Cryptocurrencies are digital assets that can be bought, sold, and/or used for the purchase of goods and services. They do not exist in physical form — only virtually — and are typically not issued or controlled by any central authority (making them “decentralized”). Cryptocurrencies use online ledgers with strong cryptographic controls to secure transactions, making them nearly impossible to counterfeit, corrupt or duplicate. Bitcoin is the best-known and most influential cryptocurrency, followed by Ethereum.
A blockchain is a distributed database that acts as a digital ledger for cryptocurrency transactions. Blockchain technology supports cryptocurrencies by storing data in “blocks” that are then chronologically “chained” together. Blockchains run on decentralized networks of computers, and peer-to-peer consensus among these distributed participants (or “nodes”) on the network is required to validate cryptocurrency transactions. Most blockchains are designed to be immutable (so that all transactions are permanent and irreversible). Blockchain technology was invented to support Bitcoin but can theoretically be used in any number of applications to record any number of data points.
Mining refers to the process of creating new cryptocurrencies, typically by solving a complex computational puzzle, as well as by the process of validating and adding cryptocurrency transactions to the blockchain public ledger. The work of miners helps keep the blockchain secure and accurate; miners are rewarded for this work by receiving cryptocurrency whenever they add a new block of transactions to the blockchain. Mining — especially Bitcoin mining — is an energy-intensive process due to the computing power it takes to solve computational puzzles and validate transactions.
Cryptocurrencies are typically not secured by any other asset such as gold or silver (with the exception of “stablecoins,” which are tied to the value of fiat currencies or other assets). Like all currencies, however, cryptocurrencies’ value is influenced by factors including their scarcity, demand, and utility as a form of payment or other medium of exchange.
Cryptocurrencies are also uniquely influenced by their holders’ perception of their projects’ potential for success in the future, which can fluctuate based on news developments, crypto-company announcements, and other events. A pertinent example of this was the 12% drop in Bitcoin’s price when Elon Musk tweeted that Tesla would not accept Bitcoin as payment. In general, cryptocurrency values tend to be more volatile than those of fiat currencies.
Cryptocurrency exchanges are regulated as money transmitters in the U.S. and must comply with anti-money laundering and other regulations issued by the Financial Crimes Enforcement Network, a bureau of the United States Department of the Treasury, as well as regulations issued by certain states. While Capitol Hill and other regulators in the U.S. have indicated a strong interest in regulating cryptocurrencies, formal laws and regulations specific to cryptocurrency have not been implemented.
In addition, cryptocurrency transactions are taxable any time a taxable event occurs — such as when selling crypto for a fiat currency or trading it for another asset — and any cryptocurrency transfer worth $10,000 or more must be reported to the Internal Revenue Service. Cryptocurrency regulations vary in countries around the world and are continually evolving. China, for example, has recently taken a particularly hard line against crypto by banning all mining and shutting down crypto companies within its borders. El Salvador, meanwhile, has officially embraced Bitcoin as a form of legal tender.
Whether or not you should invest depends on your individual goals as an investor; many individuals and institutional investors now hold Bitcoin and other cryptocurrencies as a store of value, or buy and sell them, based on price, as speculative investments. Individuals who want to gain exposure to the growing demand for cryptocurrencies can invest in them using digital exchanges. As with any investment, investors should research any cryptocurrency prior to investing, consider all associated risks, and be prepared to potentially lose their investment.
While it’s impossible to predict the future, there are many reasons to think that cryptocurrencies like Bitcoin and Ethereum will play a role in the future of financial services and technological developments. Currently, growing acceptance of Bitcoin as a payment mechanism and rising interest in the development of decentralized financial services (or “DeFi”) applications on the Ethereum network are influencing many individuals and institutional investors' decisions about whether to enter the cryptocurrency space.
In addition, many crypto proponents believe that cryptocurrencies and central bank digital currencies (CBDCs) — which are cryptos that are controlled and issued by centralized government entities — can help increase financial inclusion, especially in the developing world.
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