Cryptocurrencies are digital currencies that are produced and used electronically. They can be transferred instantly between parties without the need for a central bank, corporation, or government.
Each cryptocurrency is powered by its blockchain technology that processes transactions and maintains accounts in real-time. Cryptocurrencies are an increasingly popular form of value storage and can be traded like stocks on stock exchanges.
As of May 18, 2019, there were 1,918 active cryptocurrencies available for trading on major crypto exchanges. This number is growing rapidly due to its low cost and accessibility compared to other traditional financial assets such as stocks or bonds.
What are cryptocurrencies?
Cryptocurrencies are decentralized electronic money that is created and managed electronically using algorithms. They are also referred to as digital currencies, virtual currencies, cryptocurrencies, or assets. They were first introduced as an alternative to existing fiat currencies such as the U.S. dollar.
Crypto is decentralized in that no central authority controls them. Instead, they are managed collectively by networks of computers that follow rules and process transactions. They are also decentralized in that there is no single point of failure for them.
Therefore, if a major cryptocurrency exchange were to suffer a cyberattack or other incident, the exchange would not be able to bring the cryptocurrency network to a halt. Since crypto are decentralized, you can use them to store and exchange value without relying on third parties such as financial institutions or governments.
Advantages of investing in cryptocurrency
- Low Volatility – Cryptocurrencies have low volatility compared to stocks or bonds. This is because their prices are determined by a supply-and-demand mechanism on a blockchain network and not by a government or a central bank. As a result, you have a low risk of losing money if you invest in a certain cryptocurrency.
- Low Cost – Cryptocurrencies are decentralized and are therefore not controlled or regulated by anyone. This means that they have low costs compared to stocks, bonds, and other investments.
- Easy to Store – Unlike fiat currencies, cryptocurrencies do not require a specific physical form. This means you can use a cryptocurrency wallet app to store and trade value from anywhere in the world even if you are traveling.
- High Security – Cryptocurrency transactions are processed through decentralized blockchain networks. This makes them more secure than traditional online transactions.
Risks of investing in cryptocurrency
- Lack of Regulation – Unlike traditional stocks or bonds, cryptocurrencies are largely unregulated. This means that they are not overseen by any government agency or financial authority. This also means that they are prone to cyberattacks, fraud, theft, and other incidents that could negatively impact a traditional financial asset.
- High Volatility – Like stocks, the prices of cryptocurrencies can change rapidly. This means that you could experience small or large losses if you buy them during periods of high volatility.
- Lack of Liquidity – Most cryptocurrency exchanges do not offer sufficient liquidity. This means that you could find it difficult to get your hands on a certain cryptocurrency for immediate trading.
- No Futures or Options – Cryptocurrency trading does not provide the same investment opportunities as stocks or bonds such as futures or options. This means that you cannot use leverage to increase your investments or reduce your losses if the prices of cryptocurrencies fall.
How to buy cryptocurrencies?
There are several ways you can invest in crypto. One is by purchasing them directly with traditional fiat currencies such as dollars or euros. This is known as buying cryptocurrency “on exchanges.” Another way is to mine cryptocurrency “with a ‘miner.’” You can also earn cryptocurrency through “ico” or “token” offerings.
Cryptocurrency risks and tips for investing
- The Risk of Trading – A key element of trading crypto is that their prices are highly volatile. This makes it difficult for you to predict their future prices and therefore make objective investment decisions.
- Lack of Liquidity – The liquidity in many cryptocurrency markets is low. This means that it is difficult for you to get your hands on a certain cryptocurrency.
- High Investment Risk – Unlike stocks where you buy a small part of a company, cryptocurrencies are not backed by any tangible assets. This means that you could lose all your money if a specific cryptocurrency does not work as intended.
- No Insurance – Unlike stocks or bonds where you can purchase insurance coverage for investment risks, there is no such protection for cryptocurrencies.
Conclusion
Investing in crypto is a high-risk, high-reward type of investment. This is due to their high volatility and low liquidity. Like any other investment, it is important that you fully research the risks and rewards before you invest in crypto.
This will help you make informed decisions on whether they are right for your portfolio or not. If you choose to invest in crypto, make sure you take precautions to protect your money.
