Cryptocurrencies can offer eye-popping short-term returns, but they can also be volatile. Investors should understand the risks before buying, selling, or spending them.
There are thousands of cryptocurrencies on the market. Some are popular and widely traded, while others have tiny market valuations. The value of a cryptocurrency depends on supply and demand. Supply refers to how many coins are available to buy at a given time, while demand is the strength of people’s desire to own it. A cryptocurrency’s price fluctuates based on these factors, but some are more volatile than others.
A cryptocurrency’s underlying technology is called blockchain, which creates a digital record of transactions. To process a transaction, the blockchain collects a group of recent transactions and records them in a public ledger called a “block.” Each block contains information about the previous transactions and is added to the chain at regular intervals. Miners compete to solve complex computer algorithms to verify and add these blocks to the blockchain. As a result, the blockchain is a decentralized and secure record-keeping system.
The blockchain technology behind cryptocurrencies may have potential for other applications, such as recording property titles or medical records. However, cryptocurrencies are not yet widely used for these purposes. In addition, the cost of developing, maintaining, and securing blockchain infrastructure is high. For these reasons, it’s important to choose a well-established cryptocurrency that has a proven track record and a team with experience in the space.
Bitcoin is the most well-known cryptocurrency, but there are many other options to consider. Some, like Litecoin and Bitcoin Cash, share core characteristics with Bitcoin but explore different ways to process transactions. Others, like Ethereum, have a wider range of features and can be used to create and run applications.
If you’re interested in cryptocurrencies, you can buy them through a cryptocurrency exchange. These businesses allow you to purchase or sell cryptocurrencies at the current market price. You can also find cryptocurrency wallets that allow you to store your coins safely.
While some traders have made money betting on the change in price of cryptocurrencies, Schwab recommends treating them as speculative assets and only investing with funds that you can afford to lose. Cryptocurrencies are incredibly volatile and do not benefit from the same regulatory protections as registered securities. The future of regulation is uncertain, and it’s important to understand the risks before making a decision.
It’s also important to keep in mind that, unlike traditional investments, cryptocurrencies are not insured by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC). You should only invest with money that you can afford to lose.