Cryptos are a new kind of money that lets people transfer value securely online without the need for centralized intermediaries like banks and payment-processing companies. Instead, transactions are verified by a network of computers using free and open-source software. This is known as blockchain technology.
Bitcoin was the first cryptocurrency, but hundreds now exist. Some are similar to Bitcoin and use the same blockchain technology, but others have added features that let them do more than simply transfer value. For example, Ethereum can build entire financial ecosystems that function without a central authority (think insurance without an insurer or real estate titling without a title company).
The popularity of cryptos is driven by several factors. One is that they can be moved relatively quickly and cheaply, especially compared to traditional bank transfers. Another is that they offer a degree of privacy for users, who can use apps or websites to exchange currencies without disclosing their personal information. In addition, many cryptocurrencies are decentralized, meaning that there is no single institution that controls them and can limit their supply. This reduces the risk of a large institution failing and setting off a global crisis, as happened with the 2008 financial crisis.
For investors, it’s important to look for a reputable cryptocurrency project with a clear business plan and a track record of success. It’s also helpful to find out how widely the currency is being used; if its usage is growing, that’s often a positive sign. Some cryptocurrencies are available as coins and tokens, with coins more like traditional money and tokens representing ownership of assets on a blockchain.
A blockchain is like a spreadsheet or database that contains records of transactions. The key difference is that, instead of storing all the data in one place, it’s copied across a network of computers. When a transaction is recorded, all the copies of the blockchain instantly update to reflect it. This allows for transactions to be validated in minutes or seconds, compared to the days or even weeks that it might take for money to move from one bank to another.
The benefits of cryptos are significant, but they’re not for everyone. Their volatile prices can make them a dangerous investment, and they aren’t accepted everywhere as payments. Moreover, the technology behind them is complicated and unfamiliar to many newcomers.
Still, some experts recommend investing no more than 1% to 5% of a portfolio in cryptos, and the specific digital assets you choose matter. Some may have greater long-term potential or be less vulnerable to manipulation, and they might fit well into a diversified portfolio. Other coins might have a shorter-term advantage, and they might have less correlation with other investments. Regardless of your approach, always invest only what you can afford to lose. By the same token, don’t let fear or greed drive your decision to buy or sell. Always think through a strategy before taking action.