Cryptocurrencies, or crypto, are digital assets that use an encryption protocol to record and process transactions. Bitcoin is the most popular and well-known crypto, but there are thousands of others. Some, like Litecoin and Bitcoin Cash, are similar to Bitcoin in their basic features, while others solve different problems within the crypto ecosystem.
For many people, the value of a crypto is driven by supply and demand, similar to how fiat currencies, like the US dollar, gain value. The supply of a given coin is limited and its value will depend on how much people want to own it and how useful they expect it to be in the future. Cryptos may also gain value by being backed by real-world assets, such as gold or silver, or through their connection to the blockchain technology that underpins them. Some, called stablecoins, try to peg their value to a benchmark, like the US dollar, and their prices can be influenced by how governments or companies plan to use them or by world events.
Like any investment, cryptocurrencies can be a risky place to put your money. They’re extremely volatile, meaning that their prices can rise or fall significantly from one day to the next. They’re not regulated like traditional investments, and the laws surrounding them vary by jurisdiction. As a result, some experts advise against investing in cryptos.
While these risks are real, there are ways to play the market and potentially make good returns. One approach is to hold a portfolio of different cryptos and benefit from their price movements, which can be more dramatic than those seen in stocks and bonds. Another is to buy and sell cryptos on exchanges, where you can trade them for other cryptocurrencies or fiat currencies.
The Investopedia Explains Crypto
Some experts recommend a mix of these strategies, but others caution that crypto can be too volatile to be considered an investment. For this reason, many advisors are choosing to use crypto only as a small part of their clients’ overall investment portfolios. Ian Harvey, a New York-based wealth advisor, says that for most of his clients, crypto isn’t more than 10% of their total assets. This is low enough to protect them from major losses but high enough to feel meaningful and allow them to enjoy the ride if bitcoin goes up and down.
Beyond its investment potential, crypto is transforming the way we live. For example, it’s becoming increasingly common for retailers to accept payments made with cryptocurrency. And, because crypto isn’t tied to a particular country, it can be used to cut down on expensive currency exchange fees while traveling. This has led to a growing community of people who call themselves “crypto nomads.” It’s even possible to buy land in the virtual world Decentraland using cryptocurrency, though that is more of an art investment than a practical use of the technology.