In recent years, cryptocurrency has been a booming topic among investors. Just like traditional currency, you can exchange it for services, products or other types of cryptocurrencies. You can also cash it out, much like chips at a casino. However, these digital currencies have many key differences when it comes to storage, transactions and volatility. Before you invest, consider these factors:
Understanding the basics
Cryptocurrency is a form of digital payment. It earned its name because it uses advanced cryptography to keep your money secure. While traditional currency is managed by organizations like the Federal Reserve or World Bank, cryptocurrencies are unregulated. No governing body oversees the production of new units of exchange, called coins or tokens. Instead, they are created through a process called mining, in which user’s computers solve complex problems that are used to maintain the cryptocurrency system. This allows their value to be dictated by user supply and demand, according to Investopedia contributor Andrew Bloomenthal. This makes it a highly volatile and unpredictable investment.
Knowing the benefits of cryptocurrency
A few factors have been driving forces behind cryptocurrency’s meteoric rise in popularity. Enthusiasts praise the unregulated nature of cryptocurrency. Since no authority manages the supply of digital coins, supporters claim that it’s less prone to losing value due to inflation, explain Royal and Voigt. Speculators are also fond of these virtual tokens, since they have a tendency to grow in value, while others value their anonymity, security and low transaction fees.
Getting started
You’ll first need to download a digital wallet. They’re available for both desktop computers and smartphones. You’ll need to connect a checking or savings account to your wallet in order to begin investing. Once you’ve added money to your wallet, you’ll be able to buy, cash out, store, send and receive tokens. According to Eric Rosenberg, a contributor to The Balance, popular wallet software options include Coinbase, SoFi and Ledger. And while many wallets are free to download, keep an eye on the fine print. Rosenberg warns some wallets have transaction fees and currency conversion charges.
Choosing your cryptocurrency
Cryptocurrency goes far beyond Bitcoin — there are thousands of options available. While Bitcoin remains the largest and most popular cryptocurrency, other popular options include Ethereum, Tether, Monero, Litecoin and Ripple, according to Nathan Reiff, a writer for Investopedia. Aside from allowing you to diversify your portfolio, each cryptocurrecy has unique perks. For instance, Reiff explains that Tether attracts investors due to its stability, Litecoin offers fast transaction processing times, while Monero prioritizes security and privacy in all of its transactions.
Safeguarding your investment
While cryptocurrencies are known to be risky, there are ways to minimize your chances of losing money or having it stolen. First and foremost, consider the wallet you are using. There are countless options on the market, so it’s important to do your research to make sure that you’re downloading an app that’s free from malware, cautions Nathan Wenzler, a cybersecurity expert. Furthermore, if you forget your password, you won’t be able to access your digital currencies. Since writing down a password is unsafe, you most secure option is purchasing a physical wallet device for your coins, according to Ellen Chang, a financial writer at U.S. News and World Report. This computer hardware will securely store the private data you need to complete transactions. However, if you lose the hardware wallet, your tokens will be gone, too. Therefore, Wenzler recommends dividing up your coins and storing them in separate locations.
If you’re interested in learning more about cryptocurrency, there are many informative finance websites, blogs and podcasts on the topic. The world of cryptocurrency is always growing and changing, so make sure you read up-to-date sources. Before investing, consider consulting with a financial advisor who is familiar with the topic.