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While cryptocurrency is often associated with shady deals on the dark web, it’s a digital form of money that anyone can use. It’s virtually immune from counterfeiting or government interference, but the main appeal is the potential profit from trading it, making cryptocurrency more commodity than cash.
Most Cryptocurrencies work using blockchain technology – a type of database that serves as a permanent ledger for transactions. But their value is based on the activity of their users: The more “coins” people buy, the more those coins are worth.
The best-known cryptocurrency, or crypto for short, is Bitcoin, which has grown nearly 12,000 percent in value over the past five years. By contrast, the value of Amazon stock grew by 465 percent during that same period. One of the first-ever crypto purchase was made with Bitcoin. Back in 2010, a man bought two takeout pizzas for 10,000 bitcoins, which would be worth about $639 million today.
The creator of Bitcoin goes by Satoshi Nakamoto but (almost) no one know who Nakamoto is because it’s a pseudonym. Many think it’s a group rather than an individual. One theory is that four Japanese companies, Samsung, Toshiba, Nakamichichi and Motorola, all collaborated on it and took a part from each of their names.
There are more than 7,000 kinds of cryptocurrency. Among the largest based on the number of coins in circulation are Ethereum, Binance Coin, Cardano, Tether, Solana, and Dogecoin. That last one may sound familiar is you watch Saturday Night Live. When Tesla CEO (and major Dogecoin investor) Elon Musk hosted the show last May, he joked that the coin is a “hustle,” sometimes slang for a shady way to make money. By the next morning the price of Dogecoin had plummeted by 30 percent.
Despite that kind of volatility, crypto has become an increasingly popular investment option. More than 30 million Americans bought or traded it in the past year. People are also increasingly interested in spending crypto and one of the biggest reasons is for the privacy it affords its users. You can transfer cryptocurrency without an intermediary and, unlike credit cards, crypto obscures both your identity and the amounts you spend with it.
Businesses that allow customers to pay with crypto include PayPal, Tesla, and Xbox. Sotheby’s, the venerable auction house, announced last year that it would accept bids made in bitcoins or ethereums. Even some big name charities, including The Water Project, The Red Cross, and Save the Children, accept donations made in cryptocurrency.
One way to earn cryptocurrency is through mining, but it’s an intensely complicated process that releases new coins into circulation using advanced computer equipment. (Just like other mined materials, the total amount of some cryptocurrencies is finite.) So the way most people get their cryptocurrency is by buying it on online exchange platforms.
In order to trade cryptocurrency, you’ll need an individual investment account with a crypto exchange. Popular exchanges include Coinbase, Kraken, and Gemini, all of which charge fees, just as traditional brokerages do. You could also use a cryptocurrency broker and instead of owning the coins, speculate on their prices betting on how they will rise and fall.
While the stock market has set trading hours, cryptocurrencies do not--they can be traded 24 hours a day, seven days a week. But the government doesn’t back cryptocurrency as it does the dollar, and cryptocurrency investments don’t carry the same legal protections as traditional payment methods.
Another key difference is that investors are responsible for storing their cryptocurrencies, which is easier said than done. Because the coins aren’t insured by the FDIC, you could lose them (through theft, system failures, or simply by forgetting your key code to access them) and, thus, lost your investment. Once cryptocurrency is lost, it’s nearly impossible to recover which then makes the remaining accessible coins even more valuable.
The way to store cryptocurrency is in a digital wallet. These wallets can either be “hot” (meaning that they’re stored online), or “cold” (stored on an external device that isn’t connected to the Internet). Cold wallets are more secure since hackers can’t use the internet to access them.
Many people start trading cryptocurrency because they think these investments are exempt from taxation. But since 2014, the IRS has treated crypto as property for federal income tax purposes. Just like any other investor, one who buys cryptocurrency and later sells it at a profit will incur capital gains taxes. Even in cyberspace, the IRS always gets its due.
Taken from Reader’s Digest – February 2022
By Kat Tretina
Photo by Kanchanara on Unsplash