Cryptocurrencies have captivated investors and kept many observers on their toes. This fast-moving, volatile industry can be confusing, and terms such as ETFs and blockchains can make it tough to understand. Schwab continues to monitor cryptocurrencies as regulations and technology evolve. While traders have made money (and lost it) on the change in price of Bitcoin and other cryptocurrencies, we recommend treating them as speculative assets primarily for trading with funds outside your traditional long-term portfolio.
So-called cryptocurrencies are digital tokens that are used to exchange money for goods and services, without central banks or governments involved in the process. They use advanced coding to verify transactions and mint virtual coins, which are then traded on decentralized computer networks between people with virtual wallets, using distributed public ledgers known as blockchains. The first cryptocurrency was Bitcoin, launched in 2009 by a mysterious person called Satoshi Nakamoto. Since then, numerous others have emerged, including Ethereum, the second most popular.
Proponents of cryptocurrencies say they provide cheaper, faster money transfers and are decentralized, meaning that the system can’t be manipulated by a single party. Critics point to the high energy cost of mining them, and warn that cryptocurrencies can be used for illicit activities, such as ransomware attacks and drug cartels that use them to pay for their goods. In recent years, a number of “darknet” markets have shut down as authorities crack down on the use of cryptocurrency. Some criminals also promote fraudulent investment opportunities, known as Ponzi schemes, which promise high returns for new investors by paying off old ones with the proceeds from the sale of cryptocurrency.