Cryptocurrency has captured the attention of investors and the media, but it’s still a new and complicated investment. It’s not regulated like stocks, so it doesn’t have the same protections and is highly volatile. Despite these risks, it may be an opportunity to diversify your portfolio and earn passive income through a process called staking. To learn more about cryptocurrency, read our overview.
A cryptocurrency is a digital asset that uses encryption to verify transactions. It has no physical form and exists only on the blockchain, a secure, decentralized database that records every crypto transaction ever made. Cryptocurrencies are designed to provide a fast, low-cost, and secure alternative to traditional financial systems. Supporters of cryptocurrencies believe that it removes the need for centralized banks, which can reduce the value of money through inflation.
There are many types of cryptocurrencies, each with its own unique features and growth potential. Some, like Bitcoin (BTC), have the highest market capitalization and are often the most familiar to investors. Others, such as Ripple (XRP) and Litecoin (LTC), focus on fast, low-cost cross-border payments. Cardano (ADA) and Solana (ALN) are known for their security and sustainability, with the latter using a proof-of-stake system that’s more energy efficient than Bitcoin’s proof-of-work model.
The value of a cryptocurrency is determined by its demand. As more people use it, its price increases. However, a cryptocurrency’s price can also fall due to supply and demand imbalances, government regulation, or hacking and fraud. Investors should research different coins before making a purchase, looking at their team, technology, use cases, and community. They should also consider the fees and minimum deposit requirements of each exchange they plan to buy from, as well as security measures and usability. Wallets, which store the private keys used to validate transactions, are available in hot and cold forms that connect to the internet or are hardware-based, providing varying levels of security.
Regulatory risk: The legal status of many cryptocurrencies is unclear, with some governments considering them securities or currencies and others banning them altogether. A sudden regulatory crackdown could impact the price of cryptocurrencies by making it difficult or impossible to sell them.
Counterparty risk: Many cryptocurrencies are traded on third-party platforms that don’t offer the same consumer protections as regulated markets. This can lead to hacking, theft, and other issues. Investors should research each platform they plan to trade on and only invest money they can afford to lose.
Cryptocurrency is highly volatile, with prices swinging dramatically over short periods. Investors should only use money they can afford to lose and remain calm during market ups and downs. Regular rebalancing can help you avoid overweighting major crypto assets and chasing short-term gains. A rules-based framework that combines technical and blockchain analysis with your personal investment risk tolerance can help prevent costly emotion-driven decision-making.