Cryptocurrencies have exploded from digital novelties into trillion-dollar technologies with the potential to revolutionize money and finance. However, they still lack the regulatory protections that come with investing in traditional stocks, bonds and mutual funds. As a result, cryptocurrency prices can be volatile and investors can suffer large losses in a short period of time.
Aside from Bitcoin, the most well-known cryptocurrency, dozens of others have sprouted in recent years. The virtual coins are exchanged on decentralized computer networks between people with virtual wallets, bypassing traditional banking and allowing for relatively fast and low-cost transactions. These transactions are recorded publicly on distributed, tamper-proof ledgers known as blockchains. Unlike government-backed currency, the value of many cryptocurrency assets fluctuates based on supply and demand. In some cases, cryptocurrencies are pegged to the value of other assets—a practice known as stablecoins—although they often lose their peg in periods of volatility.
Despite their volatility, cryptocurrencies have become a major part of the global economy. Some governments have taken steps to regulate them, including imposing rules for banks that hold the currencies. For example, a new proposal would require banks to set aside enough capital to cover any potential losses incurred by holding the assets. This is a much higher standard than banks are usually held to with other assets.
Other countries are moving to ban cryptocurrencies or restrict their use. In addition, a few of the largest crypto exchanges have faced bankruptcy due to their high levels of borrowing and lending. The collapse of firms like FTX and BitGrail has sparked calls for increased regulation.