The Risks of Investing in a Digital Coin
Cryptocurrency is digital money that can be used to make purchases and invest. Transactions are verified and recorded on a public ledger called a blockchain. The value of a cryptocurrency rises or falls based on demand. Like other investments, cryptocurrencies can be risky. To protect yourself, read this article before you buy any cryptocurrency.
The first digital currency to take off was Bitcoin, which launched in 2009. Its creators built it on a technology known as blockchain, which enables decentralized networks to operate without a central authority. Many other cryptocurrencies followed. Some use the same underlying technology, but some have different features and business models. For example, Ethereum focuses on building entire financial ecosystems that run independently of a central authority—think insurance without the insurer or real estate titling without the title company.
Most traditional currencies come in the form of paper bills and coins you can hold in your hand or put in a wallet, and are backed by governments. Some, such as gold, have a long history of being seen as store of value. Others, such as Bitcoin, have a relatively newer history and are considered speculative assets that can be traded on exchanges. The price of a Bitcoin fluctuates wildly, which some experts say limits its usefulness as a means of payment.
To counter this volatility, stablecoins were developed to offer the tradability of cryptocurrencies without their price volatility. These coins peg their value to an existing currency, often one for one. One of the largest stablecoins is Tether, which is tied to the US dollar.
Other uses for cryptocurrencies include ransomware attacks, where hackers hijack computer systems and demand payment in cryptocurrency to restore them; terrorism financing, through which terrorist groups and other criminals can transfer funds across borders; and illicit activities such as drug trafficking, weapons sales, and money laundering. These risks have fueled criticism of cryptocurrencies and sparked debate over whether they should be regulated or banned altogether.
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For a more complete picture of your investment choices, we recommend you seek out expert advice before investing in any cryptocurrency. Find a top-rated online broker or robo-advisor, and check their customer support, account fees and minimums, investment choices, and mobile app capabilities.
The Federal Reserve is engaged in a series of experiments with CBDCs that give policymakers hands-on experience with this emerging technology. This report provides an overview of those experiments and discusses their opportunities and limitations.
Cryptocurrency has no physical form, so it is not subject to taxes or regulations that apply to other forms of investment. However, you should still consider your tax situation before buying or selling any cryptocurrency. The tax treatment of cryptocurrencies may change over time.