Crypto inspires passionate opinions across the investing spectrum—some believe it’s a transformational technology, while others worry it’s just a fad. As with any investment, it’s important to do your research before deciding whether or not crypto is a good fit for you.
A cryptocurrency is a medium of exchange that exists digitally and uses encryption to process transactions. Cryptocurrency is decentralized, meaning it doesn’t rely on any central authority or government to function. Instead, it’s backed by computer code that validates and records all transactions on the blockchain.
There are several reasons why people invest in crypto, from speculating on the price of a coin to purchasing it as a way to pay for goods and services online or in person. Crypto can also be a store of value or a hedge against inflation. For example, the price of bitcoin rose from nearly worthless in 2008 to thousands of dollars a coin in 2019.
The main risk associated with crypto is its volatility, which can make it difficult to predict its price and can result in significant losses if you sell at a loss or buy at a premium. In addition, crypto is often not regulated and lacks protections against fraud or misconduct by management teams.
Another risk is that some cryptocurrencies consume large amounts of energy, and the emissions produced by mining them can contribute to climate change. Additionally, crypto transactions are not always reversible, which can lead to financial loss if you make a mistake or get scammed.
While a small portion of the global economy is already based on crypto, it’s unclear how widely it will be accepted in the future. And, since most governments have yet to fully reckon with how to regulate cryptocurrencies, they can be subject to sudden regulatory changes or crackdowns that could impact the value of your investments.
Lastly, there is the risk of hacking and theft. Most cryptocurrencies don’t have a product disclosure statement or prospectus, and their code is often written in obscure computing language that’s difficult to understand. To minimize the chances of losing your investments, you should use a secure crypto wallet, store it offline (such as on a hardware device), and avoid public Wi-Fi.
To invest in cryptocurrencies, you need to open an account with a crypto exchange. These are businesses that allow you to buy or sell cryptocurrencies at the current market price, similar to a stock exchange. Some exchanges offer multiple ways to fund your account, including credit card transactions, ACH transfers, and wire transfers. Depending on the method you choose, deposit and withdrawal fees may apply. It’s important to factor these costs into your investment strategy when comparing crypto prices and platforms. In addition, many crypto networks charge transaction fees, which can eat into your returns. These fees can vary widely and fluctuate over time.