Cryptocurrency is a form of currency that is used online. Like the US Dollar and the British Pound, cryptocurrency is used for exchanging currency. Bitcoin is the most famous of these, but there are many forms of cryptocurrencies that people invest in to use online. When it comes to exchanging currency, it is built upon trust. You probably don't hesitate to exchange a dollar for a pound because you understand the system in place.
Let’s take a closer look at cryptocurrency and what you should know before investing.
NEED A REFRESHER ON HOW CRYPTOCURRENCY WORKS?
What is Cryptocurrency?
Cryptocurrencies are digital assets that people use as investments and for online purchases. You exchange your real currency to purchase "coins" or "tokens" of the given cryptocurrency. From Bitcoin and Ethereum to Litecoin and Libra, there are numerous forms that have been created by tech and finance companies over the years.
Cryptocurrency is different from physical money in the way it is exchanged. It's a peer-to-peer system that purely exists digitally so anyone can send and receive payments without a middleman (i.e. a bank). Cryptocurrencies are something of a wild west: there is no control on how they’re produced, what their value is, or how they can be exchanged. Therefore, cryptocurrencies are worth whatever people are willing to pay or exchange them for.
Cryptocurrencies are generally safe to use because they operate on blockchain technology. The blockchain uses encryption to verify transactions; data is safely stored and transmitted between wallets and public ledgers through blockchains to provide safety to users. The blockchain also provides a public record of transactions that have happened on the given cryptocurrency.
Blockchains operate on Distributed Ledger Technology: not only does a single block contain a number of transactions but every time a new transaction occurs, a record of that transaction is duplicated onto each block within the chain as well; this improves the overall safety and security of the data. Should one block in the chain is tampered with, it will become obvious: if a hacker were to attempt to corrupt a blockchain, they would have to change every single block—and there could potentially be thousands of them. This also makes blockchain an effective security measure for data.
Similar to the Stock Market, the value of cryptocurrency is constantly changing. (Photo: www.distel.com)
Understanding the Risks
But should you invest in crypto? There are some important things to understand before deciding:
1. You may not have legal protection
Have you ever had to dispute a purchase with your credit card company if a purchase went wrong? This is what is referred to as legal protection; credit card companies have a process in place to help their customers get their money back if a purchase goes south. Cryptocurrencies typically do not have such a process in place.
2. With the unknown, comes fraudulent activity
There is a lot of unknowns when it comes to understanding how cryptocurrencies work. The world of cryptocurrency holds some unpleasant surprises because so few people truly understand it. Ignorance on your part may make you a target for scams.
3. Unproven return of investment
Any investment is a gamble, but for some, rolling the dice on crypto is not a risk worth taking. There is no pattern when it comes to the rise and fall of its value, so there is no way to predict the changes or calculate your returns. As with any investment, don't invest if you can't afford to lose it.
Is it a Safe Investment?
Before throwing your hard-earned money towards cryptocurrency, let's look at how to do it safely and securely.
- Understand Exchanges and Wallets
An exchange is the platform on which digital currencies are bought and sold. There are hundreds of different exchanges to choose from, so conduct your own research before choosing one. Once you decide on an exchange, you need a wallet. Like exchanges, there are different types of digital wallets, each with its own benefits, requirements, and security features. As with exchanges, you should explore your options before investing.
- Diversify Your Investments
When it comes to investments, diversification is the key in any strategy—cryptocurrency not excluded. Instead of investing all your money into one currency, spread your investment to a variety of currencies to balance out the ups and downs of each.
The world of cryptocurrency is still finding its feet, so there is no instruction manual on how to navigate it. While cryptocurrency’s popularity is rising, there are still many questions to be explored. Before making any investment, it is important to understand your financial wellbeing before taking the plunge.