Things You Wanted to Know About Cryptocurrencies but Were Afraid to Ask

Bitcoin has been in the news for good and ill since its invention in 2009, and most recently for its crash — it's lost about 58% of its value during the second quarter, its worst quarterly loss in more than 10 years. For some, bitcoin and the wider world of cryptocurrency still represent an exciting new asset class, or a technology that could change the way we use and think about money in day-to-day life. For others, it's all "dog coins" and Elon Musk tweets. Not sure where you stand? Here are a few things you wanted to know about cryptocurrencies but were afraid to ask.

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Bitcoin (traded by investors under the symbol BTC) is essentially a software that allows for two people to exchange value without a central intermediary such as a bank. This technology was invented in 2008 by an anonymous person or group of people using the alias Satoshi Nakamoto.

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Blockchain is the technology bitcoin is based on. It is a public ledger stored on a network of computers around the world. It is very difficult to tamper with that ledger, and anyone can access it. Blockchain allows for two people to exchange digital value in a way that is easily verifiable.

Though the number changes every 10 minutes (as new bitcoins are created by a process called mining), there are around 19 million bitcoins out there. The maximum supply is 21 million.

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The value of bitcoin is a) its scarcity b) that people say it has value. Its market value has fluctuated greatly throughout the years.

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In 2010, a Florida man paid 10,000 bitcoins for two pepperoni pizzas. In November 2021, bitcoin reached its all-time high price of $68,000. Today, bitcoin is worth less than $19,000.

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There are. The smallest unit of bitcoin is called a satoshi (after founder Satoshi Nakamoto), which is one-millionth of a bitcoin.

Ethereum is its own blockchain network, on which many applications are built. It was founded by programmers Vitalik Buterin and Gavin Wood. Ethereum has its own digital currency called ether, which is the second-most-popular cryptocurrency.

There are more than 16,000 cryptocurrencies in existence, with that number growing by the day. Statistically, many will fail within a few years.

Dogecoin (often shortened to “doge”) was created by software engineers Billy Markus and Jackson Palmer. It was created as a joke, in response to the speculative nature of the cryptocurrency market. Its logo is a Shiba Inu. Doge is now consistently in the top 10 cryptocurrencies by market cap, and started a trend of “meme” coins, including the up-and-coming Shiba Inu Coin. Like Bitcoin, its value is whatever the market dictates. It is a favorite crypto of billionaire Elon Musk, who often tweets about it.

There have been many scams within the cryptocurrency world, including the phenomenon of “rug pulls,” where the founders of a project will take the investors’ money and then immediately cease work on the project. The broader cryptocurrency market is not considered a scam by most — the hard-left magazine Jacobin calls it “full-on fraud” — but should be navigated with extreme caution.

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Yes. In 2013, the U.S. Treasury Department clarified that it is legal to buy bitcoin and use it as currency wherever it is accepted. Some states have more regulations around buying crypto, but it is legal on a federal level.

Yes. The safest way to buy cryptocurrencies is on an exchange such as Coinbase, Binance, or FTX. There are also decentralized exchanges such as Uniswap or Pancakeswap.

Most crypto experts advise using a digital or analog “wallet” to store anything you buy, rather than keeping the money on exchanges. The most popular digital wallet is called MetaMask. Some people choose to trade their cryptocurrency, and others choose to “HODL” — or “hold on for dear life” and hope the value increases.

Yes. In fact, Chipotle recently announced that it will accept digital currency at nearly all of its 3,000 U.S. locations, making it one of the only restaurants to do so. The chain is working with the cryptocurrency payment network Flexa, allowing customers to pay through a digital wallet. Bitcoin is also legal tender in El Salvador, and a few other countries around the world are considering the same thing.

Surprisingly, you can also now add bitcoin to your retirement portfolio. Fidelity Investments, the largest retirement plan provider in the U.S., is now offering customers with a 401(k) the option to invest part of their retirement funds in crypto. This marks the first such offering of its kind. Fidelity clearly expects crypto to grow in popularity, though it will be providing the option in a separate "digital asset account" and capping how many times you can buy and sell bitcoin, according to CBS News.

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Crypto is just as volatile as the stock market, if not more so because it's not as established, and relatively unregulated. Bitcoin has fallen more than 70% from its all-time high near the end of 2021, and a recent sell-off erased more than $200 billion from people's crypto wallets in a single day. Stablecoins, which are cryptocurrencies that are supposed to mirror the value of the dollar and keep the market stable, have also tanked, worrying investors. Although experts say the volatility could become less dramatic as crypto becomes more established, one thing is for sure: Investing in crypto can mean wild swings.

Yes, if you buy and sell cryptocurrency, you will be taxed on profits. Check with your tax adviser for how these rules apply to you.