Over the past few years, you've probably heard—and read—more and more about cryptocurrency, including Bitcoin, Dogecoin, Ethereum, and many others. A surprising 13% of Americans traded in cryptocurrency in 2020, compared with 24% who traded in stocks. And the number of people trading in crypto is only expected to increase.1
But what exactly is cryptocurrency? In this article, we will cover some crypto and bitcoin basics to help you better understand this new asset and economy.
What Is Cryptocurrency?
According to the Federal Trade Commission (FTC), cryptocurrency is "a type of digital currency that generally only exists electronically."2 When we talk about currency, we're usually talking about a system of money used by a particular country. We may even think about the physical currency that we can carry in our wallets. Cryptocurrency operates similarly, but there is no physical currency to touch and hold. Instead, it is exchanged online and stored in a digital wallet (more on that later).
New forms of crypto are always being created, but Bitcoin is one of the most popular.
What Is Bitcoin?
Bitcoin is the cryptocurrency with which most people are familiar. It was created in 2009 and was one of the first digital currencies to gain popularity. As with other cryptocurrencies, there are no physical bitcoins. Instead, one's balance is kept on a public ledger that anyone can access, although each specific record is encrypted.3
Bitcoin isn't traded on any stock exchange, which also means it isn't regulated or secured the way other investment types are.
There are currently hundreds of different types of cryptocurrency, but, along with Bitcoin, a few other big players have come to the forefront, including Ethereum, XRP, Tether, Cardano, and Dogecoin.
How Do You Use Cryptocurrency?
As previously mentioned, rather than keep your cryptocurrency in the bank, you instead keep it in a digital wallet that can be stored online, on your computer, or on an external hard drive. To make purchases using cryptocurrency, you offer the crypto in your wallet as payment.
In some cases, you may be able to load cryptocurrency on a debit card to pay for purchases. According to Kiplinger, major debit card processors like Visa and Mastercard offer crypto-linked debit cards.4
One important thing to remember is that cryptocurrencies aren't protected by banks or financial institutions and don't come with the same legal protections as credit and debit cards. If something happens to your currency—for example, you get locked out of your digital wallet or someone steals your computer—it will be difficult to recover.
In addition, most crypto purchases aren't reversible, and the purchaser will not be able to enter a dispute with the credit card company as you can with traditional currency purchases. The FTC warns that if you store your crypto with a third-party company and that company goes out of business or is hacked, the government has no obligation to step in and help as it would with FDIC-insured assets.2
As our economy continues to become more familiar with cryptocurrencies, more people are looking into making cryptocurrency part of their overall investment strategy. Even though crypto is currently seen as a speculative investment — both volatile and risky -- it is still interesting to keep it "on the radar" of potential investing success. A discussion with your fee-only financial planner is a wise first step to making a significant cryptocurrency investment.
- https://www.cnbc.com/2021/07/23/13percent-of-americans-traded-crypto-in-the-past-year-survey-finds.html
- https://consumer.ftc.gov/articles/what-know-about-cryptocurrency-scams
- https://www.blockchain.com/explorer
- https://www.kiplinger.com/investing/cryptocurrency/603697/how-do-i-spend-my-bitcoin-and-where
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.