Cryptocurrency isn’t the black sheep it once was. It’s hit the mainstream, and it’s grabbing up more headlines and investors than ever before.
These days, about 1 in 7 Americans own some type of cryptocurrency. And a little more than half of them bought it for the first time in 2020.1
Those numbers are likely to climb this year. That’s because more than a quarter of folks say they plan to buy cryptocurrency in the next 12 months.2
With all the headlines, it’s hard to ignore all of the excitement of cryptocurrency.
Cryptocurrency is a digital or virtual currency created by encoding strings of data (crypto) into units of currency. The feds define it as “a medium of exchange that operates like a currency in some environments but does not have all the attributes of real currency.”4
That means that, unlike the U.S. dollar, cryptocurrencies are not issued by the government. They aren’t regulated by any central authority, and they don’t have a physical form. They are digital, decentralized, and encrypted.
Think of them like virtual tokens or “credits” that you can only use in certain places — and that you can’t necessarily cash out when you want to.
There are over 7,000 cryptocurrencies that currently exist. Every week new cryptocurrencies are created, and they all have different use cases and goals.5,6
Here are three of the larger names in cryptocurrency:
The first and biggest name in crypto, has dominated the market since its introduction in 2009. It’s prized for its relative resilience and widespread acceptance in the crypto space. That’s why some say it’s the closest option investors have to getting a “blue-chip” cryptocurrency.5
Second only to Bitcoin in market share, is distinctive in that it’s a software platform where users can exchange a cryptocurrency known as “ether.” Although many use the terms “Ethereum” and “ether” interchangeably, Ethereum can be used as a host for other cryptocurrencies. That means investors in Ethereum can benefit from wider uses of the platform, not just ether exchanges.5
Created in 2011, was developed to be the “silver to Bitcoin’s gold.” Using some of Bitcoin’s best features, Litecoin is a less complex cryptocurrency, meaning much shorter transaction confirmation times.
Cryptocurrencies exist in a “Wild West”–type space. They aren’t regulated, and they aren’t protected by the FDIC or any government body. That makes them ripe for hackers and scammers, who have stolen at least $11 billion in cryptocurrencies since 2011.7 And over half of that has been taken since 2019.8
Sophisticated hackers can hijack accounts, fake new currency offerings, and use other schemes to defraud.9,10 But even simple scams can work with naïve investors or insecure accounts. When they do work, accounts can be drained in minutes, and that cryptocurrency will be lost forever.
Unlike an investment or bank account, if you lose or forget your password, you can get locked out of your digital wallet.
That depends. Cryptocurrencies are attractive to folks who like to be on the cutting edge of technology. Certain ones are designed for fast, low-cost, confidential transactions with anyone who has internet access. And their limited supply and freedom from government control gives them hedge-like qualities against inflation and unstable governments. For some, that can make cryptocurrencies a worthwhile option. That doesn’t mean it’s right for you or that you should rush in, however. If you’re considering jumping into cryptocurrency, you need to be aware of its volatility and risks.
For most investors, cryptocurrency is taxed just like a standard brokerage account. Think of cryptocurrency as a growth stock without the dividends.
Without any intrinsic value, digital currency is incredibly vulnerable to huge price swings. That means a sudden boom — or bust — could take any investor for a wild ride.
Before jumping in, think about your objectives and your reasons for wanting to invest in cryptocurrency.
Are you afraid of missing out?
Are you prepared to withstand some big swings? Are you willing to lose it all?
These are just some of the questions you need to ask yourself to figure out if crypto truly makes sense for you.
The bottom line?
Cryptocurrency’s growing popularity and flashy headlines play to our emotions. The excitement and promises of big gains can push us to dive in before we really know the risks we’re taking on.
If you understand the basics, though, you can resist the temptation that comes with crypto fever, and you can set more realistic expectations when it comes to digital currency. You’ll also be setting yourself up to make better, more rational decisions in the face of any new “hot” financial trend.