cryptocurrency, Peercoin, used a proof-of-work/proof-of-stake hybrid.^[20]

On 6 August 2014, the UK announced its Treasury had commissioned a study of cryptocurrencies, and what role, if any, they could play in the UK economy. The study was also to report on whether regulation should be considered.^[21] Its final report was published in 2018,^[22] and it issued a consultation on cryptoassets and stablecoins in January 2021.^[23]

In June 2021, El Salvador became the first country to accept Bitcoin as legal tender, after the Legislative Assembly had voted 62–22 to pass a bill submitted by President Nayib Bukele classifying the cryptocurrency as such.^[24]

In August 2021, Cuba followed with Resolution 215 to recognize and regulate cryptocurrencies such as bitcoin.^[25]

In September 2021, the government of China, the single largest market for cryptocurrency, declared all cryptocurrency transactions illegal, completing a crackdown on cryptocurrency that had previously banned the operation of intermediaries and miners within China.^[26]

Formal definition

According to Jan Lansky, a cryptocurrency is a system that meets six conditions:^[27]

1. The system does not require a central authority; its state is maintained through distributed consensus.
2. The system keeps an overview of cryptocurrency units and their ownership.
3. The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.
4. Ownership of cryptocurrency units can be proved exclusively cryptographically.
5. The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.
6. If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.

In March 2018, the word cryptocurrency was added to the Merriam-Webster Dictionary.^[28]

Altcoins

Further information: List of cryptocurrencies

Tokens, cryptocurrencies, and other types of digital assets that are not bitcoin are collectively known as alternative cryptocurrencies,^[29][30][31] typically shortened to "altcoins" or "alt coins",^[32][33] or disparagingly known as "shitcoins".^[34] Paul Vigna of The Wall Street Journal also described altcoins as "alternative versions of bitcoin"^[35] given its role as the model protocol for altcoin designers. The term is commonly used to describe coins and tokens created after bitcoin.

Altcoins often have underlying differences with bitcoin. For example, Litecoin aims to process a block every 2.5 minutes, rather than bitcoin's 10 minutes, which allows Litecoin to confirm transactions faster than bitcoin.^[36] Another example is Ethereum, which has smart contract functionality that allows decentralized applications to be run on its blockchain.^[37] Ethereum was the most used blockchain in 2020, according to Bloomberg News.^[38] In 2016, it had the largest "following" of any altcoin, according to the New York Times.^[39]

Significant rallies across altcoin markets are often referred to as an "altseason".^[40][41]

Stablecoins

Stablecoins are altcoins that are designed to maintain a stable level of purchasing power.^[42]

Architecture

Decentralized cryptocurrency is produced by the entire cryptocurrency system collectively, at a rate which is defined when the system is created and which is publicly known. In centralized banking and economic systems such as the US Federal Reserve System, corporate boards or governments control the supply of currency.^{[citation needed]} In the case of decentralized cryptocurrency, companies or governments cannot produce new units, and have not so far provided backing for other firms, banks or corporate entities which hold asset value measured in it. The underlying technical system upon which decentralized cryptocurrencies are based was created by the group or individual known as Satoshi Nakamoto.^[43]

As of May 2018^[update], over 1,800 cryptocurrency specifications existed.^[44] Within a proof-of-work cryptocurrency system such as Bitcoin, the safety, integrity and balance of ledgers is maintained by a community of mutually distrustful parties referred to as miners: who use their computers to help validate and timestamp transactions, adding them to the ledger in accordance with a particular timestamping scheme.^[18] In a proof-of-stake (PoS) blockchain, transactions are validated by holders of the associated cryptocurrency, sometimes grouped together in stake pools.

Most cryptocurrencies are designed to gradually decrease the production of that currency, placing a cap on the total amount of that currency that will ever be in circulation.^[45] Compared with ordinary currencies held by financial institutions or kept as cash on hand, cryptocurrencies can be more difficult for seizure by law enforcement.^[1]

Blockchain

Main article: Blockchain

The validity of each cryptocurrency's coins is provided by a blockchain. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography.^[43][46] Each block typically contains a hash pointer as a link to a previous block,^[46] a timestamp and transaction data.^[47] By design, blockchains are inherently resistant to modification of the data. It is "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way".^[48] For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority.

Blockchains are secure by design and are an example of a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been achieved with a blockchain.^[49]

Nodes

In the world of cryptocurrency, a node is a computer that connects to a cryptocurrency network. The node supports the relevant cryptocurrency's network through either; relaying transactions, validation or hosting a copy of the blockchain. In terms of relaying transactions each network computer (node) has a copy of the blockchain of the cryptocurrency it supports, when a transaction is made the node creating the transaction broadcasts details of the transaction using encryption to other nodes throughout the node network so that the transaction (and every other transaction) is known.

Node owners are either volunteers, those hosted by the organisation or body responsible for developing the cryptocurrency blockchain network technology, or those who are enticed to host a node to receive rewards from hosting the node network.^[50]

Timestamping

Cryptocurrencies use various timestamping schemes to "prove" the validity of transactions added to the blockchain ledger without the need for a trusted third party.

The first timestamping scheme invented was the proof-of-work scheme. The most widely used proof-of-work schemes are based on SHA-256 and scrypt.^[20]

Some other hashing algorithms that are used for proof-of-work include CryptoNight, Blake, SHA-3, and X11.

The proof-of-stake is a method of securing a cryptocurrency network and achieving distributed consensus through requesting users to show ownership of a certain amount of currency. It is different from proof-of-work systems that run difficult hashing algorithms to validate electronic transactions. The scheme is largely dependent on the coin, and there's currently no standard form of it. Some cryptocurrencies use a combined proof-of-work and proof-of-stake scheme.^[20]

Mining

In cryptocurrency networks, mining is a validation of transactions. For this effort, successful miners obtain new cryptocurrency as a reward. The reward decreases transaction fees by creating a complementary incentive to contribute to the processing power of the network. The rate of generating hashes, which validate any transaction, has been increased by the use of specialized machines such as FPGAs and ASICs running complex hashing algorithms like SHA-256 and scrypt.^[51] This arms race for cheaper-yet-efficient machines has existed since the first cryptocurrency, bitcoin, was introduced in 2009.^[51]

With more people venturing into the world of virtual currency, generating hashes for validation has become more complex over time, forcing miners to invest increasingly large sums of money to improve computing performance. Consequently, the reward for finding a hash has diminished and often does not justify the investment in equipment and cooling facilities (to mitigate the heat the equipment produces), and the electricity required to run them.^[52] Popular regions for mining include those with inexpensive electricity, a cold climate, and jurisdictions with clear and conducive regulations. As of July 2019^[update], bitcoin's electricity consumption is estimated to about 7 gigawatts, 0.2% of the global total, or equivalent to that of Switzerland.^[53]

Some miners pool resources, sharing their processing power over a network to split the reward equally, according to the amount of work they contributed to the probability of finding a block. A "share" is awarded to members of the mining pool who present a valid partial proof-of-work.

As of February 2018^[update], the Chinese Government has halted trading of virtual currency, banned initial coin offerings and shut down mining. Many Chinese miners have since relocated to Canada^[54] and Texas.^[55] One company is operating data centers for mining operations at Canadian oil and gas field sites, due to low gas prices.^[56] In June 2018, Hydro Quebec proposed to the provincial government to allocate 500 MW to crypto companies for mining.^[57] According to a February 2018 report from Fortune,^[58] Iceland has become a haven for cryptocurrency miners in part because of its cheap electricity.

In March 2018, the city of Plattsburgh in upstate New York put an 18-month moratorium on all cryptocurrency mining in an effort to preserve natural resources and the "character and direction" of the city.^[59]

GPU price rise

An increase in cryptocurrency mining increased the demand for graphics cards (GPU) in 2017.^[60] (The computing power of GPUs makes them well-suited to generating hashes.) Popular favorites of cryptocurrency miners such as Nvidia's GTX 1060 and GTX 1070 graphics cards, as well as AMD's RX 570 and RX 580 GPUs, doubled or tripled in price – or were out of stock.^[61] A GTX 1070 Ti which was released at a price of $450 sold for as much as $1100. Another popular card, the GTX 1060 (6 GB model) was released at an MSRP of $250, and sold for almost $500. RX 570 and RX 580 cards from AMD were out of stock for almost a year. Miners regularly buy up the entire stock of new GPU's as soon as they are available.^[62]

Nvidia has asked retailers to do what they can when it comes to selling GPUs to gamers instead of miners. "Gamers come first for Nvidia," said Boris Böhles, PR manager for Nvidia in the German region.^[63]

Wallets

An example paper printable bitcoin wallet consisting of one bitcoin address for receiving and the corresponding private key for spending

Main article: Cryptocurrency wallet

A cryptocurrency wallet stores the public and private "keys" (address) or seed which can be used to receive or spend the cryptocurrency.^[64] With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency. With the public key, it is possible for others to send currency to the wallet.

There exist multiple methods of storing keys or seed in a wallet from using paper wallets which are traditional public, private or seed keys written on paper to using hardware wallets which are dedicated hardware to securely store your wallet information, using a digital wallet which is a computer with a software hosting your wallet information, hosting your wallet using an exchange where cryptocurrency is traded. or by storing your wallet information on a digital medium such as plaintext.^[65]

Anonymity

Bitcoin is pseudonymous rather than anonymous in that the cryptocurrency within a wallet is not tied to people, but rather to one or more specific keys (or "addresses").^[66] Thereby, bitcoin owners are not identifiable, but all transactions are publicly available in the blockchain. Still, cryptocurrency exchanges are often required by law to collect the personal information of their users.^[67]

Additions such as Monero, Zerocoin, Zerocash and CryptoNote have been suggested, which would allow for additional anonymity and fungibility.^[68][69]

Economics

Cryptocurrencies are used primarily outside existing banking and governmental institutions and are exchanged over the Internet.

