Cryptocurrency is a hot topic in finance and technology circles, with some believing it’s a transformational tech, while others worry that it’s just another fad. Regardless of your opinion, it’s important to understand what it is and how it works before investing in crypto.
Crypto is digital money, created and secured through cryptography. Unlike traditional currencies like dollars or euros, cryptocurrencies are not issued by a central bank or government and instead are managed by distributed networks of computers that run free software. These computers, known as nodes, verify and validate transactions on a public ledger called a blockchain. The blockchain is a continually updated record of all cryptocurrency transactions, and because no one central authority controls it, anyone can participate.
Investors can buy cryptocurrencies from exchanges with funds transferred from their bank accounts. This process is regulated to comply with anti-money laundering and know your customer rules. When purchasing cryptocurrencies, it’s important to do your homework, as the price of a coin can fluctuate dramatically. Speculative trading, or buying and selling on the expectation that prices will rise, is risky and can lead to losses.
Transferability
Crypto allows you to move value globally, almost instantly and 24/7 for low fees. This cuts out the need for a middleman such as a bank or payment processor, making it as easy to send money to someone in the other side of the world as it is to pay with cash at your local supermarket.
While crypto’s speed and convenience makes it an attractive option for some users, its price volatility can make it unattractive to investors. A single cryptocurrency may go up or down by large margins in a matter of hours, which can make it difficult to sell at a profit. For these reasons, it’s best to only invest small amounts of money in crypto and only when you have a strong understanding of the market.
Diversification
Like any investment, crypto can be volatile and it’s important to diversify your portfolio by buying several different cryptocurrencies. This can help you offset any losses in one currency by gains in another. It’s also a good idea to spread your investments across different industries, so that you’re not exposed to all the same risks, such as market fluctuations, cyberattacks and regulatory changes.
Cryptocurrency is still a new and evolving technology, so there’s always the possibility that future laws will change how it functions. In the meantime, it’s a good idea to follow the news and speak with a financial adviser before investing in it. They can help you understand the risks involved and determine if it’s an appropriate asset class for your situation. They can also guide you on how much to invest and help you develop a strategy to protect yourself from the impact of sudden market movements. Generally speaking, high-risk investments should make up only a small percentage of your overall portfolio — one common guideline is no more than 10%.