Cryptocurrency is a type of digital currency that doesn’t rely on a central authority to verify transactions or create new units. Instead, it relies on cryptography to prevent counterfeiting. Investing in Cryptocurrency is creating in the easiest form, to remove the hindrances faced by traditional trading.
Buying cryptocurrency is the easy part. As a crypto investor, you have to be prepared for volatility. Crypto, in general, is more volatile than traditional asset classes such as stocks. Price swings of 10% or more in just a few hours are very common.
Stock value is generally determined by the success of the company (or the impending success of the company). Higher profits mean higher dividends, which means higher stock prices.
Cryptocurrency values are also tied to the marketplace, but in a different way. There’s no physical asset that’s affected by the local economy. And the value isn’t tied to corporate profits. The value of a cryptocurrency unit is entirely dependent on whether or not people want to buy cryptocurrency units.
Investing in cryptocurrency has a few advantages:
- Diversification: The value of cryptocurrency doesn’t appear to be correlated with the price of stocks, bonds, or other asset classes. That said, cryptocurrency has only existed for about a decade, so the data is limited in this regard. Theoretically, though, it makes sense that the price of crypto is unrelated to the price of traditional assets.
- Return potential: Cryptocurrency has produced extremely strong returns as adoption increases. Most people agree the expected return for a sound cryptocurrency investment is greater than that for stocks.
- Additional utility: Unlike stocks, some cryptocurrencies provide utility. Bitcoin , for example, can be used to pay for goods and services. Other tokens may provide access to projects or discounts on a project’s services.
But there are some big disadvantages for investors as well:
- Limited regulation: There’s limited regulation in the cryptocurrency industry, which means you don’t have the same protections as you do when investing in the heavily regulated stock market. If your account gets hacked, for example, you could find your investment completely gone without any recourse. If the coin you invest in turns out to be a scam, there’s nothing you can do. Furthermore, increased regulation may decrease the demand for some cryptocurrencies, adding a risk to the investment.
- High volatility: The prices for cryptocurrency can swing wildly on a day-to-day basis. Such massive price swings can be hard for some investors to stomach.
How to Invest in Cryptocurrency
There are several different exchanges to choose from, with the most popular being Coinbase, GDAx and Bitfinex. These exchanges allow you purchase currencies like Bitcoin and Ethereum with a debit card. With most popular currencies, including Bitcoin, you can buy fractions of a coin, so you don’t need to invest thousands of dollars to get in the game.
One common way cryptocurrencies are created is through a process known as mining, which is used by Bitcoin. Mining can be an energy-intensive process in which computers solve complex puzzles in order to verify the authenticity of transactions on the network. As a reward, the owners of those computers can receive newly created cryptocurrency. Other cryptocurrencies use different methods to create and distribute tokens, and many have a significantly lighter environmental impact.
There are different wallet providers to choose from. The terms “hot wallet” and “cold wallet” are used:
- Hot wallet storage: “hot wallets” refer to crypto storage that uses online software to protect the private keys to your assets.
- Cold wallet storage: Unlike hot wallets, cold wallets (also known as hardware wallets) rely on offline electronic devices to securely store your private keys.
Typically, cold wallets tend to charge fees, while hot wallets don’t.
There are thousands of cryptocurrencies. Some of the best known include:
Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded. The currency was developed by Satoshi Nakamoto – widely believed to be a pseudonym for an individual or group of people whose precise identity remains unknown.
Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.
This currency is most similar to bitcoin but has moved more quickly to develop new innovations, including faster payments and processes to allow more transactions.
Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track different kinds of transactions, not just cryptocurrency. The company behind it has worked with various banks and financial institutions.
Is Cryptocurrency safe?
Cryptocurrencies are usually built using blockchain technology. Blockchain describes the way transactions are recorded into “blocks” and time stamped. It’s a fairly complex, technical process, but the result is a digital ledger of cryptocurrency transactions that’s hard for hackers to tamper with.
In addition, transactions require a two-factor authentication process. For instance, you might be asked to enter a username and password to start a transaction. Then, you might have to enter an authentication code sent via text to your personal cell phone.
While securities are in place, that does not mean cryptocurrencies are un-hackable.
Investing in cryptocurrencies can be an intriguing prospect for a portion of your portfolio, but you should make sure to diversify your investments with other holdings. A financial advisor could advise you on asset allocation and help you create an investment plan.