Block rewards

Proof-of-work cryptocurrencies, such as bitcoin, offer block rewards incentives for miners. There has been an implicit belief that whether miners are paid by block rewards or transaction fees does not affect the security of the blockchain, but a study suggests that this may not be the case under certain circumstances.^[70]

The rewards paid to miners increase the supply of the cryptocurrency. By making sure that verifying transactions is a costly business, the integrity of the network can be preserved as long as benevolent nodes control a majority of computing power. The verification algorithm requires a lot of processing power, and thus electricity in order to make verification costly enough to accurately validate public blockchain. Not only do miners have to factor in the costs associated with expensive equipment necessary to stand a chance of solving a hash problem, they further must consider the significant amount of electrical power in search of the solution. Generally, the block rewards outweigh electricity and equipment costs, but this may not always be the case.^[71]

The current value, not the long-term value, of the cryptocurrency supports the reward scheme to incentivize miners to engage in costly mining activities. Some sources claim that the current bitcoin design is very inefficient, generating a welfare loss of 1.4% relative to an efficient cash system. The main source for this inefficiency is the large mining cost, which is estimated to be US$360 Million per year. This translates into users being willing to accept a cash system with an inflation rate of 230% before being better off using bitcoin as a means of payment. However, the efficiency of the bitcoin system can be significantly improved by optimizing the rate of coin creation and minimizing transaction fees. Another potential improvement is to eliminate inefficient mining activities by changing the consensus protocol altogether.^[72]

Transaction fees

Transaction fees for cryptocurrency depend mainly on the supply of network capacity at the time, versus the demand from the currency holder for a faster transaction.^{[citation needed]} The currency holder can choose a specific transaction fee, while network entities process transactions in order of highest offered fee to lowest.^{[citation needed]} Cryptocurrency exchanges can simplify the process for currency holders by offering priority alternatives and thereby determine which fee will likely cause the transaction to be processed in the requested time.^{[citation needed]}

For Ether, transaction fees differ by computational complexity, bandwidth use, and storage needs, while bitcoin transaction fees differ by transaction size and whether the transaction uses SegWit. In September 2018, the median transaction fee for ether corresponded to $0.017,^[73] while for bitcoin it corresponded to $0.55.^[74]

Some cryptocurrencies have no transaction fees, and instead rely on client-side proof-of-work as the transaction prioritization and anti-spam mechanism.^[75][76][77]

Exchanges

Main article: Cryptocurrency exchange

Cryptocurrency exchanges allow customers to trade cryptocurrencies^[78] for other assets, such as conventional fiat money, or to trade between different digital currencies.

Atomic swaps

Atomic swaps are a mechanism where one cryptocurrency can be exchanged directly for another cryptocurrency, without the need for a trusted third party such as an exchange.^{[citation needed]}

ATMs

Jordan Kelley, founder of Robocoin, launched the first bitcoin ATM in the United States on 20 February 2014. The kiosk installed in Austin, Texas, is similar to bank ATMs but has scanners to read government-issued identification such as a driver's license or a passport to confirm users' identities.^[79]

Initial coin offerings

An initial coin offering (ICO) is a controversial means of raising funds for a new cryptocurrency venture. An ICO may be used by startups with the intention of avoiding regulation. However, securities regulators in many jurisdictions, including in the U.S., and Canada, have indicated that if a coin or token is an "investment contract" (e.g., under the Howey test, i.e., an investment of money with a reasonable expectation of profit based significantly on the entrepreneurial or managerial efforts of others), it is a security and is subject to securities regulation. In an ICO campaign, a percentage of the cryptocurrency (usually in the form of "tokens") is sold to early backers of the project in exchange for legal tender or other cryptocurrencies, often bitcoin or Ether.^[80][81][82]

According to PricewaterhouseCoopers, four of the 10 biggest proposed initial coin offerings have used Switzerland as a base, where they are frequently registered as non-profit foundations. The Swiss regulatory agency FINMA stated that it would take a "balanced approach" to ICO projects and would allow "legitimate innovators to navigate the regulatory landscape and so launch their projects in a way consistent with national laws protecting investors and the integrity of the financial system." In response to numerous requests by industry representatives, a legislative ICO working group began to issue legal guidelines in 2018, which are intended to remove uncertainty from cryptocurrency offerings and to establish sustainable business practices.^[83]

Price trends

The "market cap" of any coin is calculated by multiplying the price by the number of coins in circulation. The total cryptocurrency market cap has historically been dominated by Bitcoin accounting for at least 50% of the market cap value where altcoins have increased and decreased in market cap value in relation to Bitcoin. Bitcoin's value is largely determined by speculation among other technological limiting factors known as block chain rewards coded into the architecture technology of Bitcoin itself. The cryptocurrency market cap follows a trend known as the "halving", which is when the block rewards received from Bitcoin are halved due to technological mandated limited factors instilled into Bitcoin which in turn limits the supply of Bitcoin. As the date reaches near of an halving (twice thus far historically) the cryptocurrency market cap increases, followed by a downtrend.^[84]

By mid-June 2021 cryptocurrency as an admittedly extremely volatile asset class for portfolio diversification had begun to be offered by some wealth managers in the US for 401(k)s.^[85][86][87]

Social trends

See also: Crypto-anarchism and Cypherpunk

According to Alan Feuer of The New York Times, libertarians and anarchists were attracted to the philosophical idea behind bitcoin. Early bitcoin supporter Roger Ver said: "At first, almost everyone who got involved did so for philosophical reasons. We saw bitcoin as a great idea, as a way to separate money from the state."^[88] Economist Paul Krugman argues that cryptocurrencies like bitcoin are "something of a cult" based in "paranoid fantasies" of government power.^[89]

Nigel Dodd argues in The Social Life of Bitcoin that the essence of the bitcoin ideology is to remove money from both social and governmental control.^[90] Dodd discusses the "Declaration of Bitcoin's Independence" a message of crypto-anarchism with the words: "Bitcoin is inherently anti-establishment, anti-system, and anti-state. Bitcoin undermines governments and disrupts institutions because bitcoin is fundamentally humanitarian."^[91][92]

David Golumbia says that the ideas influencing bitcoin advocates emerge from right-wing extremist movements such as the Liberty Lobby and the John Birch Society and their anti-Central Bank rhetoric, or, more recently, Ron Paul and Tea Party-style libertarianism.^[93]Steve Bannon, who owns a "good stake" in bitcoin, sees cryptocurrency as a form of disruptive populism, taking control back from central authorities.^[94]

Bitcoin's founder, Satoshi Nakamoto has supported the idea that cryptocurrencies go well with libertarianism: "It's very attractive to the libertarian viewpoint if we can explain it properly." Satoshi said in 2008.^[95]

According to the European Central Bank, the decentralization of money offered by bitcoin has its theoretical roots in the Austrian school of economics, especially with Friedrich von Hayek in his book Denationalisation of Money: The Argument Refined,^[96] in which Hayek advocates a complete free market in the production, distribution and management of money to end the monopoly of central banks.^[97]

Increasing regulation

The rise in the popularity of cryptocurrencies and their adoption by financial institutions has led some governments to assess whether regulation is needed to protect users. The Financial Action Task Force (FATF) has defined cryptocurrency-related services as "virtual asset service providers" (VASPs) and recommended that they be regulated with the same money laundering (AML) and know your customer (KYC) requirements as financial institutions.^[98]

In May 2020, the Joint Working Group on interVASP Messaging Standards published "IVMS 101", a universal common language for communication of required originator and beneficiary information between VASPs. The FATF and financial regulators were informed as the data model was developed.^[99]

In June 2020, FATF updated its guidance to include the "Travel Rule" for cryptocurrencies, a measure which mandates that VASPs obtain, hold, and exchange information about the originators and beneficiaries of virtual asset transfers.^[100] Subsequent standardized protocol specifications recommended using JSON for relaying data between VASPs and identity services. As of December 2020, the IVMS 101 data model has yet to be finalized and ratified by the three global standard setting bodies that created it.^[101]

The European Commission published a digital finance strategy in September 2020. This included a draft regulation on Markets in Crypto-Assets (MiCA), which aimed to provide a comprehensive regulatory framework for digital assets in the EU.^[102][103]

On 10 June 2021, The Basel Committee on Banking Supervision proposed that banks that held cryptocurrency assets must set aside capital to cover all potential losses. For instance, if a bank were to hold bitcoin worth $2 billion, it would be required to set aside enough capital to cover the entire $2 billion. This is a more extreme standard than banks are usually held to when it comes to other assets. However, this is a proposal and not a regulation.

The IMF is seeking a co-ordinated, consistent and comprehensive approach to supervising cryptocurrencies. Tobias Adrian, the IMF's financial counsellor and head of its monetary and capital markets department said in a January 2022 interview that "Agreeing global regulations is never quick. But if we start now, we can achieve the goal of maintaining financial stability while also enjoying the benefits which the underlying technological innovations bring,"^[104]

United States

In 2021, 17 states passed laws and resolutions concerning cryptocurrency regulation.^[105] The U.S. Securities and Exchange Commission (SEC) is considering what steps to take. On 8 July 2021, Senator Elizabeth Warren, who is part of the Senate Banking Committee, wrote to the chairman of the SEC and demanded that it provide answers on cryptocurrency regulation by 28 July 2021,^[106] due to the increase in cryptocurrency exchange use and the danger this poses to consumers. On 17 February 2022, the Justice department named Eun Young Choi as the first director of a National Cryptocurrency Enforcement Team to aid in identification of and dealing with misuse of cryptocurrencies and other digital assets.^[107]

China

On 18 May 2021, China banned financial institutions and payment companies from being able to provide cryptocurrency transaction related services.^[108] This led to a sharp fall in the price of the biggest proof of work cryptocurrencies. For instance, Bitcoin fell 31%, Ethereum fell 44%, Binance Coin fell 32% and Dogecoin fell 30%.^[109] Proof of work mining was the next focus, with regulators in popular mining regions citing the use of electricity generated from highly polluting sources such as coal to create Bitcoin and Ethereum.^[110]

In September 2021, the Chinese government declared all cryptocurrency transactions of any kind illegal, completing its crackdown on crytocurrency.^[26]

United Kingdom

In the United Kingdom, as of 10 January 2021, all cryptocurrency firms, such as exchanges, advisors and professionals that have either a presence, market product or provide services within the UK market must register with the Financial Conduct Authority. Additionally, on 27 June 2021, the financial watchdog demanded that Binance, the world's largest cryptocurrency exchange,^[111] cease all regulated activities in the UK.^[112] Some commentators^[who?] believe this is a sign of what is to come in terms of stringent regulation of the UK cryptocurrency market.^[112]

South Africa

South Africa, who has seen a large amount of scams related to cryptocurrency is said to be putting a regulatory timeline in place, that will produce a regulatory framework.^[113] The largest scam occurred in April 2021, where the two founders of an African-based cryptocurrency exchange called Africrypt, Raees Cajee and Ameer Cajee, disappeared with $3.8 billion worth of Bitcoin.^[114] Additionally, Mirror Trading International disappeared with $170 million worth of cryptocurrency in January 2021.^[114]

