Making Sense of Cryptocurrencies
March 04, 2019
Social and traditional media have been abuzz with articles and information about the rising phenomenon of digital currencies. Words and phrases like blockchain, cryptocurrency, initial coin offering, and digital tokens populate our newsfeeds. But what does it all mean, and should you buy in?
What is Cryptocurrency?
Cryptocurrency, or simply crypto, is one type of digital currency. Cryptocurrencies are distinct from "fiat currencies" such as the dollar, euro, or yen. Unlike fiat currencies, crypto isn't represented or organized by physical paper units or coins. Rather, each unit is a unique alphanumeric string of computer code.
Also, cryptocurrencies are not issued by a central bank. Instead, they are controlled by technology that determines how many units are produced and how transactions are recorded. While Bitcoin is one of the earliest and most recognized cryptocurrencies, more than a thousand cryptocurrencies currently exist.
For US federal tax purposes, cryptocurrency is treated as property, which means selling or exchanging it can have tax consequences such as payment of capital gains taxes.
Cryptocurrencies and Risk
Buying, selling, and using cryptocurrencies comes with numerous risks.
- In some cases, you can spend and trade crypto, but these products are not legal tender in the US and most other jurisdictions. No law requires companies or individuals to accept crypto as a form of payment. If no one accepts a specific cryptocurrency, that crypto will become worthless.
- Platforms that buy and sell cryptocurrencies can be hacked, and some have failed. Consumers can—and have—lost money.
- Cryptocurrency payments are irreversible. Once you complete a transaction, it cannot be reversed.
Cryptocurrencies and Investing
All investments come with some degree of risk, and cryptocurrencies are no exception. Only invest what you can afford to lose, and be aware that you may lose some or all of your investment.
Investing in cryptocurrencies can take many forms such as purchasing coins in the hope their value increases or buying shares in platforms or companies that facilitate blockchain technology and other aspects of the cryptocurrency revolution in the hope they succeed.
Another way to invest is through an Initial Coin Offering, or ICO. An ICO is a way for companies to raise money that involves the creation and sale of digital tokens. A certain number of these tokens are sold to investors in exchange for other cryptocurrencies or fiat currency like the dollar.
There is a lot more to know about these complex products. Visit FINRA’s ICO and Cryptocurrencies page to learn more and find important investor alerts on these topics.
Check out more articles from FINRA on the emerging world of digital assets.
- Get a Handle on Virtual Currencies before buying into the hype.
- What is a Blockchain, and Why Should I Care? offers an introduction to the technology behind Bitcoin and other virtual currencies.
- The Ins and Outs of Initial Coin Offerings provides background about the ICO process and related risks.
- Learn more about Storing and Securing Cryptocurrencies.
- Read How to Avoid Crypto Stock Scams to keep your hard earned cash safe from a scam.
To learn more about digital assets and other investments, subscribe to FINRA's The Alert Investor newsletter.
Guest Contributor: FINRA Foundation