Cryptocurrency is a digital asset that uses a computer network to work as a medium of exchange without the need for centralized intermediaries like banks. It was created by an anonymous computer programmer or group of programmers in 2009.
Cryptocurrency prices can be volatile, so it’s important to diversify your investments. Also, many cryptocurrencies lack strong consumer protections, unlike credit cards. Read more.
What is a Cryptocurrency?
Cryptocurrencies are digital or virtual currencies that utilise cryptography to secure transactions and create new coins. They are usually built on a blockchain network which provides a decentralised, transparent and immutable digital ledger of transactions. This technology has created enormous interest in cryptocurrencies and is the underlying infrastructure that enables them to operate without central control or government manipulation.
This innovative paradigm allows them to function as a medium of exchange over a computer network without relying on centralized intermediaries such as banks or governments to enforce trust and police transactions. This decentralisation also helps to reduce the potential for a single point of failure that could cause a global crisis as happened in 2008.
Investors purchase cryptocurrency tokens (often referred to as coins) to use as alternative payment methods or as speculative investments. The cryptocurrency market is highly volatile and investors need to understand the risks and rewards of this emerging asset class. Simplilearn’s video “Cryptocurrency Explained” is a great place to start.
How do they work?
Cryptocurrencies are built on a software system, which means that their value is not tied to any physical assets. Investors hold the coins in a wallet, which is a computer app that allows them to send and receive crypto. The wallets can be “hot,” meaning connected to the internet, and used for quick transfers and easy access, or “cold” which store the crypto offline, typically in physical devices like specially designed USBs for safer and longer term storage.
Each cryptocurrency’s system uses encryption and a digital ledger known as a blockchain to record transactions in a way that’s hard for hackers to tamper with. Each user within the system has a public and private key. The private key is like the username and password for your bank account, while the public key allows anyone to verify your ownership of the currency.
Many cryptocurrencies’ prices are determined by supply and demand, while others may gain value based on being backed by real-world assets or other utility. But they all have one thing in common: they’re incredibly volatile.
What are the risks?
While many investors have seen their cryptocurrency holdings appreciate in value, it’s important to remember that these investments are risky and may lose value. Like any investment, you should only invest money that you can afford to lose.
Cryptocurrencies are volatile and not regulated or insured, unlike stocks and real money in the bank. As a result, they can experience significant losses as well as gains.
Because they are not backed by tangible assets, cryptocurrencies can be hacked, and the digital wallets used to store them are vulnerable to theft. In addition, government regulations are constantly evolving and may impact how cryptocurrencies are created, moved or traded.
Investors should consider the fact that cryptocurrency projects are often run by volunteers, and incentives do not always align among all team members. This can lead to mismanagement, insufficient development and other challenges that could negatively affect the value of a virtual currency. Regulatory risks can also include government shutdowns or restrictions on cryptocurrency trading and exchanges.
How can I invest in crypto?
There are a few different ways to invest in cryptocurrency. One option is to buy crypto directly through an exchange or investment platform. You can find some popular options at Coinbase, Gemini and Kraken.
Another option is to invest in companies that are working on or experimenting with blockchain technology. This can be done through publicly traded ETFs.
Some people choose to invest in cryptocurrencies for the same reason that they would buy any other stock: in the hope that their value will rise, netting them a profit. But this is a highly speculative investment, and even the most experienced investors can lose money.
It’s important to remember that cryptocurrencies are volatile, and they may be more susceptible to market manipulation than securities. In addition, they don’t benefit from the same regulatory protections as registered securities and the future regulatory environment is uncertain. This means that you should only invest with an amount that you’re willing to lose.