South Korea

In March 2021, South Korea implemented new legislation to strengthen their oversight of digital assets. This legislation requires all digital asset managers, providers and exchanges are registered with the Korea Financial Intelligence Unit in order to operate in South Korea.^[115] Registering with this unit requires that all exchanges are certified by the Information Security Management System and that they ensure all customers have real name bank accounts, that the CEO and board members of the exchanges have not been convicted of any crimes and that the exchange holds sufficient levels of deposit insurance to cover losses arising from hacks.^[115]

Turkey

Turkey's central bank, the Central Bank of the Republic of Turkey, banned the use of cryptocurrencies and crypto assets for making purchases from 30 April 2021, on the ground that the use of cryptocurrencies for such payments poses significant transaction risks.^[116]

El Salvador

On 9 June 2021, El Salvador announced that it will adopt Bitcoin as legal tender, the first country to do so.^[117]

India

At present, India neither prohibits nor allows investment in the cryptocurrency market. In 2020, the Supreme Court of India had specifically lifted the ban on cryptocurrency, which was imposed by the Reserve Bank of India.^{[118][119][120][121]} Since then the investment in cryptocurrency is considered legitimate though there is still ambiguity about the issues regarding the extent and payment of tax on the income accrued thereupon and also its regulatory regime. But it is being contemplated that the Indian Parliament will soon pass a specific law to either ban or regulate the cryptocurrency market in India.^[122] Expressing his public policy opinion on the Indian cryptocurrency market to a well-known online publication, a leading public policy lawyer and Vice President of SAARCLAW (South Asian Association for Regional Co-operation in Law) Hemant Batra has said that the "cryptocurrency market has now become very big with involvement of billions of dollars in the market hence, it is now unattainable and irreconcilable for the government to completely ban all sorts of cryptocurrency and its trading and investment".^[123] He mooted regulating the cryptocurrency market rather than completely banning it. He favoured following IMF and FATF guidelines in this regard.

Legality

Main article: Legality of cryptocurrency by country or territory

The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. At least one study has shown that broad generalizations about the use of bitcoin in illicit finance are significantly overstated and that blockchain analysis is an effective crime fighting and intelligence gathering tool.^[124] While some countries have explicitly allowed their use and trade,^[125] others have banned or restricted it. According to the Library of Congress in 2018, an "absolute ban" on trading or using cryptocurrencies applies in eight countries: Algeria, Bolivia, Egypt, Iraq, Morocco, Nepal, Pakistan, and the United Arab Emirates. An "implicit ban" applies in another 15 countries, which include Bahrain, Bangladesh, China, Colombia, the Dominican Republic, Indonesia, Iran, Kuwait, Lesotho, Lithuania, Macau, Oman, Qatar, Saudi Arabia and Taiwan.^[126] In the United States and Canada, state and provincial securities regulators, coordinated through the North American Securities Administrators Association, are investigating "bitcoin scams" and ICOs in 40 jurisdictions.^[127]

Various government agencies, departments, and courts have classified bitcoin differently. China Central Bank banned the handling of bitcoins by financial institutions in China in early 2014.

In Russia, though owning cryptocurrency is legal, its residents are only allowed to purchase goods from other residents using Russian ruble while nonresidents are allowed to use foreign currency.^[128] Regulations and bans that apply to bitcoin probably extend to similar cryptocurrency systems.^[129]

In August 2018, the Bank of Thailand announced its plans to create its own cryptocurrency, the Central Bank Digital Currency (CBDC).^[130]

Advertising bans

Cryptocurrency advertisements have been temporarily banned on Facebook,^[131]Google, Twitter,^[132]Bing,^[133]Snapchat, LinkedIn and MailChimp.^[134] Chinese internet platforms Baidu, Tencent, and Weibo have also prohibited bitcoin advertisements. The Japanese platform Line and the Russian platform Yandex have similar prohibitions.^[135]

U.S. tax status

On 25 March 2014, the United States Internal Revenue Service (IRS) ruled that bitcoin will be treated as property for tax purposes. Bitcoin is therefore subject to capital gains tax.^[136] In July 2019, the IRS issued letters to cryptocurrency owners instructing them to amend returns and pay taxes.^[137]

The legal concern of an unregulated global economy

As the popularity of and demand for online currencies has increased since the inception of bitcoin in 2009,^[138] so have concerns that such an unregulated person to person global economy that cryptocurrencies offer may become a threat to society. Concerns abound that altcoins may become tools for anonymous web criminals.^[139]

Cryptocurrency networks display a lack of regulation that has been criticized as enabling criminals who seek to evade taxes and launder money. Money laundering issues are also present in regular bank transfers, however with bank-to-bank wire transfers for instance, the account holder must at least provide a proven identity.

Transactions that occur through the use and exchange of these altcoins are independent from formal banking systems, and therefore can make tax evasion simpler for individuals. Since charting taxable income is based upon what a recipient reports to the revenue service, it becomes extremely difficult to account for transactions made using existing cryptocurrencies, a mode of exchange that is complex and difficult to track.^[139]

Systems of anonymity that most cryptocurrencies offer can also serve as a simpler means to launder money. Rather than laundering money through an intricate net of financial actors and offshore bank accounts, laundering money through altcoins can be achieved through anonymous transactions.^[139]

Cryptocurrency makes legal enforcement against extremist groups more complicated, which consequently strengthens them.^[140] White supremacist Richard Spencer went as far as to declare Bitcoin the “currency of the alt-right.”

Loss, theft, and fraud

Main article: Cryptocurrency and crime

In February 2014, the world's largest bitcoin exchange, Mt. Gox, declared bankruptcy. Likely due to theft, the company claimed that it had lost nearly 750,000 bitcoins belonging to their clients. This added up to approximately 7% of all bitcoins in existence, worth a total of $473 million. Mt. Gox blamed hackers, who had exploited the transaction malleability problems in the network. The price of a bitcoin fell from a high of about $1,160 in December to under $400 in February.^[141]

On November 21 2017, Tether announced that it had been hacked, losing $31 million in USDT from its core treasury wallet.^[142]

On December 7 2017, Slovenian cryptocurrency exchange Nicehash reported that hackers had stolen over $70M using a hijacked company computer.^[143]

On December 19 2017, Yapian, the owner of South Korean exchange Youbit, filed for bankruptcy after suffering two hacks that year.^[144][145] Customers were still granted access to 75% of their assets.

In May 2018, Bitcoin Gold had its transactions hijacked and abused by unknown hackers.^[146] Exchanges lost an estimated $18m and Bitcoin Gold was delisted from Bittrex after it refused to pay its share of the damages.

On September 13 2018, Homero Josh Garza was sentenced to 21 months of imprisonment, followed by three years of supervised release.^[147] Garza had founded the cryptocurrency startups GAW Miners and ZenMiner in 2014, acknowledged in a plea agreement that the companies were part of a pyramid scheme, and pleaded guilty to wire fraud in 2015. The U.S. Securities and Exchange Commission separately brought a civil enforcement action against Garza, who was eventually ordered to pay a judgment of $9.1 million plus $700,000 in interest. The SEC's complaint stated that Garza, through his companies, had fraudulently sold "investment contracts representing shares in the profits they claimed would be generated" from mining.^[148]

In January 2018, Japanese exchange Coincheck reported that hackers had stolen $530M worth of cryptocurrencies.^[149]

In June 2018, South Korean exchange Coinrail was hacked, losing over $37M worth of cryptos.^[150] The hack worsened an already ongoing cryptocurrency selloff by an additional $42 billion.^[151]

On July 9 2018 the exchange Bancor, whose code and fundraising had been subjects of controversy, had $23.5 million in cryptocurrency stolen.^[152]

A 2020 EU report found that users had lost crypto-assets worth hundreds of millions of US dollars in security breaches at exchanges and storage providers. Between 2011 to 2019, reported breaches ranged from four to twelve a year. In 2019, more than a billion dollars worth of crypto assets was reported stolen. Stolen assets "typically find their way to illegal markets and are used to fund further criminal activity".^[153]

According to a 2020 report produced by the United States Attorney General's Cyber-Digital Task Force, the following three categories make up the majority of illicit cryptocurrency uses: "(1) financial transactions associated with the commission of crimes; (2) money laundering and the shielding of legitimate activity from tax, reporting, or other legal requirements; or (3) crimes, such as theft, directly implicating the cryptocurrency marketplace itself." The report concludes that "for cryptocurrency to realize its truly transformative potential, it is imperative that these risks be addressed" and that "the government has legal and regulatory tools available at its disposal to confront the threats posed by cryptocurrency's illicit uses".^[154][155]

According to the UK 2020 national risk assessment—a comprehensive assessment of money laundering and terrorist financing risk in the UK—the risk of using cryptoassets such as Bitcoin for money laundering and terrorism financing is assessed as "medium" (from "low" in the previous 2017 report).^[156] Legal scholars suggested that the money laundering opportunities may be more perceived than real.^[157]Blockchain analysis company Chainalysis concluded that illicit activities like cybercrime, money laundering and terrorism financing made up only 0.15% of all crypto transactions conducted in 2021, representing a total of $14 billion.^{[158][159][160]}

Money laundering

See also: Cryptocurrency and crime

According to blockchain data company Chainanalysis, criminals laundered $8.6bn worth of cryptocurrency in 2021, up by 30% from the previous year.^[161] The data suggests that rather than managing numerous illicit havens, cybercriminals make use of a small group of purpose built centralized exchanges for sending and receiving illicit cryptocurrency. In 2021, those exchanges received 47% of funds sent by crime linked addresses.^[162] Almost $2.2bn worth of cryptocurrencies was embezzled from DeFi protocols in 2021, which represents 72% of all cryptocurrency theft in 2021.

According to Bloomberg and the New York Times, Federation Tower, a two skyscraper complex in the heart of Moscow City, is home to many cryptocurrency businesses under suspicion of facilitated extensive money laundering, including accepting illicit cryptocurrency funds obtained through scams, darknet markets, and ransomware.^[163] Notable businesses include Garantex, Eggchange, Cashbank, Buy-bitcoin, Tetchange, Bitzlato, and Suex, which was sanctioned by the U.S. in 2021.

Dark money has also been flowing into Russia through a dark web marketplace called Hydra, which is powered by cryptocurrency, and enjoyed more than $1 billion in sales in 2020, according to Chainalysis.^[164] The platform demands that sellers liquidate cryptocurrency only through certain regional exchanges, which has made it difficult for investigators to trace the money.

