Cryptocurrencies are trending, but just what is bitcoin or ethereum? Are they safe, or even legal?
“Cryptocurrency is a type of digital asset that can be bought, sold or transferred between parties over the Internet. Because of this, it’s used to store value — much like gold, silver and other types of traditional investments,” said Mark Grabowski, associate professor at New York’s Adelphi University who teaches courses on bitcoin, blockchain and internet law.
“Cryptocurrency also serves as a form of digital currency that can be used to purchase products and services and to make payments to others over the Internet. However, unlike traditional currency such as U.S. dollars and Euros, which can also be used electronically, there are no physical coins or paper bills for cryptocurrency,” said Grabowski, author of “Professor’s Guide to Cryptocurrency,” due out in August 2018.
Bitcoin and ethereum are two of the most popular cryptocurrencies, but there are over 1,000 others, said Kyle Fournier, director of content at CryptoManiaks.com.
One of the biggest appeals of cryptocurrencies is that they are not regulated by the government or a central bank, said Janne Lindqvist, assistant professor of electrical and computer engineering and a member of Rutgers University’s Wireless Information Network Laboratory.
A recent study found that people don’t really understand how bitcoin works, but they fear being left out as they see others cashing in, said Lindqvist. He compared the phenomenon to tulip mania during the Dutch Golden Age, when speculators bought tulip bulbs and expected that prices would just rise and rise. Instead, tulip prices eventually crashed and there was no value to them.
“Bitcoin mania resembles tulip mania in many respects. It is very human,” Lindqvist said.
While people may not understand how cryptocurrencies work, they probably don’t really understand how credit cards work either, Lindqvist said: That’s a problem if you’re interested in investing in cryptocurrency. Additionally, there are security and privacy issues, he said.
How they’re bought
Cryptocurrencies can also be bought on exchanges, which are online marketplaces, Fournier said.
“A person can buy cryptocurrency by making an account on an exchange, linking their bank account or credit card information to their account, and then exchanging their fiat money (currencies like the U.S. dollar and Euro) for cryptocurrency,” he said.
Instead of a bank keeping a ledger of your transactions, the ledger is online and in the computer, Lindqvist said. The transactions can be secure as long as your online wallet is stored securely. Cryptocurrencies are not protected like money in a bank, and if your online wallet is hacked, your investment will be lost, Lindqvist said.
“There are plenty of fraudsters who prey on people who want to make quick money,” he said.
Additionally, while cryptocurrencies may be soaring, they cannot be used for many traditional purchases, Lindqvist said.
Not all cryptocurrencies are created equally, so be careful about where you make an investment, Fournier said.
“Many cryptocurrencies are exposed as being scams. Their technology is either inferior or non-existent, and their creators saw them as a way to fool people into handing over their money. Other cryptocurrencies represent real, useful technology that has the potential to change the world,” he said.
The future is crypto
New cryptocurrencies are constantly emerging. Most are ways to store and transfer value, but others are popping up to offer people entirely new services, Fournier said.
“Steem, for example, is a decentralized social media platform that rewards people for posting content. Golem is a decentralized marketplace where people can buy and sell unused computing power. For almost every service you can think of, cryptocurrencies are being created to offer decentralized alternatives to current options,” he said.