Cryptocurrency, also known as digital currency or blockchain technology, has been attracting attention and investment from investors because of its potential to disrupt the financial industry. But what is it, and how does it work?
In simplest terms, cryptocurrency is a digital ledger that records transactions in an encrypted way. These transactions are verified by a network of computers, using complex algorithms, that are incredibly difficult to hack. Previously, record keeping and data transfer required the involvement of multiple third parties, like brokers or bankers, adding time and cost to an operation. Blockchain eliminates the need for these intermediaries, allowing information to be transferred more quickly and at a lower cost.
The most popular cryptocurrency is Bitcoin, which has a market value of over $100 billion. But there are thousands of other cryptocurrencies, some with a small market share and others with no market at all. It is important to research all of your options before making any investments, particularly as the crypto market is volatile and prices can swing dramatically.
When researching a particular cryptocurrency, it is also important to look at its long-term value and use cases. Some cryptocurrencies are linked to specific technologies that are being developed or rolled out, and this can provide a strong sense of its future prospects. However, other cryptocurrencies have no real tie to any specific technology, and their price volatility can be more unpredictable.
Before you invest in any cryptocurrency, be sure to understand its legality and tax treatment in your jurisdiction. Many governments have yet to fully reckon with how to handle cryptocurrencies, and regulatory changes and crackdowns can affect the market in unpredictable ways.
Once you have decided to buy, be sure to carefully review an exchange’s security and user interface before you link an account. Look for multiple reviews from independent sources and compare fees. Once you link an account, you will need a wallet application to store your coins and make payments. These are available on a wide variety of devices, from desktop computers to smartphones. Beware of phishing sites that may ask you to disclose your password or other sensitive information. Ensure that the app you are using offers robust security features, such as two-factor authentication.
When it comes to investing, the best strategy is usually a slow and steady one. Over-trading can add to your risk and reduce your profits. Similarly, falling for a Ponzi or MLM scheme can be disastrous. Whether or not cryptocurrency is right for you will ultimately depend on your tolerance for risk (both in financial and psychological terms), your investment horizon and how well-diversified your portfolio is. It’s a good idea to discuss any crypto investment with your trusted financial advisor. He or she can help you evaluate your risk tolerance and develop a strategy to meet your goals. He or she can also provide guidance on how to choose a reputable exchange and how to protect your assets.