Investing in cryptocurrency can be rewarding, but it’s also risky. The prices of many cryptos can fluctuate wildly, and some have lost value in the blink of an eye. In addition, investors face the possibility of regulatory changes or crackdowns that could impact the market in unpredictable ways.
Crypto inspires passionate opinions from investors, some of whom believe it’s a transformative technology and others who worry that it’s little more than a fad. Regardless of their beliefs, both groups must acknowledge that the crypto space is inherently volatile and that it can be difficult to predict the price direction of individual coins or the overall industry.
The most familiar cryptocurrency is Bitcoin, which was the first and remains one of the most popular. It’s an online digital asset that functions as a medium of exchange, and its value is determined by supply and demand. The more people who want to buy it, the higher its price. Unlike traditional currencies, however, Bitcoin is not backed by a central bank or government agency. Instead, it’s built on a decentralized network of computers that verify transactions and update the blockchain, the database that records all Bitcoin activity.
Investors often buy cryptocurrencies in the hope that their value will rise, netting them a profit. For example, if Bitcoin became more widely used for transactional purposes, its price in U.S. dollars would likely go up. That increase in demand would drive up the number of coins that people could buy, which would then raise their values.
Cryptocurrency’s volatility can be challenging for new investors. To help, it can be helpful to find a well-established coin that’s well known and has a history of steady growth. It’s also important to examine the team behind a particular cryptocurrency. An identifiable and respected leader is a good sign, as are other well-known investors who have a stake in the project. Many reputable projects make “white papers” publicly available, which describe how the coin will work and how it’ll be distributed.
Another consideration is how much energy a specific cryptocurrency requires to operate. Some, such as Bitcoin, consume a significant amount of electricity to process transactions. Others use different technology that demands less energy.
Lastly, it’s crucial to understand how to protect your cryptocurrency investments. You should always keep your private keys in a secure wallet, which is an encrypted file on your computer or mobile device that only you can access with the password you created when setting up the wallet. This prevents hackers from stealing your cryptos by accessing your wallet. It’s also a good idea to choose an exchange that’s recognized by the government, as doing so can protect you from potential fines or other sanctions. Lastly, it’s generally a bad idea to overtrade. The wild swings in crypto prices can lead to big losses if you trade too often or just before a market crash.