Demystifying Cryptocurrency

Cryptocurrency is quickly gaining in popularity but can still feel new and somewhat mysterious. Professor Pig is here to break down the basics of this virtual currency.

Recently, in the news and even featured in a Super Bowl ad, cryptocurrency is named for the complicated encryption process behind the creation and processing of digital money, often called a token or coin. It is built on a decentralized peer-to-peer network, is available to anyone, and is practically unable to be counterfeited.

Beyond Bitcoin

Launched more than 10 years ago, Bitcoin is the most well-known and widely used form of cryptocurrency. But in recent years, the field has expanded dramatically with the introduction of thousands of new digital currencies or altcoins, with names like Binance, Coin, Cardano, Dogecoin, Ethereum, Litecoin, Polkadot, and Tether. These various forms of crypto are stored in digital wallets and allow anyone anywhere to send and receive virtual payments.

How it Works

Crypto is created through a complicated process called mining. New coins are released into circulation by a computer and purchased via an online exchange platform. The more coins you have, the more they are worth.

One goal of cryptocurrency is enhanced safety. In addition to a two-factor authentication process, the purchaser’s identity and transaction amount remain private. Another aim is improved security. Digital wallets that store cryptocurrency can be online, considered ‘hot,’ or on an external device not connected to the internet, referred to as ‘cold,’ which is more secure.

Crypto can be traded 24 hours a day, seven days a week, and is now accepted by PayPal, Tesla, Xbox, and even Sotheby’s! You don’t need an intermediary like a bank when you make a transfer. Instead, a public ledger records and tracks all transactions using a technology called Blockchain. The same technology may be used to trade stocks and bonds in the future.

Profit Potential

Despite the market volatility, crypto is a popular investment option. An estimated 30 million Americans have bought or traded crypto in the past year. Since the FDIC does not ensure cryptocurrency, it lacks the legal protections of traditional payment methods. Investors are responsible for storing their cryptocurrencies, putting them at risk for theft, system failure, or loss by simply forgetting your key code. Once it is lost, cryptocurrency is nearly impossible to recover. Finally, remember that crypto is considered property by the IRS, so you will be subject to capital gains taxes when you buy and sell cryptocurrency.

Be Aware of Scams

Be on the lookout for fake websites promising outlandish returns, virtual Ponzi schemes for false investment opportunities, and online dating scams that encourage people to meet and trade cryptocurrencies.

Now that you can decipher the cryptoverse, you can decide if investing in cryptocurrency fits in with your financial goals. Ensure you’re investing safely by researching the various exchanges and types of wallets in advance. Reading reviews and learning from more experienced investors is a great idea! Be prepared for dramatic changes in your portfolio, start small, and diversify your investments across several currencies.
 

Sallie Mae does not provide, and these materials are not meant to convey, financial, tax, or legal advice. Sallie Mae makes no claims about the accuracy or adequacy of this information. These materials may not reflect Sallie Mae’s view or endorsement. Consult your own financial advisor, tax advisor, or attorney about your specific circumstances.

Works referenced:

• https://www.kaspersky.com/resource-center/definitions/what-is-cryptocurrency 
• https://www.investopedia.com/tech/most-important-cryptocurrencies-other-than-bitcoin/ 
• https://www.fool.com/investing/stock-market/market-sectors/financials/cryptocurrency-stocks/types-of-cryptocurrencies/ 
• https://www.forbes.com/advisor/investing/top-10-cryptocurrencies/ 
• https://www.sofi.com/learn/content/understanding-the-different-types-of-cryptocurrency/ 
• https://money.usnews.com/investing/cryptocurrency/slideshows/whats-the-best-cryptocurrency-to-buy 
• https://timesofindia.indiatimes.com/business/cryptocurrency/blockchain/what-are-the-top-6-cryptocurrencies-to-invest-in-2022/articleshow/88958809.cms