Almost 74% of ransomware revenue in 2021 — over $400 million worth of cryptocurrency — went to software strains likely affiliated with Russia, where oversight is notoriously limited.^[163] But Russians are also leaders in the benign adoption of cryptocurrencies, as the ruble is unreliable, and Putin likes the idea of "overcoming the excessive domination of the limited number of reserve currencies."^[165]

Darknet markets

Main article: Darknet market

Properties of cryptocurrencies gave them popularity in applications such as a safe haven in banking crises and means of payment, which also led to the cryptocurrency use in controversial settings in the form of online black markets, such as Silk Road.^[139] The original Silk Road was shut down in October 2013 and there have been two more versions in use since then. In the year following the initial shutdown of Silk Road, the number of prominent dark markets increased from four to twelve, while the amount of drug listings increased from 18,000 to 32,000.^[139]

Darknet markets present challenges in regard to legality. Cryptocurrency used in dark markets are not clearly or legally classified in almost all parts of the world. In the U.S., bitcoins are labelled as "virtual assets".^{[citation needed]} This type of ambiguous classification puts pressure on law enforcement agencies around the world to adapt to the shifting drug trade of dark markets.^{[166][unreliable source?]}

Wash trades

Various studies have found that crypto-trading is rife with wash trading. Wash trading is a process, illegal in some jurisdictions, involving buyers and sellers being the same person or group, and may be used to manipulate the price of a cryptocurrency or inflate volume artificially. Exchanges with higher volumes can demand higher premiums from token issuers.^[167] A study from 2019 concluded that up to 80% of trades on unregulated cryptocurrency exchanges could be wash trades.^[167] A 2019 report by Bitwise Asset Management claimed that 95% of all Bitcoin trading volume reported on major website CoinMarketCap had been artificially generated, and of 81 exchanges studied, only 10 provided legitimate volume figures.^[168]

As a tool to evade sanctions

In 2018, cryptocurrencies were already discussed as a tool to evade economic sanctions for example against Russia and Iran, but also Venezuela. In April of that year, Russian and Iranian economic representatives met to discuss how to bypass the global SWIFT system through decentralized blockchain technology.^{[citation needed]} Russia also secretly supported Venezuela with the creation of the petro (El Petro), a national cryptocurrency initiated by the Maduro government to obtain valuable oil revenues by circumventing US sanctions.^[169]

In 2022, cryptocurrencies have again attracted attention, when Western nations imposed severe economic sanctions on Russia in the aftermath of its invasion of the Ukraine in February. However, American sources warned in March that some crypto-transactions could potentially be used to evade economic sanctions against Russia and Belarus.^[170] Cryptocurrencies have also been used to finance covert arms for the Ukrainian resistance.^[171]

Impacts and analysis

The Bank for International Settlements summarized several criticisms of cryptocurrencies in Chapter V of their 2018 annual report. The criticisms include the lack of stability in their price, the high energy consumption, high and variable transactions costs, the poor security and fraud at cryptocurrency exchanges, vulnerability to debasement (from forking), and the influence of miners.^{[172][173][174]}

Speculation, fraud, and adoption

See also: Cryptocurrency bubble, Cryptocurrency and crime, and Criminal activity on Bitcoin's network

Cryptocurrencies have been compared to Ponzi schemes, pyramid schemes^[175] and economic bubbles,^[176] such as housing market bubbles.^[177]Howard Marks of Oaktree Capital Management stated in 2017 that digital currencies were "nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it", and compared them to the tulip mania (1637), South Sea Bubble (1720), and dot-com bubble (1999), which all experienced profound price booms and busts.^[178]

Regulators in several countries have warned against cryptocurrency and some have taken measures to dissuade users.^[179] However, research in 2021 by the UK's financial regulator suggests such warnings either went unheard, or were ignored. Fewer than one in 10 potential cryptocurrency buyers were aware of consumer warnings on the FCA website, and 12% of crypto users were not aware that their holdings were not protected by statutory compensation.^[180][181] Of 1000 respondents between the ages of eighteen and forty, almost 70% falsely assumed cryptocurrencies were regulated, 75% of younger crypto investors claimed to be driven by competition with friends and family, 58% said that social media enticed them to make high risk investments.^[182] The FCA recommends making use of its warning list, which flags unauthorized financial firms.^[183]

Many banks do not offer virtual currency services themselves and can refuse to do business with virtual currency companies.^[184] In 2014, a senior banking officer Gareth Murphy suggested that the widespread adoption of cryptocurrencies may lead to too much money being obfuscated, blinding economists who would use such information to better steer the economy.^[185] While traditional financial products have strong consumer protections in place, there is no intermediary with the power to limit consumer losses if bitcoins are lost or stolen. One of the features cryptocurrency lacks in comparison to credit cards, for example, is consumer protection against fraud, such as chargebacks.

The French regulator Autorité des marchés financiers (AMF) lists 16 websites of companies that solicit investment in cryptocurrency without being authorized to do so in France.^[186]

In October 2021, a paper by the National Bureau of Economic Research found that Bitcoin suffers from systemic risk as the top 10,000 addresses control about one-third of all Bitcoin in circulation.^[187] It's even worse for Bitcoin miners, with 0.01% controlling 50% of the capacity. According to researcher Flipside Crypto, less than 2% of anonymous accounts control 95% of all available Bitcoin supply.^[188] This is considered risky as a great deal of the market is in the hands of a few entities.

A paper by John Griffin, a finance professor at the University of Texas, and Amin Shams, a graduate student found that in 2017 the price of Bitcoin had been substantially inflated using another cryptocurrency, Tether.^[189]

Banks

As the first big Wall Street bank to embrace cryptocurrencies, Morgan Stanley announced on 17 March 2021 that they will be offering access to Bitcoin funds for their wealthy clients through three funds which enable Bitcoin ownership for investors with an aggressive risk tolerance.^[190] BNY Mellon on 11 February 2021 announced that it would begin offering cryptocurrency services to its clients.^[191]

On 20 April 2021,^[192]Venmo added support to its platform to enable customers to buy, hold and sell cryptocurrencies.^[193]

In October 2021, financial services company Mastercard announced it is working with digital asset manager Bakkt on a platform that would allow any bank or merchant on the Mastercard network to offer cryptocurrency services.^[194]

Environmental impact

See also: Bitcoin § Energy consumption and carbon footprint, and Environmental impact of cryptocurrencies

Mining for proof-of-work cryptocurrencies requires enormous amounts of electricity and consequently comes with a large carbon footprint.^[195] Proof-of-work blockchains such as Bitcoin, Ethereum, Litecoin, and Monero were estimated to have added 3 to 15 million tonnes of CO2 emissions to the atmosphere in the period from 1 January 2016 to 30 June 2017.^[196] By November 2018, Bitcoin was estimated to have an annual energy consumption of 45.8TWh, generating 22.0 to 22.9 million tonnes of carbon dioxide, rivalling nations like Jordan and Sri Lanka.^[197] By the end of 2021, Bitcoin was estimated to produce 65.4 megatons of carbon dioxide, as much as Greece,^[198] and consume between 91 and 177 terawatt-hours annually.^[199][200]

Critics have also identified a large electronic waste problem in disposing of mining rigs.^[201] Mining hardware is improving at a fast rate, quickly resulting in older generations of hardware.^[202]

Bitcoin is the least energy-efficient cryptocurrency, using 707.6 kilowatt-hours of electricity per transaction.^[203] In comparison, the world's second-largest cryptocurrency, Ethereum, uses 62.56 kilowatt-hours of electricity per transaction.^[204]Ripple ($XRP) is the world's most energy efficient cryptocurrency, using 0.0079 kilowatt-hours of electricity per transaction.^[205]

A few papers concluded that variable renewable energy power stations could invest in Bitcoin mining to reduce curtailment, hedgeelectricity price risk, stabilize the grid, increase the profitability of renewable energy power stations and therefore accelerate transition to sustainable energy.^{[206][207][208][209][210][211][212]}

Technological limitations

There are also purely technical elements to consider. For example, technological advancement in cryptocurrencies such as bitcoin result in high up-front costs to miners in the form of specialized hardware and software.^[213] Cryptocurrency transactions are normally irreversible after a number of blocks confirm the transaction. Additionally, cryptocurrency private keys can be permanently lost from local storage due to malware, data loss or the destruction of the physical media. This precludes the cryptocurrency from being spent, resulting in its effective removal from the markets.^[214]

Academic studies

Main article: Ledger (journal)

In September 2015, the establishment of the peer-reviewedacademic journalLedger (ISSN 2379-5980) was announced. It covers studies of cryptocurrencies and related technologies, and is published by the University of Pittsburgh.^[215]

The journal encourages authors to digitally sign a file hash of submitted papers, which will then be timestamped into the bitcoin blockchain. Authors are also asked to include a personal bitcoin address in the first page of their papers.^[216][217]

Aid agencies

A number of aid agencies have started accepting donations in cryptocurrencies, including the American Red Cross,^{[citation needed]}UNICEF,^[218] and the UN World Food Program.^{[citation needed]}

Christopher Fabian, principal adviser at UNICEF Innovation said that UNICEF would uphold existing donor protocols, meaning that those making donations online would have to pass rigorous checks before they were allowed to deposit funds to UNICEF.^[219][220]

In 2022, the Ukrainian government raised over $10 million worth of aid through cryptocurrency following the 2022 Russian invasion of Ukraine.^[221]

Criticism

Bitcoin has been characterized as a speculative bubble by eight winners of the Nobel Memorial Prize in Economic Sciences: Paul Krugman,^[222]Robert J. Shiller,^[223]  Joseph Stiglitz,^[224]Richard Thaler,^[225]James Heckman,^[226]Thomas Sargent,^[226]Angus Deaton,^[226] and Oliver Hart;^[226] and by central bank officials including Alan Greenspan,^[227]Agustín Carstens,^[228]Vítor Constâncio,^[229] and Nout Wellink.^[230]

The investors Warren Buffett and George Soros have respectively characterized it as a "mirage"^[231] and a "bubble";^[232] while the business executives Jack Ma and J.P. Morgan Chase CEO Jamie Dimon have called it a "bubble"^[233] and a "fraud",^[234] respectively, although Jamie Dimon later said he regretted dubbing Bitcoin a fraud.^[235]BlackRock CEO Laurence D. Fink called bitcoin an "index of money laundering".^[236]

See also

References

What is cryptocurrency trading?

