Cryptocurrency is all the rage in the investing world these days. Talk of investing in cryptocurrency is on the news, magazines, finance websites, and more. Also, everyone seems to think it's the "new new" when it comes to building wealth.
It certainly is super trendy these days! It's worth looking at, BUT before you take the leap into investing in digital currency, there are a few critical things you need to know. Like every investment you consider, it's important to first educate yourself about it and do your own research to make informed decisions.
Let's start by first defining what cryptocurrency is!
What is Cryptocurrency?
Cryptocurrency is essentially virtual or digital money. It has no ties to any traditional financial institution, banking, or currency system. You can also make transfers between individuals without the need for any financial intermediaries (aka middlemen). Cryptocurrency is also a form of payment that's now used online to buy services and goods.
You exchange real currency for cryptocurrency to use for payment or purchase it as an investment. The demand for digital currency has grown steadily over the last few years. Especially with the media showcasing how many initial investors have made thus far.
Is cryptocurrency like gold?
I've seen and heard A LOT of comparisons between investing in cryptocurrency and gold. Traditionally, buying gold (and other precious metals) has been a way for people to diversify their investment portfolios further.
Tangible assets such as gold allow you to hedge against things like natural disasters, currency declines, or collapses. Now, many people consider cryptocurrency to be a form of digital gold.
Since it has no ties to any traditional banking or financial system, some people consider it a way to protect against risks associated with these systems that are severely impacted by things happening within a government-controlled economy.
Gold is a limited resource (limited by what's available to be mined from the ground, of course). What's surprising is that cryptocurrencies are also limited. Huh? That's right—there's a limit to how much of it can be created via its digital mining processes. For example, only 21 million Bitcoin can ever be mined due to the digital nature of how it's created.
However, the main difference between cryptocurrency and gold is that gold has associated value. Gold has associated value because it's actually used in industries to make things like jewelry.
So the demand for gold doesn't just come from the commodity itself; it comes from the related industries and products that use it. Cryptocurrency, on the other hand, does not have this same associated value (right now). Its worth is determined by what investors are willing to pay for it.
What risks does buying cryptocurrency have?
Investing in cryptocurrency is can be high risk. That's because it is a very volatile and highly speculative investment (again, right now) based on supply and demand. And while high-risk investments also generate high returns, it's important to only invest what you can afford to lose. Should your long-term retirement savings be in cryptocurrency? I would not recommend it.
Also, cryptocurrencies are prone to a certain level of hacking, despite high security. That's because all their online transactions are stored in online ledgers. Just ask Bitcoin—they've experienced hacking more than 40 times.
Also, keep in mind that there is a chance that many of these different cryptocurrencies we hear about today may not be around long-term. So again, when investing in a high-risk asset such as cryptocurrency, only invest what you can afford to lose.
Is all cryptocurrency the same?
The answer is no; in the same way, all currency is not the same. For example, the American Dollar is different from the British Pound, which is also different from the Chinese Yen in terms of value. Also, their buying power, supply, demand, inflation, and other economic factors are different.
When buying cryptocurrency, you'll need to do some serious research to determine what type to buy. Believe it or not, some cryptocurrencies have no practical purpose or real value. The only reason they are selling is that people are interested in buying them.
Types of Cryptocurrency
If you are considering investing in cryptocurrency, there are many types to choose from. Here are five of the most popular ones:
Bitcoin is one of the most popular digital currencies available. It originated in 2008 and is also one of the most valuable cryptocurrencies reaching prices over $45,000! The reasoning behind its high value is because there are a limited number of Bitcoins available. It offers peer-to-peer transactions that are accepted worldwide.
However, you should keep in mind that the users determine the value, so there are no price guarantees, which is why cryptocurrency is a volatile investment.
Ethereum is the second most valuable cryptocurrency on the market. It is a programmable blockchain that provides a marketplace for apps, games, and financial services that can be paid for with cryptocurrency. It allows users to “borrow against their holders or lend them out for interest.”
The users also pay fees to use dApps (the Ethereum platform), and the fees are referred to as “gas” because the cost depends on the amount of computational power used.
Litecoin is a peer-to-peer internet currency that was created to become “the lite version of Bitcoin.” Like other cryptocurrencies, you will need a digital wallet to store them. Although Litecoin is significantly less valuable than Bitcoin, it is able to handle more transaction volume than its competitor.
The reason is it has more frequent block generation, which allows its network to support more transactions.
Bitcoin cash is known as peer-to-peer electronic cash. It allows you to send money all over the world at any time of day. It is also referred to as “scarce digital currency” because only 21 million coins will ever be in existence.
Since it eliminates credit card fees, many merchants offer exclusive discounts for using Bitcoin cash.
Like Litecoin, it is a peer-to-peer digital currency that can be sent all over the world. It is easy to use and widely accepted by online retailers.
Other popular cryptocurrencies include:
What's best for cryptocurrency storage?
When you invest traditionally in stocks and bonds, you can access your investments via a brokerage account. With cryptocurrency, your assets are stored in a cryptocurrency wallet or digital wallet. This is a secure digital wallet for storing, sending, and receiving digital currency.
You must back it up securely and keep your pin or access details secure. If you happen to lose access to your wallet or lose your access details, it could be a nightmare to recover.
So it’s best to use a trusted, secure, and easy-to-access digital wallet. For instance from Coinbase, BlockFi, or Paypal.
Should you invest in cryptocurrency?
This is a personal choice! Like every investment you consider, it's important to first learn about it and do your own research to make informed decisions.
It's also essential that you already have broad diversification in your existing portfolio in more stable assets. You also need to understand the potential risks that come with investing in cryptocurrency!
How do you invest in cryptocurrency?
You can buy and sell cryptocurrency through cryptocurrency exchanges. Coinbase, eToro, Binance, and BlockFi are some of the more popular cryptocurrency exchanges. These companies allow you to purchase digital currency with your debit card.
Some may allow you to use funds in your Paypal account too. Paypal also allows you to buy Cryptocurrency directly through your account.
Bitcoin even has ATMs where you can buy and sell digital currency with cash or a credit card. These kiosks connect directly to the Bitcoin exchange, so you can buy digital currency in person. Bitcoin sold or purchased is done from your digital wallet using a QR code provided by the Bitcoin ATM. Some Bitcoin ATMs will dispense cash for a sale.
Keep in mind that fees associated with buying and selling digital currency will depend on the amount of the transaction and the cryptocurrency exchange used.
Become a savvy cryptocurrency investor
Now you know some of the key things to consider if you are thinking of investing in cryptocurrency. Remember, it's all about staying informed and not placing all your bets on any investment, no matter how incredible it sounds.
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