Cryptocurrency is digital money that can be used to buy or exchange goods and services. It’s not tied to a government or bank, and it can move quickly and without fees. But it’s not without risk, and investors need to do their homework.
A pseudonymous person or group published a whitepaper online outlining principles for a new kind of digital money in late 2008. That became Bitcoin, the first cryptocurrency. Since then, others have emerged. Each is different, but they all share a common element: blockchain technology.
Each person using a cryptocurrency network is assigned a unique ‘address,’ which has a public key and a private key. The public key is what anyone can see; the private key is your password that proves your ownership of the cryptocurrency. Using software, you can manage your cryptocurrency. A wallet lets you store your private keys, which are what you use to make transactions on the blockchain. You need to keep your wallet secure, because hackers may try to steal your crypto. It’s best to write down the seed words for your wallet on a piece of paper and keep it somewhere safe. You should also avoid public Wi-Fi and, if possible, use a virtual private network service to protect your data and communications.
Like other investments, cryptocurrencies can rise and fall in value. The price of a crypto can also be affected by political or regulatory changes, as well as the potential for hacking or other scams. Because crypto is not insured, as are assets held in a bank account, you should only invest an amount you’re willing to lose.
While crypto is becoming increasingly popular as an investment, it’s not for everyone. Many legacy investors, such as Warren Buffett of Berkshire Hathaway, have sworn to never invest in it because of the risks involved. He once compared it to “rat poison,” and the 94-year-old “Oracle of Omaha” says it will eventually go bust.
The Securities and Exchange Commission (SEC) recently approved the first exchange-traded fund linked to spot bitcoin, further demonstrating that the market is maturing. But it’s still early days for the industry, and investing in crypto can be a risky way to diversify your portfolio.
Buying too much: Prices for cryptos can rise and fall quickly, and some people get caught up in the hype of new cryptocurrencies, overbuying. They then find themselves selling at a loss. Not doing enough research: Many people don’t understand that a crypto’s price isn’t necessarily related to the technology it’s built on or its utility as a means of payment. They also fail to realize that crypto transactions are irreversible, which can be costly if you’ve made a mistake.
Not understanding how to store your crypto safely: Cryptocurrency wallets can be vulnerable to hackers, and keeping your coins in an insecure wallet can lead to theft or even loss. You should always choose a trusted wallet provider and take steps to protect your computer, including not entering your seed words on an untrusted site. Consider using a hardware wallet to further safeguard your assets.