Buying and selling cryptocurrencies can feel like doing commerce in a sort of digital wild west. There are fortunes to be made, but also scammers and thieves ready to take advantage of the unprepared.
But as the world enters its second decade with crypto, traditional financial services and mainstream businesses have been examining how they can get in on it, and regulators have also taken note. As the market continues to evolve, here are five things to know about cryptocurrency:
How it works
Cryptocurrencies rely on a technology called blockchain, which is an open database of every transaction that verifies the security of transactions.
For Bitcoin, each “block” contains numerous transactions, and they are added to the blockchain by computers doing complex mathematical equations, a process called “mining.” The miners are then provided Bitcoin as transaction fees for the service.
The amount of Bitcoin rewarded to miners decreases by half for every 210,000 blocks confirmed, and there’s a maximum amount of potential Bitcoin: 21 million. The ability to create Bitcoin will stop in the year 2140, when the supply reaches that limit.
Other cryptocurrencies are tied to other systems. Some are even connected to physical assets like gold. Popular cryptocurrencies besides Bitcoin include Ethereum, Litecoin, Bitcoin Cash and XRP.
People store their cryptocurrencies in a “wallet,” an app that contains the mathematical signature proving ownership of the currency.
Cryptocurrencies can be bought and sold on exchanges. Popular ones include Coinbase, Binance and Gemini. Intercontinental Exchange Inc., the owner of the New York Stock Exchange, has announced plans to launch a crypto exchange called Bakkt.
The first – and to date – most popular cryptocurrency, Bitcoin, went live on Jan. 3, 2009. It was created by someone named Satoshi Nakamoto, who may actually be several people using a pseudonym. The first 50 Bitcoin were mined that day.
Bitcoinmarket.com, the first Bitcoin exchange, opened in March of 2010. Others soon followed.
On May 22, 2010, a man paid 10,000 Bitcoin to someone who ordered two pizzas for him from Papa John’s. As the market value of Bitcoin later skyrocketed, that Bitcoin would be worth millions of dollars.
Namecoin, the first alternative cryptocurrency — called an “altcoin” — was launched on April 18, 2011.
Bitcoin’s market price hit $10,000 per coin for the first time on Nov. 28, 2017. It peaked less than a month later at its all-time high price of $19,783.21.
In June of 2019, Facebook announced that it planned to launch a cryptocurrency called Libra.
What’s it worth?
The price of cryptocurrencies can fluctuate widely. Bitcoin’s price has previously dropped about $1,000 in a single day.
Bitcoin remains the most valuable cryptocurrency and has the highest market capitalization — calculated by the number of currently available currency and the price. Other cryptocurrencies range in price from a few hundred dollars per “coin” to a fraction of a cent.
Exchanges like Coinbase keep track of the prices of various cryptocurrencies and provide a platform for trading them.
Is it legal?
The short answer is, “Yes.” But illegal activity can still be tied to crypto.
The IRS has treated cryptocurrencies as property for tax purposes since 2014. The U.S. Commodity Futures Trading Commission defines virtual currencies as commodities. The Securities and Exchange Commission says offers and sales of digital assets were subject to federal law.
In April of 2019, the SEC issued its framework on digital currencies that fall under the category of a “security.”
The SEC has recently announced several cases of litigation related to cryptocurrencies:
- In May, authorities filed civil action against a California man who they said disguised a pyramid scheme behind digital assets.
- Prosecutors charged the CEO of a cryptocurrency company with fraudulently distributing shares in order to meet Nasdaq listing criteria.
- A Russia-based website that had claimed to provide independent ratings of initial coin offerings settled with the SEC after officials said the site had actually been taking payments from the groups whose coins it was rating.
- The SEC filed charges in August against a Dallas-based company and its founders who it accused of defrauding investors out of millions with unregistered offerings on an unregistered exchange.
- In September, officials sued another company and its founder for allegedly selling millions of dollars’ worth of coins in an unregistered offering.
Cryptocurrencies are a rapidly evolving field.
One exchange, Mt. Gox, was shuttered after it “lost” hundreds of thousands of Bitcoin and went bankrupt. In May, the exchange Binance said hackers stole thousands of Bitcoin worth millions of dollars.
Some lawmakers are eager to add additional regulations, just as more traditional businesses — like Facebook with its Libra — are looking to get into the market.
Federal Reserve Chairman Jerome Powell said in early September that Libra will need to be held to a high standard.
“Libra would have to be held to the highest regulatory standards and supervisory expectations,” he said.