Cryptocurrency is digital money. That means there’s no physical coin or bill—it’s all online. You can transfer cryptocurrency to someone online without a go-between, like a bank. Bitcoin and Ether are well-known cryptocurrencies, but new cryptocurrencies continue to be created.
People might use cryptocurrencies for quick payments and to avoid transaction fees. Some might buy cryptocurrencies as an investment, hoping the value goes up. You can buy cryptocurrency with a credit card or electronic bank payment (ACH transaction)—or, in some cases, get it through a process called mining that produces new coins.
Cryptocurrency is stored in a digital wallet, either online, on your computer, or on other hardware. Cryptocurrency wallets are generally classified as hot wallets or cold wallets. Hot wallets are connected to the internet (and may be more vulnerable to hacking) and cold wallets are not (and may be more secure).
In some contexts, cryptocurrency may not have the same protections as when you are using U.S. dollars. And scammers often ask people to pay with cryptocurrency because they know that such payments are typically not reversible.
Cryptocurrencies Are Not Backed by a Government
Cryptocurrencies are not insured by the government like U.S. bank deposits are. This means that cryptocurrency stored online does not have the same protections as money in a bank account. If you store your cryptocurrency in a digital wallet provided by a company, and the company goes out of business or is hacked, the government may not be able to step and help get your money back as it would with money stored in banks or credit unions.
A Cryptocurrency’s Value May Change Frequently
A cryptocurrency’s value can change by the hour. An investment that may be worth thousands of U.S. dollars today might be worth only hundreds tomorrow. If the value goes down, there’s no guarantee that it will go up again.
Investing in Cryptocurrency
As with any investment, before you invest in cryptocurrency, know the risks and how to spot a scam.
No One Can Guarantee You Will Make Money
Anyone who promises you a guaranteed return or profit is likely a scammer. Just because an investment is well known or has celebrity endorsements does not mean it is good or safe. That holds true for cryptocurrency, just as it does for more traditional investments. Don’t invest money you can’t afford to lose.
Not All Cryptocurrencies or Companies Promoting Them Are the Same
Look into the claims that companies promoting cryptocurrency are making. Search online for the name of the company, the cryptocurrency name, plus words like “review,” “scam,” or “complaint.”
Paying with Cryptocurrency
If you are thinking about using cryptocurrency to make a payment, know the important differences between paying with cryptocurrency and paying by traditional methods.
You Don’t Have the Same Legal Protections When You Pay with Cryptocurrency
Credit cards and debit cards have legal protections if something goes wrong. For example, if you need to dispute a purchase, your credit card company has a process to help you get your money back. Cryptocurrency payments typically are not reversible. Once you pay with cryptocurrency, you only can get your money back if the seller sends it back.
Before you buy something with cryptocurrency, know a seller’s reputation, where the seller is located, and how to contact someone if there is a problem.
Refunds Might Not Be in Cryptocurrency
If refunds are offered, find out whether they will be in cryptocurrency, U.S. dollars, or something else. And how much will your refund be? The value of a cryptocurrency changes constantly. Before you buy something with cryptocurrency, learn how the seller calculates refunds.
Some Transaction Information May Be Public
Although cryptocurrency transactions are anonymous, the transactions may be posted to a public ledger, like Bitcoin’s blockchain. A blockchain is a public list of records that shows when someone transacts with cryptocurrency. Depending on the cryptocurrency, the information added to the blockchain can include information like the transaction amount. The information also can include the sender’s and recipient’s wallet addresses—a long string of numbers and letters linked to a digital wallet that stores cryptocurrency. Both the transaction amount and wallet addresses could be used to identify who the actual people using it are.
Cryptocurrency Scams
As more people become interested in cryptocurrency, scammers are finding more ways to use it. For example, scammers might offer investment and business opportunities, promising to double your investment or give you financial freedom.
Watch out for anyone who:
• guarantees that you’ll make money
• promises big payouts that will double your money in a short time
• promises free money in dollars or cryptocurrency
• makes claims about their company that are not clear
Cryptojacking
Cryptojacking is when scammers use your computer or smartphone’s processing power to mine cryptocurrency for their own benefit, and without your permission. Scammers can put malicious code onto your device simply by your visiting a website. Then they can help themselves to your device’s processor without you knowing.
If you notice that your device is slower than usual, burns through battery power quickly, or crashes, your device might have been cryptojacked. Here is what to do about it:
• Close sites or apps that slow your device or drain your battery.
• Use antivirus software, set software and apps to update automatically, and never install software or apps you do not trust.
• Do not click links without knowing where they lead and be careful about visiting unfamiliar websites.
• Consider a browser extension or ad blockers that can help defend against cryptojacking. But do your research first. Read reviews and check trusted sources before installing any online tools. Some websites may keep you from using their site if you have blocking software installed.
Report Scams
Report fraud and other suspicious activity involving cryptocurrency, or other digital assets to:
• the FTC at ftc.gov/complaint
• the Commodity Futures Trading Commission (CFTC) at 866-366-2382 or at CFTC.gov/TipOrComplaint
• the U.S. Securities and Exchange Commission (SEC) at sec.gov/tcr
In Texas, cryptocurrency is recognized as digital money, but it is not backed by the government nor insured like traditional bank deposits. The Texas Department of Banking has issued guidance recognizing the use of cryptocurrencies, and the state allows for the use of digital currencies in transactions and investments. However, consumers are warned to exercise caution due to the lack of legal protections compared to traditional payment methods, the volatility of cryptocurrency values, and the potential for scams. Cryptocurrency transactions are not reversible, and refunds may not be provided in the same form of currency. Texas law requires money transmission licenses for cryptocurrency exchanges operating in the state. Additionally, the Texas State Securities Board actively monitors and investigates cryptocurrency-related investment opportunities to protect consumers from fraud. Consumers are encouraged to report scams to federal agencies like the FTC, CFTC, and SEC. It's important to note that while Texas provides some regulatory guidance, federal law, including regulations by the SEC and CFTC, also applies to cryptocurrency activities, and these laws can preempt state regulations.
