Cryptocurrencies are decentralized, meaning unlike standard credit and debit, they’re controlled by users and computer algorithms as opposed by a central bank or government.
Digital coins can be obtained online for dollars, through the exchange of good and services, or by trading already-obtained cryptocurrencies for other cryptocurrencies. There are even bitcoin ATMs, or kiosks where users can purchase bitcoin by using cash or debit.
Transactions are sent using software called cryptocurrency wallets. The person who creates the transaction uses the wallet to transfer balances from one public address to another. Each transaction leads back to a unique set of keystrokes, and whoever owns that passcode owns the amount of cryptocurrency associated with it.
All transactions and balances are recorded on a digital public ledger called a blockchain.
Since digital money is created and stored electronically, “payments made with virtual currencies are not only irreversible, they also do not have the same legal protections as most traditional payment methods, such as the ones you have when using a credit card,” according to a Federal Trade Commission report resurfaced by the Better Business Bureau.
And that’s only partly why some investors preach caution. Another reason is stability.
Berkshire Hathaway chairman and CEO Warren Buffett has warned that bitcoin’s value is unstable, called the currency a “gambling device” during a FOX Business interview in May. Legendary investor and Vanguard founder Jack Bogle said during a 2017 Council on Foreign Relations event that you should “avoid bitcoin like the plague.”
“Bitcoin has no underlying rate of return,” he said. “You know bonds have an interest coupon, stocks have earnings and dividends, [and] gold has nothing. There is nothing to support bitcoin, except the hope you will sell it to someone for more than you paid for it.”
Much like stock exchanges, the value of cryptocurrencies fluctuates depending on market conditions. Bitcoin, for example, dropped from a high near $14,000 in June 2019 to just below $10,000 recently, so you should only purchase what you can afford to lose.