Cryptocurrency trading is the act of speculating on cryptocurrency price movements via a CFD trading account, or buying and selling the underlying coins via an exchange.

CFD trading on cryptocurrencies

CFDs trading are derivatives, which enable you to speculate on cryptocurrency price movements without taking how does cryptocurrency investment work of the underlying coins. You can go long (‘buy’) if you think a cryptocurrency will rise in value, or short (‘sell’) if you think it will fall.

Both are leveraged products, meaning you only need to put up a small deposit – known as margin – to gain full exposure to the underlying market. Your profit or loss are still calculated according to the full size of your position, so leverage will magnify both profits and losses.

Buying and selling cryptocurrencies via an exchange

When you buy cryptocurrencies via an exchange, you purchase the coins themselves. You’ll need to create an exchange account, put up the full value of the asset to open a position, and store the cryptocurrency tokens in your own wallet until you’re ready to sell.

Exchanges bring their own steep learning curve as you’ll need to get to grips with the technology involved and learn how to make sense of the data. Many exchanges also have limits on how much you can deposit, while accounts can be very expensive to maintain.

How do cryptocurrency markets work?

Cryptocurrency markets are decentralised, which means they are not issued or backed by a central authority such as a government. Instead, they run across a network of computers. However, cryptocurrencies can be bought and sold via exchanges and stored in ‘wallets’ .

Unlike traditional currencies, cryptocurrencies exist only as a shared digital record of ownership, stored on a blockchain. When a user wants to send cryptocurrency units to another user, they send it to that user’s digital wallet. The transaction isn’t considered final until it has been verified and added to the blockchain through a process called mining. This is also how new cryptocurrency tokens are usually created.

What is blockchain?

A blockchain is a shared digital register of recorded data. For cryptocurrencies, this is the transaction history for every unit of the cryptocurrency, which shows how ownership has changed over time. Blockchain works by recording transactions in ‘blocks’, with new blocks added at the front of the chain.

Enabling payments: “Hands-off”

Some companies use crypto just to facilitate payments. One avenue to facilitate payments is to simply convert in and out of crypto to fiat currency to receive or make payments without actually touching it. In other words, the company is taking a “hands-off” approach that keeps crypto off the books.

Enabling crypto payments, such as bitcoin, without bringing it onto the company’s balance sheet may be the easiest and fastest entry point into the use of digital assets. It may require the fewest adjustments across the spectrum of corporate functions and may serve immediate goals, such as reaching a new clientele and growing the volume of each sales transaction. Enterprises adopting this limited use of crypto typically rely on third-party vendors.

The third-party vendor, acting as an agent for the company, accepts or makes payments in crypto through conversion into and how does cryptocurrency investment work of fiat currency. This may be the simplest option to pursue. And, in all likelihood, it may cause relatively few disruptions to a company’s internal functions, since the “hands-off” approach keeps crypto off the corporate balance sheet.

The third-party vendor, which will charge a fee for this service, handles the bulk of the technical questions and manages a number of risk, compliance, and controls issues on behalf of the company. That does not mean, however, that the company is necessarily absolved from all responsibility for risk, compliance, and internal controls issues. Companies still need to pay careful attention to issues such as anti-money laundering and know your customer (AML and KYC) requirements, how does cryptocurrency investment work. And, of course, they also need to abide by any restrictions set by the Office of Foreign Assets Control (OFAC), the agency that administers and enforces economic and trade sanctions set by the US government.

Cryptocurrency – meaning and definition

Cryptocurrency, sometimes called crypto-currency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies don't have a central issuing or regulating authority, instead using a decentralized system to record transactions and issue new units.

What is cryptocurrency?

Cryptocurrency is a digital payment system that doesn't rely on banks to verify transactions. It’s a peer-to-peer system that can enable anyone anywhere to send and receive payments, how does cryptocurrency investment work. Instead of being physical money carried around and exchanged in the real world, cryptocurrency payments exist purely as digital entries to an online database describing specific transactions. When you transfer cryptocurrency funds, how does cryptocurrency investment work, the transactions are recorded in a public ledger. Cryptocurrency is stored in digital wallets.

Cryptocurrency received its name because it uses encryption to verify transactions. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers. The aim of encryption is to provide security and safety.

The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best known today. Much of the interest in cryptocurrencies is to trade for profit, with speculators at times driving prices skyward.

How does cryptocurrency work?

Cryptocurrencies run on a distributed public ledger called blockchain, a record of all transactions updated and held by currency holders.

Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.

If you own cryptocurrency, you don’t own anything tangible. What you own is a key that allows you to move a record or a unit of measure from one person to another without a trusted third party.

Although Bitcoin has been around since 2009, cryptocurrencies and applications of blockchain technology are still emerging in financial terms, and more uses are expected in the future. Transactions including bonds, stocks, and other financial assets could eventually be traded using the technology.

Cryptocurrency examples

There are thousands of cryptocurrencies. Some of the best known include:

Bitcoin:

Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded. The currency was developed by Satoshi Nakamoto – widely believed to be a pseudonym for an individual or group of people whose precise identity remains unknown.

Ethereum:

Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.

Litecoin:

This currency is most similar to bitcoin but has moved more quickly to develop new innovations, including faster payments and processes to allow more transactions.

Ripple:

Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track different kinds of transactions, not just cryptocurrency. The company behind it has worked with various banks and financial institutions.

Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them from the original.

How to buy cryptocurrency

You may be wondering how to buy cryptocurrency safely. There are typically three steps involved. These are:

Step 1: Choosing a platform

The first step is deciding which platform to use, how does cryptocurrency investment work. Generally, you can choose between a traditional broker or dedicated cryptocurrency exchange:

• Traditional brokers. These are online brokers who offer ways to buy and sell cryptocurrency, as well as other financial assets like stocks, bonds, and ETFs. These platforms tend to offer lower trading costs but fewer crypto features.
• Cryptocurrency exchanges. There are many cryptocurrency exchanges to choose from, each offering different cryptocurrencies, wallet storage, interest-bearing account options, and more. Many exchanges charge asset-based fees.

When comparing different platforms, consider which cryptocurrencies are on offer, what fees they charge, their security features, storage and withdrawal options, and any educational resources.

Step 2: Funding your account

Once you have chosen your platform, the next step is to fund your account so you can begin trading, how does cryptocurrency investment work. Most crypto exchanges allow users to purchase crypto using fiat (i.e., government-issued) currencies such as the US Dollar, the British Pound, or the Euro using their debit or credit cards – although this varies by platform.

Crypto purchases with credit cards are considered risky, and some exchanges don't support them. Some credit card companies don't allow crypto transactions either. This is because cryptocurrencies are highly volatile, and it is not advisable to risk going into debt — or potentially paying high credit card transaction fees — for certain assets.

Some platforms will also accept How does cryptocurrency investment work transfers and wire transfers. The accepted payment methods and time taken for deposits or withdrawals differ per platform. Equally, the time taken for deposits to clear varies by payment method.

An important factor to consider is fees. These include potential deposit and withdrawal transaction fees plus trading fees. Fees will vary by payment method and platform, which is something to research at the outset.

Step 3: Placing an order

You can place an order via your broker's or exchange's web or mobile platform. If you are planning to buy cryptocurrencies, you can do so by selecting "buy," choosing the order type, entering the amount of cryptocurrencies you want to purchase, and confirming the order. The same process applies to "sell" orders.

There are also other ways to invest in crypto. These include payment services like PayPal, Cash App, and Venmo, which allow users to buy, sell, or hold cryptocurrencies. In addition, there are the following investment vehicles:

• Bitcoin trusts: You can buy shares of Bitcoin trusts with a regular brokerage account. These vehicles give retail investors exposure to crypto through the stock market. 
• Bitcoin mutual funds: There are Bitcoin ETFs and Bitcoin mutual funds to choose from. 
• Blockchain stocks or ETFs: You can also indirectly invest in crypto through blockchain companies that specialize in the technology behind crypto and crypto transactions. Alternatively, you can buy stocks or ETFs of companies that use blockchain technology.

The best option for you will how does cryptocurrency investment work on your investment goals and risk appetite.

How to store cryptocurrency

Once you have purchased cryptocurrency, you need to store it safely to protect it from hacks or how does cryptocurrency investment work. Usually, cryptocurrency is stored in crypto wallets, which are physical devices or online software used to store the private keys to your cryptocurrencies securely. Some exchanges provide wallet services, making it easy for you to store directly through the platform. However, not all exchanges or brokers automatically provide wallet services for you.

There are different wallet providers to choose from. The terms “hot wallet” and “cold wallet” are used:

• Hot wallet storage: "hot wallets" refer to crypto storage that uses online software to protect the private keys to your assets.
• Cold wallet storage: Unlike hot wallets, cold wallets (also known as hardware wallets) rely on offline electronic devices to securely store your private keys.

Typically, cold wallets tend to charge fees, while hot wallets don't.

What can you buy with cryptocurrency?

When it was first launched, Bitcoin was intended to be a medium for daily transactions, making it possible to buy everything how does cryptocurrency investment work a cup of coffee to a computer or even big-ticket items like real estate. That hasn’t quite materialized and, while the number of institutions accepting cryptocurrencies is growing, large transactions involving it are rare, how does cryptocurrency investment work. Even so, how does cryptocurrency investment work, it is possible to buy a wide variety of products from e-commerce websites using crypto. Here are some examples:

Technology and e-commerce sites:

Several companies that sell tech products accept crypto on their websites, such as newegg.com, AT&T, and Microsoft. Overstock, an e-commerce platform, was among the first sites to accept Bitcoin. Shopify, Rakuten, and Home Depot also accept it.

Luxury goods:

Some luxury retailers accept crypto as a form of payment. For example, how does cryptocurrency investment work, online luxury retailer Bitdials offers Rolex, how does cryptocurrency investment work, Patek Philippe, and other high-end watches in return for Bitcoin.

Cars:

Some car dealers – from mass-market brands to high-end luxury dealers – already accept cryptocurrency as payment.

Insurance:

In April 2021, Swiss insurer AXA announced that it had begun accepting Bitcoin as a mode how does cryptocurrency investment work payment for all its lines of insurance except life insurance (due to regulatory issues). Premier Shield Insurance, which sells home and auto insurance policies in the US, also accepts Bitcoin for premium payments.

If you want to spend cryptocurrency at a retailer that doesn’t accept it directly, you can use a cryptocurrency debit card, such as BitPay in the US.

