Cryptocurrency is digital money. That means there’s no physical coin or bill — it’s all online. You can transfer cryptocurrency to someone online without a go-between, like a bank. Bitcoin and Ether are well-known cryptocurrencies, but new cryptocurrencies continue to be created.
People might use cryptocurrencies for quick payments and to avoid transaction fees. Some might get cryptocurrencies as an investment, hoping the value goes up. You can buy cryptocurrency with a credit card or, in some cases, get it through a process called “mining.” Cryptocurrency is stored in a digital wallet, either online, on your computer, or on other hardware.
Before you buy cryptocurrency, know that it does not have the same protections as when you are using U.S. dollars. Also know that scammers are asking people to pay with cryptocurrency because they know that such payments are typically not reversible.
The fact that cryptocurrencies are digital is not the only important difference between cryptocurrencies and traditional currencies like U.S. dollars.
Cryptocurrencies aren’t backed by a government.
Cryptocurrencies are not insured by the government like U.S. bank deposits are. This means that cryptocurrency stored online does not have the same protections as money in a bank account. If you store your cryptocurrency in a digital wallet provided by a company, and the company goes out of business or is hacked, the government may not be able to step and help get your money back as it would with money stored in banks or credit unions.
A cryptocurrency’s value changes constantly.
A cryptocurrency’s value can change by the hour. An investment that may be worth thousands of U.S. dollars today might be worth only hundreds tomorrow. If the value goes down, there’s no guarantee that it will go up again.
As with any investment, before you invest in cryptocurrency, know the risks and how to spot a scam. Here are some things to watch out for as you consider your options.
No one can guarantee you’ll make money.
Anyone who promises you a guaranteed return or profit is likely a scammer. Just because an investment is well known or has celebrity endorsements does not mean it is good or safe. That holds true for cryptocurrency, just as it does for more traditional investments. Don’t invest money you can’t afford to lose.
Not all cryptocurrencies — or companies promoting cryptocurrency — are the same.
Look into the claims that companies promoting cryptocurrency are making. Search online for the name of the company, the cryptocurrency name, plus words like “review,” “scam,” or “complaint.”
Read more about Investing Online.
If you are thinking about using cryptocurrency to make a payment, know the important differences between paying with cryptocurrency and paying by traditional methods. You don’t have the same legal protections when you pay with cryptocurrency. Credit cards and debit cards have legal protections if something goes wrong. For example, if you need to dispute a purchase, your credit card company has a process to help you get your money back. Cryptocurrency payments typically are not reversible. Once you pay with cryptocurrency, you only can get your money back if the seller sends it back. Before you buy something with cryptocurrency, know a seller’s reputation, where the seller is located, and how to contact someone if there is a problem. Refunds might not be in cryptocurrency. If refunds are offered, find out whether they will be in cryptocurrency, U.S. dollars, or something else. And how much will your refund be? The value of a cryptocurrency changes constantly. Before you buy something with cryptocurrency, learn how the seller calculates refunds.