Cryptocurrencies use cryptography principles to mint virtual coins that can be exchanged between people over decentralized computer networks. Transactions are recorded publicly on distributed, tamper-proof ledgers known as blockchains. Bitcoin, launched in 2009 by the pseudonymous software engineer Satoshi Nakamoto, has become the most popular cryptocurrency and is currently worth about $1 trillion. Numerous other digital currencies have also gained prominence and investment from high-profile investors. The popularity of cryptocurrencies raises important questions for policymakers, including concerns about financial stability and consumer protection. Many cryptocurrencies are used to make illicit transactions, and the anonymity provided by their systems encourages criminal activities such as money laundering, terrorist financing, and fraud. Bitcoin mining also requires massive amounts of electricity, which can have environmental consequences.
While some analysts say cryptocurrencies can be used as a store of value, surveys suggest that only a small percentage of users purchase goods or services using them. The volatility of cryptocurrencies’ prices, combined with the lack of regulation, means that investors face greater risks than those involved in traditional investments, such as stocks and mutual funds.
As the cryptocurrency market has grown, some investors have gotten into trouble by investing in fraudulent operations such as pyramid schemes and ponzi schemes that promise high returns on investment. Others have been hurt by the price volatility of cryptocurrencies, which can make it difficult to budget or plan for the future. Regulatory changes are beginning to take shape in the United States and elsewhere, though it is not yet clear whether they will help to stabilize the crypto industry.