Cryptocurrency fraud and cryptocurrency scams

Unfortunately, cryptocurrency how does cryptocurrency investment work is on the rise, how does cryptocurrency investment work. Cryptocurrency scams include:

Fake websites: Bogus sites which feature fake testimonials and crypto jargon promising massive, guaranteed returns, provided you keep investing.

Virtual Ponzi schemes: Cryptocurrency criminals promote non-existent opportunities to invest in digital currencies and create the illusion of huge returns by paying off old investors with new investors’ money. One scam operation, BitClub Network, raised more than $700 million before its perpetrators were indicted in December 2019.

"Celebrity" endorsements: Scammers pose online as billionaires or well-known names who promise to multiply your investment in a virtual currency but instead steal what you send. They may also use messaging apps or chat rooms to start rumours that a famous businessperson is backing a specific cryptocurrency. Once they have encouraged investors to buy and driven up the price, the scammers sell their stake, and the currency reduces in value.

Romance scams: The FBI warns of a trend in online dating scams, where tricksters persuade people they meet on dating apps or social media to invest or trade in virtual currencies. The FBI’s Internet Crime Complaint Centre fielded more than 1,800 reports of crypto-focused romance scams in the first seven months of 2021, with losses reaching $133 million.

Otherwise, fraudsters may pose as legitimate virtual currency traders or set up bogus exchanges to trick people into giving them money. Another crypto scam involves fraudulent sales pitches for individual retirement accounts in cryptocurrencies. Then there is straightforward cryptocurrency hacking, where criminals break into the digital wallets where people store their virtual currency to steal it.

Is cryptocurrency safe?

Cryptocurrencies are usually built using blockchain technology. Blockchain describes the way transactions are recorded into "blocks" and time stamped. It's a fairly complex, technical process, but the result is a digital ledger of cryptocurrency transactions that's hard for hackers to tamper with.

In addition, transactions require a two-factor authentication process, how does cryptocurrency investment work. For instance, you might be asked to enter a username and password to start a transaction. Then, you might have to enter an authentication code sent via text to your personal cell phone.

While securities are in place, that does not mean cryptocurrencies are un-hackable. Several high-dollar hacks have cost cryptocurrency start-ups heavily. Hackers hit Coincheck to the tune of $534 million and BitGrail for $195 million, making them two of the biggest cryptocurrency hacks of 2018.

Unlike government-backed money, the value of virtual currencies is driven entirely by supply and demand. This can create wild swings that produce significant gains for investors or big losses. And cryptocurrency investments are subject to far less regulatory protection than traditional how does cryptocurrency investment work products like stocks, bonds, and mutual funds.

Four tips to invest in cryptocurrency safely

According to Consumer Reports, all investments carry risk, but some experts consider cryptocurrency to be one of the riskier investment choices out there. If you are planning to invest in cryptocurrencies, how does cryptocurrency investment work, these tips can help you make educated choices.

Research exchanges:

Before you invest, learn about cryptocurrency exchanges. It’s estimated that there are over 500 exchanges to choose from, how does cryptocurrency investment work. Do your research, read reviews, and talk with more experienced investors before moving forward.

Know how to store your digital currency:

If you buy cryptocurrency, you have to store it. You can keep it on an exchange or in a digital wallet, how does cryptocurrency investment work. While there are different kinds of wallets, each has its benefits, technical requirements, and security. As with exchanges, you should investigate your storage choices before investing.

Diversify your investments:

Diversification is key to any good investment strategy, and this holds true when you are investing in cryptocurrency. Don't put all your money in Bitcoin, for example, just because that's the name you know. There are thousands of options, and it's better to spread your investment across several currencies.

Prepare for volatility:

The cryptocurrency market is highly volatile, so be prepared for ups and downs. You will see dramatic swings in prices. If your investment portfolio or mental wellbeing can't handle that, cryptocurrency might not be a wise choice for you.

Cryptocurrency is all the rage right now, but remember, it is still in its relative infancy and is considered highly speculative. Investing in something new comes with challenges, so be prepared. If you plan to participate, do your research, and invest conservatively to start.

One of the best ways you can stay safe online is by using a comprehensive antivirus. Kaspersky Internet Security defends you from malware infections, how does cryptocurrency investment work, spyware, data theft and protects your online payments using bank-grade encryption.

Related articles:

What is cryptocurrency and how does it work?

Cryptocurrency is a digital currency using cryptography to secure transactions. Learn about buying cryptocurrency and cryptocurrency scams to look out for.

Cryptocurrency has moved into the mainstream as an investment asset class. If you're looking to add some to your portfolio, it may be difficult to figure out how to get started. Crypto is currently unregulated, and investing in it can feel more Wild West than Wall Street.

Read on to learn the basics of cryptocurrency and how to get started investing in it.

What is cryptocurrency?

Cryptocurrency is a type of digital currency that doesn't rely on a central authority to verify transactions or create new units. Instead, it relies on cryptography to prevent counterfeiting.

Blockchain technology supports cryptocurrency. A blockchain consists of individual blocks of data that can contain information about anything, such as transactions made in a specific cryptocurrency. Each block of data makes a reference to the previous block, creating a chain of blocks. The reference uses cryptography to ensure the chain remains immutable so hackers are unable to change data.

There are thousands of cryptocurrencies in existence right now. That's largely due to the ease of creating a new currency by using smart contracts. New coins can simply piggyback on an existing blockchain that already has a well-established network of computers verifying how does cryptocurrency investment work to pick a cryptocurrency to invest in

Before you go ahead and buy some coins or tokens just because somebody says it's a good investment, it will pay to do some research.

First of all, it's important to understand that picking a good cryptocurrency is not like picking a good stock. A stock represents ownership in a company that creates profits for its shareholders, or at least has the potential to do so. Owning a cryptocurrency represents ownership in a digital asset with zero intrinsic value.

What makes a cryptocurrency increase or decrease in price is simple supply and demand. If there's increased demand and a limited supply increase, the price goes up. If supply becomes constrained, price goes up, and vice versa. So, when how does cryptocurrency investment work a cryptocurrency, the most important questions to answer are how the supply increases, and what will drive demand for the coin higher.

You can answer those questions by reading the white paper that a cryptocurrency team publishes to attract interest in their project. Look at the roadmap for a project and see if anything could spark an increase in demand. Research the team behind a project and see if they have the skills to execute their vision. Try to find a community of people already investing in the cryptocurrency and gauge their sentiment.

It's also important to consider how much money has already flowed into a cryptocurrency. If the market cap is already very high, there may not be much potential growth left. A high price will curb demand and increase supply as early investors look to take money off the table.

Image source: Getty Images.

How to invest in cryptocurrencies

Once you've found a cryptocurrency you think will make a good investment, it's time to start buying.

The first step is to open an account with a cryptocurrency exchange. Most stock brokers don't support trading in cryptocurrency. Coinbase(NASDAQ:COIN) is one of the most popular and beginner-friendly exchanges in the U.S. Other options include Gemini, and newer brokers such as Robinhood(NASDAQ:HOOD) and SoFi(NASDAQ:SOFI) support crypto. Just be sure the exchange you want to use also supports the cryptocurrency you want to buy.

Once you've funded how does cryptocurrency investment work account with how does cryptocurrency investment work currency, you can make an order to buy your cryptocurrency. Orders how does cryptocurrency investment work an exchange work the same way as orders in the stock market. The exchange will match your buy order with someone making a sell order at the same price and make the trade.

Once your trade is complete, the exchange will hold your cryptocurrency for you in a custodial wallet.

Buying cryptocurrency is the easy part. As a crypto investor, you have to be prepared for volatility. Crypto, how does cryptocurrency investment work, in general, is more volatile than traditional asset classes such as stocks. Price swings of 10% or more in just a few hours are very common.

Additionally, you should consider how much of your portfolio you ultimately want to allocate to a specific cryptocurrency and to the asset class in general. With the volatility of crypto, be sure to give yourself wide bands of acceptable allocations. If your investments fall out of those bands, be sure to rebalance.

Advantages and drawbacks to investing in cryptocurrency

Investing in cryptocurrency has a few advantages:

• Diversification: The value of cryptocurrency doesn't appear to how does cryptocurrency investment work correlated with the price of stocks, bonds, or other asset classes. That said, cryptocurrency has only existed for about a decade, how does cryptocurrency investment work, so the data is limited in this regard. Theoretically, though, it makes sense that the price of crypto is unrelated to the price of traditional assets.
• Return potential: Cryptocurrency has produced extremely strong returns as adoption increases. Most people agree the expected return for a sound cryptocurrency investment is greater than that for stocks.
• Additional utility: Unlike stocks, some cryptocurrencies provide utility. Bitcoin(CRYPTO:BTC), for example, how does cryptocurrency investment work, can be used to pay for goods and services. Other tokens may provide access to projects or discounts on a project's services.

But there are some big disadvantages for investors as well:

• Limited regulation: There's limited regulation in the cryptocurrency industry, which means you don't have the same protections as you do when investing in the heavily regulated stock market. If your account gets hacked, for example, you could find your investment completely gone without any recourse. If the coin you invest how does cryptocurrency investment work turns out to be a scam, there's nothing you can do. Furthermore, increased regulation may decrease the demand for some cryptocurrencies, adding a risk to the investment.
• High volatility: The prices for cryptocurrency can swing wildly on a day-to-day basis. Such massive price swings can be hard for some investors to stomach.

Top cryptocurrencies to consider as a beginner investor

As a beginning cryptocurrency investor, you shouldn't try to find a diamond in the rough. You should get your feet wet with more established cryptocurrencies that have built-out networks to support them. That will allow you to get more familiar with the mechanics of cryptocurrency investing, as well as how it fits into your portfolio.

Bitcoin(CRYPTO:BTC) is an easy place to start. Every cryptocurrency exchange will support trading in Bitcoin. It's well-established, how does cryptocurrency investment work, and you know what you're getting with Bitcoin. It's nothing fancy, just digital cash, but it has a first-mover advantage that had made it widely adopted. That gives Bitcoin a competitive advantage when it comes to being actually usable as a medium of exchange.

Ether(CRYPTO:ETH) is also a good choice for beginner investors. Ethereum's technology is behind most DeFi projects, which use the Ethereum blockchain to execute smart contracts and provide financial services without a central authority. Anytime a user wants to write a smart contract to the blockchain, they'll have to how does cryptocurrency investment work Ether to do so. Increased adoption of DeFi applications will lead to greater demand for Ether.

