A cryptocurrency is a digital medium of exchange that functions like money but is not backed by any central bank or government agency. It’s created using cryptography principles and is exchanged on decentralized computer networks between people with virtual wallets. The transactions are recorded publicly on a public ledger known as the blockchain. Bitcoin is the most well-known cryptocurrency, but many others have sprung up.
Like any investment, cryptocurrency can carry risks. It can be hacked, stolen or lost, and you may lose some or all of your investment. Additionally, cryptocurrencies are not insured. Crypto markets are also volatile, and the fascination with them may be more speculative than rational.
Unlike conventional national currencies, which get part of their value from being legal tender, cryptocurrencies do not have any intrinsic value other than their market price. This makes them susceptible to financial instability and other challenges that traditional currencies do not face.
The world is divided on how to view cryptocurrencies. Some, including Bill Gates and Al Gore, see them as potentially improving the economy, while others, such as Nobel laureates Paul Krugman and Robert Shiller, believe they are a Ponzi scheme and a risk to global financial stability. Some governments have taken a hands-off approach, while others have banned or cracked down on them.
While some people use cryptocurrencies to make purchases, most investors buy them to speculate or “hodl” them for their own personal portfolios. Since they can be traded anonymously, cryptocurrencies are often used for illegal activities such as ransomware (where cybercriminals hack into computer systems and demand payment in cryptocurrency) or to buy drugs on darknet markets. Authorities have shut down several of these websites but the fad for cryptocurrency has continued to attract criminals.
How can you invest in cryptocurrencies? You can directly purchase cryptocurrencies on exchanges or brokers. You can also indirectly invest in cryptocurrencies through securities that track the blockchain technology behind them, such as stocks or ETFs. Choosing the right investment for you will depend on your investment goals and risk appetite.
Before investing in cryptocurrency, be sure to research the market and company thoroughly. Look for independent articles and a clear understanding of the technology behind the currency. Consider talking with a financial advisor who is familiar with the space as well. Cryptocurrency investments are typically linked to a specific technological product, so it can be challenging to discern which ones are worth the risk.
It’s important to keep in mind that cryptocurrencies are not regulated in the same way as securities, so they are susceptible to changes in regulation and could become less valuable. They are also often difficult to convert into traditional cash. You should have a backup plan for your digital wallet so that you can recover your coins if they are lost or stolen. It’s also a good idea to have a stop-loss order in place in case the price of a cryptocurrency starts to drop significantly.