What is Virtual Currency?

Written by: Sarah Brady

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Whenever you think of money you probably picture dollar bills and metal coins. But there’s another type of money that can’t be held in your hand: virtual currency.

What is virtual currency? Even though you can’t touch it, virtual currency can be used in some of the same ways as fiat currency, or paper money. Like U.S. dollars, virtual currencies like Bitcoin can represent real-world value, and can be used for certain purchases and transactions.

Of course virtual currency is different from fiat currency in a lot of ways, too. For military members in particular, there have been changing rules about what you own and whether or not you have to report your crypto holdings.

Types of Virtual Currency

There are two types of virtual currency, and they can each be used in unique ways. Here’s a look at what they are and what makes them different from one another:

  • Closed virtual currency. This type of currency can only be used on one platform or in one system, e.g. tokens earned in a video game or frequent flier miles. Closed virtual currency doesn’t have real value in dollars and can’t be converted into any other type of money.
  • Open virtual currency. Also known as convertible virtual currency, this type of currency can be converted to other forms of money. Some examples include cryptocurrency, which can be converted to cash, or credit card points that can be redeemed for rewards.

Differences Between Virtual Currencies and Cryptocurrencies

Even though cryptocurrency is virtual, it lives in a class of its own when compared to most other virtual currencies. So before asking how to invest in virtual currency, it’s important to understand the unique benefits and risks involved with buying crypto.

These are some of the most notable differences between cryptocurrency and other virtual currencies:

  • Most virtual currencies are not regulated, but some governments have policies pending or in place to regulate crypto.
  • Cryptocurrency is secured by a virtual ledger that tracks each purchase and sale, also known as cryptography, which other virtual currencies don’t have.
  • Cryptocurrency can be cashed out or used to make purchases through certain merchants, while most virtual currencies cannot.
  • The value of cryptocurrency can fluctuate quickly while most virtual currencies have a relatively fixed value.

Investing in Cryptocurrency

If you’re interested in investing in cryptocurrency, there are several ways to go about buying and storing your coins and tokens. But where to decide to buy and store your crypto can impact both how secure your crypto is and how it can be used.

Cryptocurrency Exchanges

The most popular way to invest in cryptocurrency is through crypto exchanges. Crypto exchanges are online platforms that allow you to buy, store and sometimes trade various types of crypto. Most of these activities require you to pay fees set by the exchange.

Each exchange has its own features, but you can typically purchase crypto with a debit card or by making an ACH transfer from your bank. A few platforms also allow credit card purchases but the purchase will most likely be processed as a high-cost, high fee cash advance, or it may be declined by the creditor all-together.

Some crypto exchanges also provide you with a crypto wallet, which is a place where you can virtually store your crypto information online. They may also give you convenient ways to cash out or use your crypto. like through public kiosks or when you’re at check-out with certain retailers.

Exchanges vs. Wallets

One way to store your crypto is in a wallet that’s provided by a crypto exchange. While this may be the most convenient way to store your coins and tokens, especially if you make frequent trades. it’s not the safest option.

Other options include using a downloaded, stand-alone wallet app, or keeping your crypto in cold storage. With cold storage, you save your crypto offline where it can’t be stolen by a hacker, like on a USB card or external hard drive.

Cryptocurrency Investing Steps

Each cryptocurrency exchange may have a different process to get started, but here’s what you can generally expect:

  • Step 1. Create an account with a cryptocurrency exchange.
  • Step 2. Connect to your bank account or provide other payment information.
  • Step 3. Wait for approval to begin trading, which can sometimes take several days or weeks.
  • Step 4. Submit a purchase order for the cryptocurrency of your choice.
  • Step 5 (optional). Transfer your purchases into a dedicated cryptocurrency wallet.

 

Indirectly Investing with Cryptocurrency Stock

There’s another way to invest in cryptocurrency that doesn’t involve buying virtual currency. Instead of purchasing coins or tokens, you can buy stock in a company that deals in or services crypto or invest in a fund that holds crypto.

Some ways to invest in cryptocurrency stock include:

  • Crypto exchanges that also operate as brokerages, like Robinhood.
  • Cryptocurrency exchange-traded funds (ETFs) and mutual funds, like those offered by Charles Schwab.

Risks to Investing in Cryptocurrency

Cryptocurrency is a high-risk investment that’s surrounded by lots of misinformation. Before you invest, make sure you weigh the possibility of cashing-in against the serious drawbacks of investing in crypto:

  • Volatility. Cryptocurrency is one of the most volatile asset classes, meaning its value can change drastically in a short period of time and investors can lose a lot of money, fast. For example, many bitcoin holders saw the value of their bitcoin investments cut in half in 2022.
  • Lack of regulation. Unlike fiat currencies, crypto isn’t regulated or insured by a central authority. While that gives investors certain freedoms, it also means having less legal protection. Crypto exchanges also have relatively little oversight and are exceptionally vulnerable to collapse. In the 2022 FTX collapse, for example, $8 billion in customer funds went missing.
  • Security. In 2022, $3.8 billion worth of crypto was stolen from cryptocurrency businesses. Unlike other financial accounts, such as credit cards and loans, you probably won’t receive a fraud alert or other notification if your crypto investment account is compromised.
  • Fraud risk. Cryptocurrency is a preferred method of payment for scammers since victims have no legal recourse if they send crypto to the wrong person. According to the Federal Trade Commission (FTC) scammers commonly (and successfully) impersonate legitimate companies to advertise fake crypto investment opportunities.

Investors should also keep in mind that there are tax ramifications for crypto investing. You may have to report income you gain or lose, and you may have to pay additional taxes as a result of your investments.

Security Clearance Concerns with Cryptocurrency

If you’re still considering crypto investing, you’re probably wondering, “Can military invest in cryptocurrency?”

The answer is a bit tricky when it comes to security clearance since cryptocurrency regulations have changed several times in the past few years. As of late 2022, investors were required to report crypto holdings if the crypto was purchased from foreign exchanges or held in foreign-backed wallets, but you don’t need to report crypto holdings backed by U.S. companies.

In other words, there are minimal security clearance concerns when it comes to investing in cryptocurrency. However, if owning crypto causes you financial problems, your security clearance could be indirectly impacted.

Final Thoughts

There are a variety of ways to start investing in cryptocurrency, but no matter how you start it’s important to practice caution.

Your favorite musician or athlete might be out there promoting a new coin, but at the end of the day they won’t be around to help you if you lose money on crypto. In other words, don’t let trends or advertising persuade you to make financial decisions.

Instead, there are some simple measures you can take to reduce your risk. You can diversify your portfolio—or spread your investments across various asset classes—to avoid losing all of your money when one coin or token crashes, or if the crypto market takes another dive.

Most importantly, make sure you only invest money you’re willing to lose.

About The Author

Sarah Brady

Sarah Brady is a Personal Finance Writer and educator who's been helping people improve their financial wellness since 2013. Sarah writes for Experian, Investopedia and more, and she's been syndicated by Yahoo! News and MSN. She is a workshop facilitator and former consultant for the City of San Francisco's Affordable Home Buyer Programs, as well as a former Certified Housing & Credit Counselor (HUD, NFCC). Sarah can be contacted via sarahcbrady.com.

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