If you’ve been on the internet or watched the news, you’ve most likely heard of cryptocurrency, or crypto. You may be intrigued by the idea, but have no idea how it works. Here, we’ll go over the basic concepts and talk about getting involved in cryptocurrency.
What Is Cryptocurrency?
Image via Flickr by microsiervos
Cryptocurrency – commonly referred to as crypto – is a digital currency intended to be used as a medium of exchange. Cryptocurrency is secured via cryptography, making it virtually impossible to counterfeit or double spend. Unlike traditional government-based currency such as the USD, cryptocurrencies don’t have a central issuing or regulating authority; rather, they utilize a decentralized system called a blockchain to track assets and record transactions. Cryptocurrency does away with bank accounts, ATM cards, and checks, allowing for quicker transaction speed, fewer transactions costs and fees, ease of accessibility, heightened security, and more.
How To Invest in Cryptocurrency
Initially, the only way to acquire cryptocurrencies was through crypto mining. Mining uses high-powered graphics processing units to create new coins and validate incoming cryptocurrency transactions via blockchain network and then add those entries to a distributed ledger. Crypto mining provides safeguards against corruption and double-spending of digital currency. Many online entities allow you to buy and sell crypto using fiat currency, money backed by a government such as the U.S. dollar. You can also often buy and sell cryptocurrencies for other cryptocurrencies. You’ll need an online crypto wallet to store your currency.
Popularity of Crypto
Cryptocurrency has exploded in popularity recently. There are currently over 17,000 different cryptocurrencies on the market, and that number is only increasing as time goes on. Recent estimates put the total value of cryptocurrencies at around $1.7 trillion, down from a high of $2.9 trillion late last year. There are a variety of reasons crypto is becoming more popular. One is that those who support crypto see it as the currency of the future and want to get involved early on and have their investment grow rapidly.
Another reason is that crypto eliminates the need for central banks to manage the money supply and devalue the currency over time via inflation. The technology behind crypto, blockchain, is another reason people are flocking to crypto due to its decentralized recording and processing capabilities and the fact that they’re inherently more secure than traditional payment systems. Finally, some people see crypto as an opportunity to make enormous profits quickly.
Crypto as an Investment Instrument
Cryptos can increase in value, often exponentially, but many of those in the investment world don’t consider crypto an actual investment but as speculations. This is because cryptos don’t inherently generate cash flow and only become profitable when someone is willing to pay more for it than you did. That is in contrast to a well-managed business that increases value over time by growing profitability and increasing the cash flow of its operation. Since crypto mining uses high-powered graphics processing units to make coins and process transactions, it can also be damaging to the environment.
Another potential issue with crypto being the currency of the future is that they’re unstable. The value of a cryptocurrency can fluctuate in value by double, triple, or even more. This instability makes it difficult to determine an equitable price for goods and services in a cryptocurrency. The potential for a significant increase in value also lends itself to people keeping their crypto rather than spending it, further complicating its viability as a currency.
Crypto Legality and Protecting Yourself in the Crypto Market
Federal governments essentially determine legality. In the United States, crypto is completely legal, while its use has been all but banned in China. You must also be vigilant about investing in any form of crypto. Scammers abound in the crypto world and try to take advantage of new or naïve investors to steal money from them. So how should you protect yourself? The main thing is to research the company releasing new crypto in an initial coin offering (ICO) or on the exchanges you want to buy and sell crypto through.
For an ICO, make sure you read and thoroughly understand the prospectus offered by the company. Ensure you know who owns the company doing the release. A reputable business or person behind the ICO is typically a good sign. Another thing you can do to protect yourself is to determine who else is investing in the crypto you’re looking to buy. Are there major players who are putting money into it? If so, that’s a positive indication that crypto may be a viable option.
When participating in an ICO, make sure you understand if you’re only buying crypto tokens or getting shares of the company. This is an important distinction, as you can participate in the earnings as an owner or only be entitled to the tokens and their future value increase if no shares are involved. Also, in an ICO, determine if the currency is already developed or merely the company’s way to generate funds to develop its cryptocurrency. The further the coin’s development process, the more stable and viable it is.
Reading through the prospectus in an ICO is tedious and time-consuming work. However, the more detailed it is, the more likely it will be a legitimate investment for your portfolio. Even legitimacy doesn’t guarantee profitability. A legitimate company that has put a lot of time and effort into developing the cryptocurrency doesn’t guarantee success. While blockchain technology is secure, there are still hackers out there who will try to hack into systems and steal cryptocurrency. Cryptocurrency is a very volatile and speculative investment. However, if you understand the risks and do your homework, it can be highly profitable.
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