Cryptocurrencies like bitcoin are generating lots of buzz, but the volatile prices can boost or damage portfolios. Before investing, it’s important to understand the basics.
Most of us have heard the word “crypto” and maybe even seen its volatile prices in our newsfeeds. But, how much do we really know about it? Crypto is a digital form of currency that’s not tied to any government or company and can be used for transactions online. Cryptocurrency also functions as an investment, and its prices are influenced by many of the same factors as stocks.
For example, the more people who hold a cryptocurrency, the higher its price. That’s because the value of a cryptocurrency is based on supply and demand. Also, some cryptocurrencies gain value from being backed by something that’s tangible, such as real estate or a business. Stablecoins are designed to avoid the volatility that other cryptocurrencies experience by pegging their value to existing currencies or assets.
Some cryptocurrencies have a lot of potential, and their investors hope that the technology behind them will revolutionize how we do business and store information. But, there are plenty of critics who believe that crypto markets are fundamentally fraudulent. They’re concerned that early adopters get rich at the expense of latecomers (a pyramid scheme) or that some projects lure unsuspecting investors with promises of safe returns and then collapse when new money stops coming in (a Ponzi scheme).
Despite these concerns, cryptocurrencies continue to attract millions of people, including some who have been excluded from traditional financial systems. They include criminals, tax evaders and people who buy and sell illicit goods or services. Others argue that crypto’s ability to create permanent records of ownership makes it especially useful for marginalized groups, such as people of color or dissidents living under authoritarian regimes.
The most common way to invest in a cryptocurrency is through an exchange, which links your bank account to allow you to purchase crypto with your U.S. dollars. Then, you can transfer your coins to a digital wallet for storage. Some wallets are free, while others charge a small fee for their services.
Cryptocurrency investments aren’t insured by the FDIC or SIPC, so they’re risky. You should only invest what you can afford to lose, and always diversify your portfolio.
Before you invest, check out the website for any cryptocurrencies you’re considering. Read independent articles about them, too. And, remember that if you’re buying and selling, you should do so on a reputable crypto exchange or peer-to-peer platform. If you want to trade on a centralized platform, make sure it’s licensed and regulated by your country’s securities commission. Also, look out for scams and phishing. The crypto community is full of con artists.