A third option for beginner investors is Cardano(CRYPTO:ADA). Cardano offers an alternative to Ethereum that's designed to be more energy efficient by using a proof-of-stake system to verify blocks on the blockchain. As such, it currently has much lower transaction fees than Ethereum. Additionally, Cardano has a hard cap on the total supply of the token similar to Bitcoin. That means the supply could become constrained in the future, which will drive the price higher.

Making money by investing in cryptocurrencies

Investing in crypto requires you to do your research and be confident enough in your investment to hang on during what's sure to be a wild ride. If you can do that, the payoff could be worth it as the expected returns are higher than most other asset classes.

It's possible to get filthy rich by investing in cryptocurrency in 2022 -- but you could also lose all of your money. Investing in crypto assets is risky but also potentially extremely profitable.

Cryptocurrency is a good investment if you want to gain direct exposure to the demand for digital currency. A safer but potentially less lucrative alternative is buying the stocks of companies with exposure to cryptocurrency.

Let's examine the pros and cons of investing in cryptocurrency.

Is cryptocurrency safe?

Several factors make cryptocurrency a not entirely safe investment. However, other signs are emerging that cryptocurrency is here to stay.

There are numerous risks associated with crypto. Investors and users must decide for themselves if the benefits outweigh these risks.

Cryptocurrency risks

Cryptocurrency exchanges, more so than stock exchanges, are vulnerable to being hacked and becoming targets of other criminal activity. Security breaches have led to sizable losses for investors who have had their digital currencies stolen, spurring many exchanges and third-party insurers to begin offering protection against hacks. 

Safely storing cryptocurrencies is also more difficult than owning stocks or bonds. Cryptocurrency exchanges such as Coinbase(NASDAQ:COIN) make it fairly easy to buy and sell crypto assets such as Bitcoin(CRYPTO:BTC) and Ethereum(CRYPTO:ETH), but many people don't like to keep their digital assets on exchanges due to the risks of allowing any company to control access to their assets.

Storing cryptocurrency on a centralized exchange means you don't have full control over your assets. An exchange could freeze your assets based on a government request, or the exchange could go bankrupt and you'd have no recourse to recover your money.

Some cryptocurrency owners prefer offline "cold storage" options such as hardware wallets, but cold storage comes with how does cryptocurrency investment work own set of challenges. The biggest is the risk of losing your private key; without a key, it's impossible to access your cryptocurrency.

There's also no guarantee that a crypto project you invest in will succeed. Competition is fierce among thousands of blockchain projects, and many projects are no more than scams. Only a small percentage of cryptocurrency projects will ultimately flourish.

Regulators may also crack down on the entire crypto industry, especially if governments view cryptocurrencies as a threat rather than an innovative technology.

The cutting-edge technology elements of cryptocurrency also increase the risks for investors. Much of the tech is still being developed and is not yet extensively proven in real-world scenarios.

The Motley How does cryptocurrency investment work 5 Million Dollar Crypto Bet. Read More »

Cryptocurrency adoption

Despite the risks, cryptocurrencies and the blockchain industry are growing stronger. Much-needed financial infrastructure is being built, and investors how does cryptocurrency investment work increasingly able to access institutional-grade custody services. Professional and individual investors are gradually receiving the tools they need to manage and safeguard their crypto assets.

Crypto futures markets are being established, and many companies are gaining direct exposure to the how does cryptocurrency investment work sector. Financial giants such as Block(NYSE:SQ) and PayPal(NASDAQ:PYPL) are making it easier to buy and sell cryptocurrency on their popular platforms. Other companies, including Block, have poured hundreds of millions of dollars into Bitcoin and other digital assets, how does cryptocurrency investment work. Tesla(NASDAQ:TSLA) purchased $1.5 billion worth of Bitcoin in early 2021. By February 2022, the electric vehicle maker reported that it held almost $2 billion of the cryptocurrency. MicroStrategy (NASDAQ:MSTR) -- a business intelligence software company -- has been accumulating Bitcoin since 2020. It held $5.7 billion in the cryptocurrency by the end of 2021 and said it plans to buy more with excess cash generated from operations.

Although other factors still affect the riskiness of cryptocurrency, the increasing pace of adoption is a sign of a maturing industry, how does cryptocurrency investment work. Individual investors and companies are seeking to gain direct exposure to cryptocurrency, considering it safe enough for investing large sums of money.

Is crypto a good long-term investment?

Many cryptocurrencies such as Bitcoin and Ethereum are launched with lofty objectives, which may be achieved over long time horizons. While the success of any cryptocurrency project is not assured, early investors in a crypto project that reaches its goals can be richly rewarded over the long term.

For any cryptocurrency project, however, achieving widespread adoption is necessary to be considered a long-term success.

Bitcoin as a long-term investment

Bitcoin, as the most widely known cryptocurrency, benefits from the network effect -- more people want to own Bitcoin because Bitcoin is owned by the most people. Bitcoin is currently viewed by many investors as "digital gold," but it could also be used as a digital form of cash.

Bitcoin investors believe the cryptocurrency will gain value over the long term because the supply is fixed, unlike the supplies of fiat currencies such as the U.S. dollar or the Japanese yen. The supply of Bitcoin is capped at fewer than 21 million coins, while most currencies can how does cryptocurrency investment work be printed at the will of central bankers. Many investors expect Bitcoin to gain value as fiat currencies depreciate.

Those who are bullish about Bitcoin being extensively used as digital cash believe it has the potential to become the first truly global currency. 

Ethereum as a long-term investment

Ether is the native coin of the Ethereum platform and can be purchased by investors wishing to gain portfolio exposure to Ethereum. While Bitcoin can be viewed as digital gold, Ethereum is building a global how does cryptocurrency investment work platform that supports many other cryptocurrencies and a massive ecosystem of decentralized applications ("dApps").

The large number of cryptocurrencies built on the Ethereum platform, plus the open-source nature of dApps, how does cryptocurrency investment work opportunities for Ethereum to also benefit from the network effect and to create sustainable, long-term value. The Ethereum platform enables the use of "smart contracts," which execute automatically based on terms written directly into the contract code.

The Ethereum network collects Ether from users in exchange for executing smart contracts. Smart contract technology has significant potential to disrupt massive industries such as real estate and banking and also to create entirely new markets.

As the Ethereum platform becomes increasingly used worldwide, the Ether token increases in utility and value. Investors bullish on the long-term potential of the Ethereum platform can profit directly by owning Ether.  

That's not to say Ethereum doesn't have competition. A number of "Ethereum Killers," how does cryptocurrency investment work Solana (CRYPTO:SOL), Polygon (CRYPTO:MATIC), and Avalanche(CRYPTO:AVAX), are all built to handle smart contracts and use a blockchain system capable of processing more transactions per second. The speed has the added advantage of being less expensive for users as well. But Ethereum is the most broadly adopted platform for using smart contracts.

Should you invest in cryptocurrency?

Owning some cryptocurrency can increase your portfolio's diversification since cryptocurrencies such as Bitcoin have historically shown few price correlations with the U.S. stock market. If you believe that cryptocurrency usage will become increasingly widespread over time, then it probably makes sense for you to buy some crypto directly as part of a diversified portfolio. For every cryptocurrency that you invest in, be sure to have an investment thesis as to why that currency will stand the test of time. If you do your research and learn as much as possible about how to invest in cryptocurrency, you should be able to manage the investment risk as part of your overall portfolio.

If buying cryptocurrency seems too risky, you can consider other ways to potentially profit from the rise of cryptocurrencies. You can buy the stocks of companies such as Coinbase, Block, and PayPal, or you can invest in an exchange like CME Group(NASDAQ:CME), which facilitates crypto futures trading. Although investments in these companies may be profitable, they do not have the same upside potential as investing in cryptocurrency directly.

Expert Q&A

The Motley Fool sought blockchain insights from three finance experts: Dr. Christine Parlour, professor and Sylvan C. Coleman Chair of Finance and Accounting at the Haas School of Business, University of California, Berkeley; Dr. Jimmie Lenz, director of Duke University's Master of Engineering in FinTech and Master of Engineering in Cybersecurity; and Dr. Merav Ozair, who is a leading blockchain expert and a FinTech Professor at Rutgers Business School.

bitcoin investor seriös Sylvan C. Coleman Chair of Finance and Accounting at the Haas School of Business, University of California, Berkeley" src="https://g.foolcdn.com/image/?url=https%3A%2F%2Fg.foolcdn.com%2Feditorial%2Fimages%2F532009%2Fchristine-parlour-uc-berkeley.jpeg&w=700&op=resize">

Dr. Christine Parlour, professor and Sylvan C. Coleman Chair of Finance and Accounting at the Haas School of Business, University of California, Berkeley. Most of her work is in institutionally complex areas in finance, banking and financial technology. Her current work focuses on fintech, how does cryptocurrency investment work, payment systems, blockchain and cryptocurrency, how does cryptocurrency investment work, and market infrastructure.

The Motley Fool: What advice would you give to someone interested in investing in blockchain technology?

Parlour: Be curious but also be cautious. It is important to recognize that there is not a complete regulatory framework in this area. So, it is important to do your homework. First, consider the venue that you use to access the market. There are regulated crypto exchanges and trading places; however, there are also unregulated ones. Second, while most tokens are based on open-source code, it is not the case that they have the same disclosure regimes as blue chip stocks. So, be careful and investigate the nature of the underlying token. Note that in other countries (Canada, Europe), there are ETFs and ETPs that track crypto portfolios; these have not received regulatory approval yet in the U.S. If and when they are offered to consumers, these will be a low-cost way of accessing the crypto market, and then someone else will handle the market mechanics. 

Dr. Jimmie Lenz, director of Duke University's Master of Engineering in FinTech and Master of Engineering in Cybersecurity. Dr. Lenz is an experienced executive, lecturer, and scholar in the field of banking and capital markets, so we asked him a few questions about DeFi and blockchain.

Lenz:Learn and keep learning. The developments in the space are happening at a rapid pace, so much so that new knowledge is being generated constantly. As a professor teaching blockchain, this is the hardest part, reinventing the course every semester, but it keeps my students and me as current as possible. This doesn't mean neglecting base knowledge; having this is crucial, as well as how does cryptocurrency investment work sense of the history to understand why developments have occurred at specific times.

