Cryptocurrencies are gaining popularity, but it’s important to understand the risks before you invest. They can have eye-popping returns, but they’re not backed by the government or banks like traditional currency and are subject to rapid price fluctuations. If you decide to invest in cryptocurrency, make sure it’s only a small percentage of your total portfolio and that you take steps to protect yourself from theft and loss.
Cryptos are digital assets that function similarly to spreadsheets or databases, but they use blockchain technology to store and verify transactions on a public ledger. Bitcoin is the best known and most popular cryptocurrency, but there are thousands of others that offer different functions. You can buy and sell cryptos on exchanges, similar to stock brokerages. When choosing an exchange, look for low fees and ensure that it operates in your jurisdiction. Some exchanges also offer a feature that allows you to verify your identity before trading. This is called two-factor authentication and can be a great way to secure your accounts in case of a hack.
While traditional currency comes in bills and coins that you can hold in your hand, most cryptocurrencies are stored in digital wallets. These wallets are encrypted so that only the owner has access to your cryptocurrency, and they can be secured with passwords. You should always back up your wallet to a computer that isn’t connected to the internet and keep it in a safe place where it can’t be stolen or destroyed, such as a hard drive or a safety deposit box. If you own a large amount of crypto, consider getting an encrypted hardware wallet.
In addition to protecting your investments, a cryptocurrency wallet can help you send and receive payments. Cryptocurrency is global and can be sent from one person to another without the need for bank account information, international wires or currency conversions. This can be helpful in transferring money to refugees or those who live in countries with unstable financial systems.
The value of most cryptocurrencies is driven by demand, supply and speculation. Some cryptocurrencies are backed by real-world assets or cash flow, while others try to peg their values to other currencies or commodities. Many people think that if enough people use cryptocurrency, it could replace more traditional payment methods or even become the new world currency.
When investing in cryptocurrencies, remember that they’re not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corp. Platforms that buy and sell crypto may be hacked or shut down, and they’re not regulated by the SEC like stocks are. As a result, your cryptocurrency holdings can lose value quickly, and you should only purchase them with money that you’re willing to lose completely.