What Is Cryptocurrency? Basics of Bitcoin & Blockchain Technology

How do you buy and sell bitcoin or any other cryptocurrency? Learn the basics of bitcoin, blockchain technology, and any risks before jumping in to the cryptocurrency pool.

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Key Takeaways

  • Bitcoin and other cryptocurrencies are gaining more attention as digital payment systems
  • Cryptocurrencies are risky in part because they’re not regulated by the U.S. Securities and Exchange Commission (SEC) and prices can swing sharply
  • Before buying bitcoin or other cryptocurrencies, investors should study these markets and understand the unique risks

Thinking about jumping into the cryptocurrency pool? How and whether to buy bitcoin or other cryptocurrencies are questions many investors have pondered as crypto markets—and the blockchain technology underlying digital currencies—increasingly moves into the mainstream.

Learning how to buy and sell bitcoin doesn’t take just any old investor education effort, and bitcoin and other cryptocurrencies aren’t just any old asset class. Investors who are interested in cryptocurrency should get familiar with a few questions considering recent growth in crypto markets, wide price fluctuations, and the absence of hard rules and regulations governing these instruments.

Before trading or investing in bitcoin, ethereum, or other cryptocurrencies, make sure you understand what you’re getting into and the wide array of choices. Let’s look at a few basic questions.

Before exploring the topic, it’s important to note that as of March 2021, bitcoin futures are the only cryptocurrency product available to qualified TD Ameritrade clients on the thinkorswim® platform, and not all clients will qualify to trade them. Visit the Bitcoin Futures page for more information.

What Is Cryptocurrency?

Cryptocurrencies, also referred to as coins, are virtual currencies secured through one-way cryptography. Many are based on public blockchain technology, a distributed ledger of all transactions that’s decentralized and can’t be changed under most circumstances. Unlike traditional currencies, such as the U.S. dollar, they’re not controlled by any central government or authority.

As of March 2021, there were more than 4,000 cryptocurrencies and tokens worldwide, according to CoinMarketCap. Bitcoin leads the list as one of the most actively traded cryptocurrencies, currently sporting an overall market cap of more than $1 trillion. (In March 2021, bitcoin soared to a record above $60,000, which is triple its level at the end of 2020.) Other popular cryptocurrencies include ethereum, tether, and litecoin.

What Is a “Smart Contract” and How Do They Work?

Bitcoin and others like it are considered by many to be alternative payment mechanisms; yet, they’re also highly speculative and subject to sharp daily price swings.

In contrast, other cryptos (like ethereum) are designed to facilitate transfer of ownership through so-called smart contracts, in which a token is attached to, and thus verifies, legal documents and other agreements.

Ethereum proponents aim to replace internet third parties and see the currency as a “world computer” that decentralizes, and some would argue democratizes, existing client-server models, according to CoinDesk, Inc., a digital publisher devoted to the crypto and blockchain community.

How and Where Do People Buy and Sell Bitcoin?

There are several thousand digital or online platforms on which you can buy and sell bitcoin and other cryptocurrencies. You can buy bitcoin with a credit card or through an online payment system, and you can sell bitcoin for cash. Top exchanges for trading bitcoin include Binance, Huobi Global, BitZ, Upbit, and Bybit, according to CoinMarketCap.

To trade on these exchanges, you typically need to set up a “wallet” (similar to an account) where you store your cryptocurrency. Payment options include credit and debit cards, wire transfers, and hard cash.

But whichever exchange or method investors may choose for buying and selling crypto, they should proceed with caution, according to market professionals. It’s a good idea to know where an exchange is based, how long it’s been around, and what kind of security it has in place.

There are a few ways to gain exposure to bitcoin without owning the actual cryptocurrency. Some traditional, established exchanges, including Chicago-based CME Group (CME), offer futures contracts linked to bitcoin (/BTC).

Bitcoin’s recent rally has led to some clamoring for cryptocurrency-based exchange-traded funds (ETFs), which U.S. regulators, as of November 2021, had yet to approve. (Earlier in 2021, regulators in Canada approved North America’s first bitcoin ETF).

What About the Risks of Cryptocurrencies?

There are many cryptocurrency risks, and authorities are still getting regulatory infrastructure in place for cryptocurrencies. Nothing exists yet to back you up, like the Federal Deposit Insurance Corporation does for U.S. bank customers. That means investors are entirely responsible for the security of any cryptocurrency holdings.

The SEC has noted that with cryptocurrencies, there is “substantially less investor protection than in our traditional securities markets, with correspondingly greater opportunities for fraud and manipulation.”

Additionally, cryptocurrency prices and prices for any related securities can be very volatile. Considering the possibility that the entire value of a cryptocurrency investment could disappear, investors who don’t think they could handle the market swings might want to steer clear.

What’s Happening with Blockchain?

Bitcoin and other cryptocurrencies grab many financial media headlines, but it’s the underlying technology, blockchain, that may hold the most longer-term possible benefit for businesses and consumers, according to some third-party analysts.

Many banks and other financial services companies have invested in blockchain, seeking ways distributed ledger technology could reduce costs or improve efficiency. Funding for blockchain-based companies jumped 79% in 2020, according to CryptoPotato. In 2019, blockchain startup investments totaled $3.08 billion globally, according to CB Information Services.

Ultimately, bitcoin and other cryptocurrencies, plus the underlying blockchain, are like a lot of new tech-driven innovations—tremendous potential but also tremendous risks. Investors considering cryptocurrencies would be wise to proceed with caution and study these markets carefully before taking any positions. The buck, whether digital or paper, stops with you.

Carefully consider whether trading in bitcoin futures is appropriate for you in light of your experience, objectives, financial resources, and other relevant circumstances. For additional information, read more about the basics of bitcoin and other cryptocurrencies, and check the TD Ameritrade Bitcoin Futures page.

Virtual currencies including bitcoin are very speculative, experience significant price volatility, and are not suitable for all investors.  Fluctuations in the underlying virtual currency’s value between the time you place a trade for a virtual currency futures contract and the time you attempt to liquidate it will affect the value of your futures contract and the potential profit and losses related to it. Be very cautious and monitor any investment that you make. Like all futures products, speculating in these markets should be considered a high-risk transaction. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment, and a potential total loss of their investment.

Carefully consider the investment objectives, risks, charges and expenses before investing in any ETF. A prospectus, obtained by calling 800-669-3900, contains this and other important information about an investment company. Read carefully before investing.

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Key Takeaways

  • Bitcoin and other cryptocurrencies are gaining more attention as digital payment systems
  • Cryptocurrencies are risky in part because they’re not regulated by the U.S. Securities and Exchange Commission (SEC) and prices can swing sharply
  • Before buying bitcoin or other cryptocurrencies, investors should study these markets and understand the unique risks

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