A Beginner’s Guide to Investing in Cryptocurrencies

Crypto is an area of technology that has gained traction in the mainstream. It has shifted from a niche topic to one that receives lots of buzz in the media, as people view it as an attractive way to produce outsized investment returns.

The word cryptocurrency refers to a digital asset that acts as a medium of exchange. It is a system of data recording and verification that allows individuals to conduct transactions without the need for a central authority, like a bank. Instead, these transactions are recorded on a blockchain, which resembles a spreadsheet or database but with key differences. For example, the data is not stored in a single location but rather is copied and saved across many computers on a network. Every computer then updates its copy of the blockchain to reflect new transaction records, allowing the system to operate without the need for a central repository or any trusted intermediaries.

Bitcoin is the best known cryptocurrency, but thousands of others exist. Some are more volatile than others. As a rule, high-risk investments should make up only a small part of your overall portfolio.

Before you invest, take time to understand what you’re buying. Learn how cryptocurrencies are backed by supply and demand, and how they differ from stocks. Unlike stocks, which are backed by hard assets and cash flow, most cryptos are not backed by anything at all. So, their value is based entirely on the belief that other investors will pay more for them than what they cost to purchase.

Cryptos are very volatile. They can rise or fall in seconds on nothing more than a rumor that turns out to be baseless. That makes them a great investment for sophisticated traders who can execute trades quickly and have a firm grasp on the market’s fundamentals, but they are not suitable for most beginners.

When investing in crypto, be sure to use a reputable exchange and verify your identity. Many exchanges require KYC, which requires you to provide documentation such as a passport or driver’s license. Once you’ve established an account, protect your funds by using a strong password and two-factor authentication. Ideally, you should also store your seed words on paper and avoid public Wi-Fi if possible. Lastly, remember that your crypto holdings are not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation, so only invest with money you’re willing to lose.

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