The cryptocurrency market inspires passionate opinions—some think it’s a transformational technology, while others worry it’s a bubble that could collapse. Either way, it’s important to understand crypto before investing in it.
Cryptocurrencies are digital assets that provide access to a global marketplace of services and goods. They can be transferred quickly, easily, and anonymously. The popularity of cryptocurrencies is largely due to their decentralized nature. People can use them to buy a wide variety of things, including software, digital real estate, and even illegal drugs. Cryptocurrencies are also stable, which makes them attractive as store of value assets. This feature, combined with the ecosystem’s collective belief and confidence in a coin, gives it an intrinsic value that is independent of its price or market fluctuations.
Bitcoin was the first cryptocurrency, launched in 2008, and it has led the way for other coins to be created. It has become a global phenomenon, and its price is affected by everything from interest in the blockchain technology behind it to social media postings by well-known individuals. This irrational exuberance can cause coin prices to spike or drop dramatically, which can be risky for investors.
One of the biggest differences between traditional stock investments and cryptocurrencies is that the latter are not linked to a company with a track record of financial performance. For this reason, it can be more challenging to evaluate and compare crypto projects. A good place to start is looking at how widely a cryptocurrency is used, and many reputable projects make data publicly available on their usage. It’s also worth evaluating who is leading the project—an identifiable name is a positive sign and will help with investor confidence. A well-written and clean website is a must, too, free of spelling and grammatical errors.
Cryptocurrency markets are relatively new and have limited historical data regarding returns and correlations. As a result, it can be challenging to develop accurate models for valuation and investment analysis.
Another consideration is how a cryptocurrency is regulated. Regulators have signaled that they want to treat cryptocurrencies like securities, but they do not fit neatly into existing regulatory frameworks. In the United States, for example, bitcoin and other cryptocurrencies have been classified as commodities rather than securities. This creates ambiguity that lawmakers will have to resolve, and it may lead to future changes in how the industry is regulated.
The security of a cryptocurrency is built on something called the blockchain, which is a public ledger that contains transaction records. Each block on the blockchain has a unique address, and every user is incentivized to contribute to maintaining this information by mining, or collecting and verifying transactions that are then added to the chain. The blockchain is also transparent, so anyone can view the entire history of a particular cryptocurrency’s transactions without the need for intermediaries. It’s this transparency that makes the blockchain so useful for storing transaction data. It’s also what allows the blockchain to resist cyberattacks and hacking.