Cryptocurrency may once have seemed like a niche interest or even a passing fad, but it’s quickly moving into the mainstream market.
There’s a lot of hype surrounding cryptocurrency recently, but what exactly is cryptocurrency? and is it good for the average consumer or investor?
Reporting for TODAY, NBC’s senior consumer investigative correspondent Vicky Nguyen broke down what cryptocurrency is and how to know whether it’s trustworthy, and what red flags you should be aware of before taking a leap.
What is cryptocurrency?
Cryptocurrency is a virtual currency that is stored on a sort of digital ledger called a blockchain.
Some cryptocurrencies can be used like money to purchase goods. Other cryptocurrencies are handled like stocks that are traded, meaning their value can fluctuate and change.
There are over 17,000 cryptocurrencies, but some that are most popular include Bitcoin, Ethereum, Tether, and LiteCoin. Cryptocurrencies are traded on digital platforms and exchanges, such as Coinbase, Binance, and Gemini.
The “crypto” in the name refers to the fact that the transaction details are encrypted on the blockchain, with cryptocurrency owners holding a digital “key” that proves they own the currency.
What is cryptocurrency, and is it worth the risk of your money?
What’s the point of cryptocurrency?
Why use cryptocurrency at all, instead of sticking with traditional money or stocks?
Many people believe this gives cryptocurrency owners more security, privacy and autonomy.
Other proponents of cryptocurrency are interested in the potential future with applications of the blockchain, the digital network where cryptocurrency is stored.
For example, the blockchain could serve as a network for passing on different kinds of information, according to the accounting firm PricewaterhouseCoopers — such as sharing patients’ healthcare information securely, or even gathering votes for an election.
How does cryptocurrency work?
Cryptocurrencies run on a distributed public ledger called blockchain, which records all transactions updated and held by the currency holders.
They produce units of cryptocurrency through a process called mining, which involves using computer power to solve complicated mathematical problems that are used to generate coins. you can also buy crypto from brokers, then store or spend them using cryptographic wallets.
If you own cryptocurrency, you don’t own anything substantial. What you own is a key that allows you to move a record from one person to another without a trusted third party.
Cryptocurrencies and other applications of blockchain technology are still emerging in financial terms, and more uses are expected to develop in the future. Transactions including stocks and other financial assets that could eventually be traded using the technology.
Cryptocurrency examples
Over the years many cryptocurrencies have come out. Some of the best known include:
Bitcoin:
Founded in 2009, Bitcoin was the first cryptocurrency to be made and is still the most traded. The currency was developed by Satoshi Nakamoto – And has now become one of the most valuable and commonly used cryptocurrencies.
Ethereum:
Which was developed in 2015, Ethereum is a blockchain platform that has its own cryptocurrency, called Ethereum or Ether (ETH). It has become one of most popular cryptocurrencies after Bitcoin.
Litecoin:
This currency is most like 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 is also used to track different kinds of transactions, not just cryptocurrency. The company behind ripple have worked with various banks and financial organization.
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 to exchange
The first step is to decide which platform to use. Generally, you can choose between using a traditional broker or a cryptocurrency exchange:
Traditional brokers. These are online brokers who offer ways that you can buy and sell cryptocurrency, as well as other financial assets like bonds, stocks and NTFs. 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. exchanges charge an asset-based fee.
When comparing different platforms, you should consider which cryptocurrencies are on offer, and what fees they charge, their security features, storage and withdrawal options, and any educational resources.
Step 2: Funding your account
Once you have chosen the right platform, the next step is to fund your account so you can start buying and trading. Most crypto exchanges allow users to purchase crypto using currencies such as the British Pound, the Euro or the U.S Dollar using their debit or credit cards – although this varies by platform.
Crypto purchases with credit cards are risky, and some exchanges don’t support them. Some credit card companies don’t allow you to purchase crypto and make transactions either. This is because cryptocurrencies are highly volatile, and it is not advisable to take the risk of getting into debt — or potentially paying high credit card transaction fees — for liable assets.
Other platforms will also accept ACH transfers and wire transfers. The accepted payment methods and time taken for deposits or withdrawals differ depending on the platform. Equally, the time taken for deposits to clear varies by payment method.
It is important factor to consider is fees. These include a potential deposit and withdrawal transaction fees plus trading fees. Fees will differ by your payment method and platform you choose, 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 your planning to buy cryptocurrencies, you can do so by selecting “buy,” choosing the order type, entering the number of cryptocurrencies you would want to purchase, and confirming an 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 or Bitcoin mutual funds you can 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 a cryptocurrency, you need to store it safely to protect it from hackers or theft. Usually, your cryptocurrency is stored in crypto wallets, which are physical devices or an online software which is used to store the private keys to your cryptocurrencies securely. Certain exchanges provide wallet services, which make it easier for you to store directly through the platform. However, not all exchanges or brokers will 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.
What can you Purchase with cryptocurrency?
When first launched, Bitcoin was intended to be a medium for your daily transactions, making it possible to buy anything from a computer or even bigger items like real estate. That hasn’t quite come to be 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 and Microsoft. Overstock was among one of the first sites to accept Bitcoin. Now stores such as Shopify and Home Depot also accept it.
Luxury goods:
Luxury retailers accept cryptocurrencies as a form of payment. For example, the 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 such as tesla. – already accept cryptocurrency as payment.
Insurance:
In April 2021, Swiss insurer AXA announced that it had begun accepting Bitcoin as a means 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: Unreliable sites which feature fake statements and crypto jargon promising massive, guaranteed returns, provided you keep investing your hard-earned money.
Virtual Ponzi schemes: Cryptocurrency criminals promote non-existent opportunities for you to invest into digital currencies and create the illusion of huge rewards by paying off their old investors with new investors’ money. One scam operation, called BitClub Network, raised over $700 million before its perpetrators were indicted in December 2019.
“Celebrity” endorsements: Scammers will pose online as billionaires or well-known investors who promise that they can 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 drive up the price, the scammers sell their stake, and the currency reduces in value.
Romance scams: The FBI warns people of this trend in online dating scams, where tricksters persuade people they meet through 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 normally built using blockchain technology. Blockchain describes the way transactions are recorded into “blocks” and time stamped. It’s a 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 protection. For example, you will be asked to enter a username and password to start a transaction. Then, you might have to enter an authentication code that was sent sent via text or phone call to your personal cell phone.
While securities are put in place, that does not guarantee cryptocurrencies are not capable of being hackable. Multiple 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.
Federal government-backed money, the value of virtual currencies is driven by supply and demand. This can create certain times that produce significant gains and even losses for investors. 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, the majority of investments carry risk, but 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 make an investment, you should learn about cryptocurrency exchanges. It’s estimated that there are over 500 exchanges to choose from. Research, keep up with current events, and talk with more experienced investors before moving forward.
Know how to store your digital currency:
When you buy cryptocurrency, you must store it. You can keep it on an exchange or add it to a digital wallet. whilst there are many different kinds of wallets, certain ones have its own 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 decide you are investing into cryptocurrency. For example, don’t put all your money in Bitcoin, for example, just because it is a popular crypto. There are thousands of options to choose from, and it’s better to spread your investment across several currencies.
Prepare for volatility:
The cryptocurrency market is highly volatile, so you will go though some ups and downs. You will see drastic 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 early infancy and is considered highly speculative. Investing in something new comes with its challenges, so be prepared. If you plan to be involved, do your research, and invest smartly before you start.
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