Should you get in on it? Is it even real? Here, we lift the veil on this cagey source of cash.

Bitcoin, Ethereum, Dogecoin. All these terms that weren’t in existence five years ago can make your head spin. If you’re not already investing in cryptocurrency—and maybe even if you are—you’re probably as confused as the rest of us about what this medium of exchange is, how it works, who uses it and why it matters. Cryptocurrency may never be used to pay your grocery bill, but it’s worth being aware of its benefits and drawbacks. Here, we focus on eight things you need to know.

1 What is cryptocurrency?

Cryptocurrency is any form of currency that exists digitally or virtually and uses cryptography to secure transactions. What does that even mean, you may be asking? It means that your money is secret. You access your money (cryptocurrency) through a secure website or app and make transactions accordingly. Only you (or whoever has your passcode) can access your cryptocurrency and make transactions. If you lose your passcode, have questions, or need any help, you are on your own. There are no crypto busters or managers you can call.

2 So what’s Bitcoin?

Bitcoin is a type of cryptocurrency, called store of value tokens. There are other types of cryptocurrencies, including DeFi, NFT (non-fungible tokens), utility tokens and yield farming tokens. Bitcoin happens to be the most popular and well known in the media.

3 How can I use cryptocurrency?

Cryptocurrency can be used to purchase goods and services, just as you’d use physical money. You can also invest in cryptocurrency, which means you are using it to make money.

4 Why would I want to invest in it?

The purpose of investing in anything, including cryptocurrency, is to make money. There is opportunity to do so with cryptocurrency; however, there are even greater risks if you lose your money. If you’re interested in cryptocurrency, talk with a professional and start small, with an amount that you could afford to lose without breaking a sweat.

5 But isn’t my money protected when it’s in cryptocurrency?

No. Not even a little bit! Cryptocurrency is decentralized, which means that there is no government or authority who regulates it. This, in turn, means that if you lose your passcode or your backup recovery codewords, or the fund manager mysteriously goes missing, you have no recourse to get your money back. In Canada, the federal and provincial governments regulate banks and credit unions. Your money is insured in credit unions, and in banks through the Canadian Deposit Insurance Corporation (CDIC). The benefit to this is that if you have issues with your account or you suspect some kind of fraud, you will have some recourse. That’s not the case with cryptocurrency.

6 Is investing in cryptocurrency wise, then?

That’s for you to discuss with your Certified Financial Planner. However, what I can say is that the crypto market can be very volatile Remember, you can use crypto to purchase goods and services, and/or use it as an investment strategy. It’s important that you understand what you’re investing in, and even more crucial that you understand the risks associated with this investment. For example, since 2021, Bitcoin’s value has varied considerably. More specifically, in approximate figures, it was worth around $61,000 near the beginning of the year; it then dropped to $31,000, rose again to $67,000, dropped to $37,000, rose to $47,000, and has since dropped to a little more than $20,000. This speaks to how volatile the market is. It’s important to ask yourself if you can afford to risk your money in that kind of roller-coaster scenario.

7 Can I convert crypto­currency into cash?

Yes, you can. This is done through a virtual wallet. Just like the traditional wallet you carry around, the virtual version holds your money, only digitally. To convert your funds to cash, you can add your traditional real-life Canadian bank account to your wallet. It’s important that your wallet is recognized by the Canadian government so that it’s aware of your transactions for tax purposes.

8 Do I have to claim my cryptocurrency on my taxes?

Yes, you do. Once your crypto­currency has been converted to Canadian currency, you claim that on your taxes, as per the rules set out by the Canada Revenue Agency.

Cryptocurrency will likely increase in popularity as more people explore this investment option. As with all your investments, do the research and consider working with a professional so that your money can grow for you while you get a good night’s sleep!