Cryptocurrency 101 The Risk vs. Reward

Cryptocurrency  101 The Risk vs. Reward Cryptocurrency  101: The Risk vs. Reward Cryptocurrency  101: The Risk vs. RewardThe stock market is confusing enough. Now people are talking about cryptocurrency, Bitcoin, and other types of confusing money terms. Is this a real-world way to make money?It seems like every day we hear about how much a certain  cryptocurrency’s  value is skyrocketing, how a  millionaire was made  with  cryptocurrency, or how the number of people using  cryptocurrency  wallets is  exponentially increasing.Created in 2009,  Bitcoin  was the first  cryptocurrency, and arguably is still the most recognizable name in the game. Ten years later, there are almost  3,000 different  digital currencies  in the  cryptocurrency  market, and for many, this new type of investment holds the answer to their financial future.Unfortunately, there are a lot of  scams  out there related to the  crypto market. And similar to the  stock market, there is also a lot of uncertainty. Your first line of defense? Learning more about it.What is  cryptocurrency?Most tra ditional forms of currency are centralized.  U.S. dollars, for example, are regulated by the  Federal Reserve, the central bank of the United States. It sets monetary policy, provides payment services (including ensuring there is enough money in circulation), and regulates banks. Through these duties, the Federal Reserve provides a level of financial stability to the United States.Unlike  U.S. dollars, most  cryptocurrency  is  decentralized, which means there is no single government or financial entity that regulates them. At its most basic,  cryptocurrency  is  digital currency  (or money). So instead of requiring people to carry around paper money, such as  U.S.  dollar  bills,  cryptocurrency  allows for transactions that are all based online. Additionally, instead of storing money in a bank like you do with  U.S. dollars, you store  cryptocurrency  in a digital wallet.Cryptocurrency  advocates generally believe that centralized currency has a potential fatal flaw: A mistake mad e by the one high authority can negatively impact the entire system. That’s why  cryptocurrencies  were designed as a decentralized alternative to government currencies.  Cryptocurrencies  use technology, frequently one called  blockchain, to ensure a level of decentralization, transparency, and security.How do people make money from  cryptocurrency?There are several ways people make money from  cryptocurrency, but we’ll just go over a few of the most common ones. We cant tell you anything about the  payout  value or whether they are good ways to make  passive income, but we can provide general information about how certain people are using this type of digital money.First, you can invest in  cryptocurrency  by  buying it  with  U.S. dollars  (hopefully at a  lower price) and hope its value increases. There are crypto exchanges that help facilitate these transactions. Of course, like any investment, there are risks associated with this. The  cryptocurrency  might not increase in value, and it could even decrease over a  period of time, causing you to lose money.Other people earn their cryptocurrency by mining. Someone who mines cryptocurrency uses their computer to validate blocks of cryptocurrency transactions. This is part of the blockchain technology we mentioned earlier.Cryptocurrencies  use a public ledger to record all transactions, kind of like your bank statement records the transactions of your  bank account.However,  cryptocurrency  transactions can’t be validated unless the network (made up of miners) solve the complex mathematical problems established by the  cryptocurrency’s protocol. Solving the math problems “unlocks” the  cryptocurrency  and makes it available. Miners get a fraction of the currency they unlock, and that’s how they earn  money online. Some  cryptocurrencies  require sophisticated (and expensive) computers to solve their math problems, while others can be solved with a standard computer. Others join a mining network for a fee, which allows them to work with other miners and share profits.Other people earn  cryptocurrency  by  completing microtasks, which are frequently called “bounties.” Sometimes, startups will offer  cryptocurrency  in exchange for real work, such as writing promotional copy, creating a video review â€" whatever the startup needs. There are websites that list bounties and airdrops, a similar type of task-based work. Many crypto enthusiasts believe that its best to get in on the ground floor with new  cryptocurrencies, and you can usually find this type of work on these websites.So what is the problem?Well, you’ve probably already noticed by now that  cryptocurrency  doesn’t come for free, and it’s not always straightforward, at least not for people who don’t have a background in the type of technology that  cryptocurrency  uses.  Cryptocurrency  is not infallible either, despite what some crypto-enthusiasts may have you believe.2019 alone saw  several major  cryp tocurrency  scams, resulting in more than $4.26 billion that had been stolen from crypto users, exchanges, and investors. These  scams  include, but are not limited to:A $28 million hacking of a Japanese  cryptocurrency  exchange  A $40 million hacking of one of the world’s biggest  cryptocurrency  exchanges  A three-year phishing  scam  resulting in more than $100 million in stolen  cryptocurrency.The takeaway here is that both supposedly secure institutions, such as large exchanges, and individuals are being targeted by crypto thieves and scammers.The U.S. Federal Trade Commission offers some words of warning about  cryptocurrency  on its  website. Remember:Cryptocurrency  is not backed by a government.  While this is the appeal for many, it also means that your  cryptocurrency  does not have the same protections as the money in your  FDIC-insured  bank account. If your  cryptocurrency  is stolen, for example, or the crypto business you are working with shutters and you lose all your money, there is very little you can do to recoup losses. Likewise, the transactions you make with  cryptocurrency  don’t have the same protections as  U.S. dollars.The value of  cryptocurrency  changes all the time.  We mentioned this above as a risk for investing in  cryptocurrency.  Cryptocurrency  value can fluctuate from hour to hour. The value of  Bitcoin, for example, fluctuated wildly in 2019, and  dropped 8%  in one day that June. When a  cryptocurrency’s value drops, there is no guarantee that it will return to its  higher price.Scams  abound. Some reports will have you believe that  cryptocurrency  is the silver bullet  of your financial woes, but just like with any get-rich-quick scheme, if it sounds too good to be true, it probably is. Scammers frequently offer investment or business opportunities related to  cryptocurrency  that promise (1) you’ll make money, (2) you’ll make money fast, and/or (3) you’ll get free money. These are all red flags. If someon e promises you a way to make a  lot of money  in a short amount of time, always proceed with caution.The Dangers of Borrowing  CryptocurrencyThere is another potentially dangerous game in town, and it’s called borrowing  cryptocurrency. There are companies that target people in the market for short-term, low-dollar loans, such as  payday loans  (which are sometimes referred to as  no credit check loans  or  bad credit loans). But this is a newly created field, and the risks associated with  cryptocurrency  multiple when you add in a loan element.Risks increase even further when you don’t understand the underlying technology of  cryptocurrency.  Cryptocurrency  loans can also be straight-up  scams, along with fake  cryptocurrencies, fake  cryptocurrency  websites and mobile apps, and email phishing  scams.Reporting  Cryptocurrency  ScamsIf you or someone you know has been the victim of a  cryptocurrency  scam, there are three ways to report it:Send a complaint to the FTC.Report i t to the Commodity Futures Trading Commission (CFTC).Report it to the US Securities and Exchange Commission (SEC).