Cryptocurrency

Cryptocurrency summary:

• Cryptocurrency is still relatively new and has many of the same risks as any other type of asset or investment.

• Popular cryptocurrencies include Bitcoin, Ethereum, Solana, and Dogecoin. They are called cryptocurrencies because of the cryptography—complicated algorithms to code information—that keeps them secure.

• Cryptocurrencies were designed to make payments and move money without a central third party like a bank or a government, but they are now also used as investments.

Cryptocurrency definition and meaning

Cryptocurrencies like Bitcoin, Ethereum, and Solana are digital money systems that don't rely on banks or governments to stay secure. Crypto payments can be made at any time, sometimes don't have many fees, and operate globally. Cryptocurrency investments have become more popular, but they can be extremely risky and volatile. 

Key concept: A decentralized, secure, and transparent digital payment system that doesn’t rely on traditional financial intermediaries like banks or governments.

More on cryptocurrency

By design, cryptocurrencies operate without middlemen such as banks or governments. That's what people mean when they talk about decentralization, which is a key feature of cryptocurrency. However, crypto projects still need to work with banks and follow regulations that are set by governments.

Key features of cryptocurrency

Cryptocurrency has to comply with government regulations set by agencies such as the SEC, which routinely regulates cryptocurrency. The SEC sets laws and regulations for crypto exchanges and online brokerage firms to follow.

Here are some other key features of cryptocurrencies:

• Cryptocurrencies only exist digitally. You may have physical dollars in your wallet, but you won't ever hold a physical Bitcoin. They are entirely virtual and stored in a digital wallet. 

• Most cryptocurrencies use blockchain technology. The blockchain is like a huge encrypted ledger that runs on a number of computers.

• Cryptocurrencies have many uses. The most common is for payments and money transfers. However, some can also store tiny pieces of code, known as smart contracts. These can be programmed and used in other industries such as insurance and real estate.

• Security through cryptography. Advanced coding techniques known as cryptography secure all transactions in cryptocurrency, making them very difficult to counterfeit or spend twice.

Cryptocurrency: a comprehensive breakdown

Cryptocurrency was ideated as an easy way to make digital payments, but it has since become a form of investment. Indeed, some cryptocurrencies have delivered high returns to certain investors. 

Equally, it is still a relatively new asset and there are no guarantees. Many cryptos have also fallen in value or failed completely. If cryptocurrencies collapse, investors will lose their money.

If your cryptocurrency account collapses for some reason, there’s no protection from the Federal Deposit Insurance Corporation (FDIC). The FDIC only insures deposits of currencies declared legal tender by a government, such as U.S. dollars. The money has to be in an account with a bank that the FDIC insures, or a credit union that the National Credit Union Administration (NCUA) insures. 

How do I buy cryptocurrency?

You can buy cryptocurrencies via dedicated platforms or crypto ATMs, as well as some payment apps and online brokerages. If you have a brokerage account that offers it, you could also buy crypto ETFs, which means you don't have to worry about how to store your cryptocurrency. 

If you buy cryptocurrency, it’s a good idea to invest conservatively. Rather than go all in, balance crypto with other investments. That way, any losses won't totally derail your finances. 

Don't borrow money to buy crypto. And if you’re paying down high-interest credit card debt, prioritize this over any crypto investments. 

How does crypto lending work? 

Cryptocurrencies aim to take the middleman out of financial transactions. The same applies to borrowing and lending. If you own a cryptocurrency like Bitcoin, you might be able to use it as collateral on a crypto lending platform. 

This may offer an alternative to debt consolidation loans, though it's important to understand the pros and cons. The big advantage of crypto lending is that you might qualify for lower rates than you'd get elsewhere. Many crypto lending platforms don't require credit checks either, making them an appealing option for people with low credit scores. 

One disadvantage of crypto lending is that you need to tie up a sizable amount of crypto to qualify. As with other secured loans, you could lose your assets if you don’t keep up with repayments. Also, if the value of your crypto falls, it might mean you no longer have enough to secure the loan. In that scenario, you may have to deposit more money or face liquidation.