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, you exchange it online and keep it 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 that most people are familiar with. It was created in 2009 and was one of the first digital currencies to gain popularity. Like with other cryptocurrencies, there are no physical bitcoins. Instead, your balance is kept on a public ledger that everyone 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 traded, 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 exchange the crypto in your wallet for payment.
In some cases, you may also be able to load cryptocurrency on your 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 find a solution.
In addition, most crypto purchases aren't reversible, and you won't be able to dispute the purchase with your credit card company like you can with traditional exchanges. 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 evolve, more people are looking to make cryptocurrency part of their overall investment strategy. Right now, crypto is seen as a speculative investment—interesting, volatile, and risky. There's still much we don't know about crypto's stability or longevity, but it's worth learning about to understand how currencies are changing around us.
This content is developed from sources believed to be providing accurate information. 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.