Dr. How does cryptocurrency investment work Ozair is a leading blockchain expert and a FinTech Professor at Rutgers Business How does cryptocurrency investment work. She serves as research director of RBS Blockchain Hub, how does cryptocurrency investment work, as well as an advisor and researcher at the Rutgers Blockchain and FinTech Collaboratory.

Ozair: Blockchain technology is definitely the future. There is no escaping that. However, it is difficult to predict which projects will last and which will fail and be forgotten.

Most blockchain technology companies are in their early, if not very how does cryptocurrency investment work, stages. Hence, investing in companies utilizing blockchain technologies has all the how does cryptocurrency investment work risks as investing in a start-up. And like in any start-up, the risk-reward ratio is high.

Therefore, learn about blockchain technology, do a thorough due diligence on any project -- from its technology to business model to execution. Learn about the "problem" it is trying to solve and what solution it's offering -- both from a technological perspective and a business perspective.

There's a lot of potential with blockchain technology, but the execution is in the details.

Cryptocurrency. It’s the hot buzzword of the investing world these days. But what is cryptocurrency really? Ever heard of Bitcoin, Dogecoin, Litecoin, XRP or Ethereum? Nope—they aren’t embarrassing rock band names from the ’90s. They’re actually types of cryptocurrency (aka digital money). And they’re trending everywhere you how does cryptocurrency investment work the million-dollar (crypto?) question here is, should you invest in cryptocurrency? Despite what every loudmouth on the internet yells at you from how does cryptocurrency investment work digital soapbox, buying cryptocurrency isn’t a safe bet for your investing future. But we’ll get to that in a minute. Let’s unpack what in the world crypto is first.

What Is Cryptocurrency? 

Cryptocurrencies are digital assets people use as investments and for online purchases. You exchange real currency, like dollars, to buy “coins” or “tokens” of a certain kind of cryptocurrency.

Think of it this way: Cryptocurrency is kind of like swapping out your money in a new country, how does cryptocurrency investment work. A Benjamin can buy you a nice dinner in the States, but if you want to enjoy fine dining in Italy, you’ll need some euros. We value dollars and euros because we know we can purchase goods or services with them. The same goes for cryptocurrency. How does cryptocurrency investment work exchange your money for crypto and use it just like real money (at places that accept it as a type of payment).

So, where the heck do we get the word cryptocurrency from, anyway? Glad you asked. It comes from the word cryptography meaning the art of writing or solving codes. Sounds like the setup of an Indiana Jones movie, right? Each coin of cryptocurrency is a unique line of code. And cryptocurrencies can’t be copied, which makes them easy to track and identify as they’re traded.

You’ve probably heard of people making (or losing!) hundreds of thousands of dollars by investing in cryptocurrency. It feels like a modern-day gold rush all of a sudden.

How Does Cryptocurrency Work?

Cryptocurrency is exchanged from person to person on the web without a middleman, like a bank or government. It’s like the wild, wild west of the digital world—but there’s no marshal to uphold the law.

Here’s what we mean: Have you ever hired a kid in your neighborhood to mow your lawn or watch your dog while you were out of town? Chances are, you paid them in cash. You didn’t need to go to the bank to make an official transaction. That’s what it’s like to exchange cryptocurrencies. They’re decentralized—which means no government or bank controls how they’re made, what their value is, or how they’re exchanged.

Because of that, cryptocurrencies are worth whatever people are willing to pay or exchange for them. Yep, it’s pretty wild.

How Do You Store Your Cryptocurrency?

Hang with us, we’re about to get how does cryptocurrency investment work techy here. You store your cryptocurrency in something called a digital wallet—usually in an app or through the vendor where you purchase your coins. Your wallet gives you a private key—a unique code that you enter in order to digitally sign off on purchases. It’s mathematical proof that the exchange was legit.

With us so far? Okay, good. Because we’re about to get into the tech weeds even more.

Cryptocurrencies use something how does cryptocurrency investment work blockchain technology. A blockchain is like a really long receipt that keeps growing with each exchange of crypto. It’s a public record of all of the transactions that have ever happened in a given cryptocurrency. Yes, it sounds like it’s straight out of The Matrix. Just think of it like a ledger that shows the history of that piece of currency.

What Types of Cryptocurrency Are There?

Bitcoin is the top dog that everyone knows about, but it’s not the only kind of cryptocurrency out there. There’s Litecoin, Polkadot, Chainlink, Mooncoin. .how does cryptocurrency investment work. and, oh, just about 10,000 other kinds of weirdly named coins coming up the ranks. Let’s best money making method runescape 2022 on the top contenders:

Bitcoin 

Yeah, how does cryptocurrency investment work, it’s the household name that most people think of when you talk about cryptocurrency. That’s because it was the first cryptocurrency, and it’s been around for a while now. Bitcoin was created in 2009 by an unknown person who goes by the secret name Satoshi Nakamoto—whoever that is.¹And that big secret is part of its underground feel that people like. But there’s no denying the fact that everything anonymous is super shady.

Even though cryptocurrency is rocky, crypto investors seem to like Bitcoin because they think it has a little more strength than the rest. It’s also valued much higher than its competitors (for now).

Ethereum

This one is the next most popular cryptocurrency after Bitcoin. And even though Ethereum is like Bitcoin with its crypto coins (called Ether), it’s a little different too. Ethereum is a bit more complex because it allows its users to “mine” their coins. What does that even mean? In the crypto world, mining happens when people use their computers to solve super complicated math problems that make sure new crypto transactions are correct, which adds to the blockchain (aka the receipt). These people “mining” are then paid in—you guessed it—Ether coins.

Dogecoin 

Dogecoin (pronounced “dohj-coin”) started as a joke back in 2013 and is now the hottest thing to invest in. At the time, there was a meme going around of a Shiba Inu (that’s a kind of dog). The creators of Dogecoin named their cryptocurrency after the “Doge” meme, it became their mascot, and the rest is internet history. Oh, we’re serious. You can’t make this stuff up.

So, all of that to say, there’s no shortage of coins to invest in out there in cryptocurrency land. And depending on what’s trending that day (Dogecoin, anyone?), you’ll see the value on these coins go up and down like one of those swinging pirate ship rides at a carnival. If you chase crypto based on what’s hot that day, you’ll probably wind up sick too (just like you would from that dang carnival ride).

What Can You Buy With Cryptocurrency? 

At this point, most people still see how does cryptocurrency investment work as an investment. But cryptocurrency is quickly gaining speed and becoming more widely accepted as currency. And that could become even now factory investors popular as these cryptocurrencies keep gaining trust.

Some major retailers, like Whole Foods, Nordstrom, how does cryptocurrency investment work, Etsy, How does cryptocurrency investment work PayPal are now letting people pay using crypto. And of course, any two people who value the tokens can exchange them for goods or services with each other. And let’s not forget the whole cryptocurrency digital art craze called NFTs where you buy digital art with digital money—but that’s a different story for another day.

Is Cryptocurrency a Good Investment? Four Things to Know 

Before you say good-bye to your dollars and hello to Bitcoin, Ether or Doge, there are a few things you need to know up front.

1. Cryptocurrency is unstable.

It’s true—crypto is about as hot tempered as a 12-year-old. Its value swings way up, only to come plunging back down, and you never really know what you’re going to get each day. The value of cryptocurrencies goes through extreme ups and downs. There’s no denying that some are really hot right now—but for how long? Someone sneezes and the price drops! Investing in cryptocurrency is risky, to say the least.

But here’s the crazy thing: A recent study by Piplsay shows that 50% of Americans think investing in cryptocurrency is safe.² Fifty percent! News flash: Cryptocurrency definitely isn’t a sure thing—it carries a huge amount of risk. Let’s be real here, all investing comes with some level of risk. But why jump all the way to the deep how does cryptocurrency investment work with something this up and down?

2. Cryptocurrency has lots of unknowns.

There’s still a lot that needs to be ironed out with how cryptocurrencies work. Think about it: Nobody even knows who the founder of Bitcoin is! Only a small percentage of people in the world really understand the system and know how to operate it. Ignorance makes you vulnerable. We always tell people that if you can’t explain your investments to a 10-year-old, you have no business investing in them to begin with. You’re setting yourself up for a big mess.

P.S. Even though it might seem like everyone and their grandpa is investing in crypto, research shows only 4% of Americans have done it.³

3. Cryptocurrency makes fraud easier.

All it takes is five minutes on the internet to know not everyone has your best interests at heart. Scammers will stop at nothing to get access to your personal information and passwords—even your bank account. And guess what? Cryptocurrency makes it that much easier for them.

Now look, we’re not saying everyone who uses cryptocurrency is a bad guy who’s dodging the government and making shady deals on the black market. But if someone wanted to commit a crime and fly under the radar without being tracked, cryptocurrency is going to call their name.

4, how does cryptocurrency investment work. Cryptocurrencies have an unproven rate of return.

Trading in cryptocurrency is kind of like gambling. Because it’s exchanged from person to person without anyreal regulations, there’s no pattern to the rise and fall of its value. You can’t figure out the changes or calculate returns like you can with growth stock mutual funds. There just isn’t enough data, or enough credibility, to create a long-term investing plan based in cryptocurrency. Don’t play poker with your financial future here.

Should I Invest in Cryptocurrency?

Plain and simple—investing in cryptocurrency is not a good way to build wealth for your future. If you really want a solid investment, don’t mess around with adding some crypto coins to your digital wallet. Here’s the better plan: If you’re out of debt, have an emergency fund that will cover three to six months how much is 200 bitcoin in dollars expenses, and you’re ready to invest, then focus on investing 15% of your income in growth stock mutual funds—which are way more secure than crypto.

Don’t give in to stupid just because there’s a lot of hype. We’ve talked to people who have taken out a mortgage or cashed out their entire 401(k) early to invest in cryptocurrency—heck no! Don’t put it all on the line and risk your financial future, your retirement dreams and your family’s well-being. If you can’t afford to lose the money, don’t invest it in something as unstable as crypto.

A Better Way to Invest

Bottom line? The road to building wealth is slow and steady, and there are stillway too many unknowns when it comes to cryptocurrency. Could crypto become a more legit way to invest later on down the road? Sure. But as things stand today, just say no.

Get-rich-quick schemes are just that—schemes.Don’t risk it and pour all your hopes, dreams and money into them. Instead, sit down with a SmartVestor who has the heart of a teacher. Let them walk you through a solid strategy for investing. And don’t knock that 401(k), folks. It’s the number one wealth-building tool of millionaires! And millionaires don’t build wealth through risky investments like crypto.