While browsing online publications or watching the news, you might have come across some bit-part information on Bitcoin or some other cryptocurrency. And it might have sparked your curiosity, especially the part about Bitcoin’s value jumping up, and wise investors making thousands of dollars seemingly overnight. Still, you never quite got a grasp of what it was. You also may have heard that crypto is doing pretty well as an investment despite the prevailing coronavirus-induced flip-flops on the money markets, rekindling your interest. If you’re contemplating an investment in digital currency, here’s what you need to know.
What is Cryptocurrency?
As the name suggests, cryptocurrency is an encrypted currency—a medium of exchange, though different from fiat currency. You can use crypto to buy and sell goods or services both online and in some brick-and-mortar stores. But unlike ordinary cash, cryptocurrency is not centrally regulated by any government. Also, unlike conventional currency, crypto has no physical form. And you can only use it to trade with merchants who accept crypto as a form of payment.
And then you have tokens, which is when companies come up with their own cryptocurrency. Record management systems, primarily Blockchain, are responsible for recording all cryptocurrency transactions in various computers spread-out globally. This system is encrypted with complex protocols, making crypto a secure means of transacting.
The Bitcoin you may have heard of is just one of many cryptocurrencies available today. Other popular currencies include Ethereum, Litecoin, Bitcoin cash, Chainlink, and Tether, or altcoins. “Altcoin” is an umbrella term that includes all cryptocurrencies that aren’t Bitcoin. As of today, the cryptocurrency industry trades with over 6,000 different types.
Is Cryptocurrency a Good Investment?
Whether cryptocurrency is a worthy investment is the million-dollar question. Like any other investor, you naturally want to know if cryptocurrency can offer good returns. Before you set aside funds for your crypto investment, you need to understand that it is quite volatile, and with any volatile medium of investment comes risk. As much as you stand to make significant gains when the value shoots up, you’re also likely to suffer great losses if the value of your token nosedives.
Therefore, experts advise investors looking to speculate in the crypto market to invest an amount of cash they’re comfortable with losing. It’s generally not recommended that you start withdrawing your 401K benefits to bet them all on the next big crypto wave. That portion of your savings you’re comfortable risking after placing the more significant sum in less volatile investments is what you can splash on crypto speculation.
More cautious experts warn investors away from cryptocurrencies altogether, saying that cryptos are bound to implode shortly as their value doesn’t depend on anything physical. The dollar, for instance, depends on the federal gold reserves. Crypto’s worth depends primarily on supply and demand. For example, prices go up due to the excitement a new currency generates and the fear of missing out.
What to Do if You’re an Investor
It pays to study and understand the digital currency market well to enhance your chances of making a good return from your cryptocurrency investment. Many traders believe that it’s best to invest in currencies with known creators. The more visible they are to the public eye, the more confidence you can have in the currency. You can further bolster this confidence by looking to see if any big-name investors are taking the bait. This is particularly important if you’re looking to participate in the currency’s initial coin offering (ICO).
After setting aside a sum to risk on crypto, it’s wise to spread your risk by dividing it up among several different currencies. If one plunges and another makes some gains in value, you will be able to cover your losses to an extent or even end up with a surplus.
Buying and selling cryptocurrency is usually done through exchanges, which will also provide you with a virtual wallet to store your coins or tokens. Among the more popular exchanges are Coinbase, Robinhood, and Tradestation. Be sure to read reviews of them before settling on one as they don’t operate the same way. Some, for instance, will offer free cryptocurrency trades, while others don’t.
When you finally purchase your crypto and begin trading, be sure to keep a record of your transactions. Your records will be important for working out and declaring what you owe the IRS in cryptocurrency taxes.
Knowledge is Investing Power
Cryptocurrency investment sounds novel and exciting, a secret avenue where a select few are making untold wealth. The truth is that buying crypto as an investment is risky. All investments are risky, but crypto lacks official regulation making it all the more susceptible to wild fluctuations. Arming yourself with knowledge on the currencies and the market before jumping aboard the digital currency bandwagon is essential if you’re to stand a chance of enjoying any returns.
