Cryptocurrencies have exploded in popularity and value over the last decade, ballooning from digital novelties to trillion-dollar technologies with the potential to shake up the global financial system. While critics point to a lack of oversight, regulators are starting to catch up.
Crypto has become an investment vehicle of choice for investors seeking higher returns than those available from traditional investments. But it’s important to consider the risks before investing.
A key element to understand is blockchain technology, which cryptocurrencies are built upon. Blockchain is a distributed public ledger that records transactions in an encrypted format. Each time a transaction occurs, it is recorded on a block that gets added to the blockchain. When a new block is created, the old ones get linked to it by cryptography. This process is called mining and is a key aspect of how cryptocurrencies are made.
The appeal of cryptocurrency lies in its decentralized nature. It can be transferred relatively quickly and anonymously, even across borders. Dissidents in authoritarian countries have raised funds in crypto to avoid state controls and sanctions. And terrorist groups, including the self-proclaimed Islamic State and the military wing of Hamas, use it to finance their activities.
However, there are also serious drawbacks. Crypto’s volatility makes it risky to invest in, and there is no guarantee that the value of your investments will increase. And it’s important to remember that, unlike cash in your wallet or a savings account, cryptocurrency is not insured by any government or private institution.
Before making a crypto investment, think about your personal goals and what time horizon you’re working with. You’ll want to make sure that your overall portfolio plan is designed to help you achieve those goals. This includes having an emergency fund in place, a manageable level of debt and a diversified mix of assets.
It’s also important to keep in mind that crypto can be used to pay for goods and services, as well as for investments. For example, you can buy furniture and home goods with crypto by turning it into gift cards for retailers like World Market, Wayfair, Pottery Barn and more. You can also pay your phone bill with crypto through the BitPay Card.
Finally, as with any investment, it’s essential to diversify your crypto portfolio. Different cryptocurrencies may rise and fall at different times, so spreading your holdings among different currencies can help to reduce your exposure to volatile price movements. Also, remember that high-risk investments should only make up a small portion of your overall portfolio. A common guideline is to limit your investments in crypto to no more than 10% of your total portfolio. And if you’re considering investing in crypto, start with a small amount and grow your contributions gradually, using a strategy known as dollar-cost averaging. By doing so, you can minimize your exposure to market fluctuations while still increasing your potential for long-term gains.