With the proliferation of cryptocurrency and new virtual currencies coming into the market at a staggering pace, it’s easy to believe these are the newest hot investments. But are bitcoin, and altcoins NEO, Ethereum and others such wise investments? The truth about cryptocurrency is that fortunes are being both made and lost in this extremely volatile market. If you are interested in trading or investing in cryptocurrency and building a "crypfolio," you need to be aware of the benefits and the potential risks before you start.
What is Cryptocurrency?
Cryptocurrency is a newly coined word for digital money which is designed to replace current payment systems with a digital form of currency secured by cryptography, or computer code. Unlike a stock or other typical investment, you are not buying a piece of a company when you buy cryptocurrency. Rather, you are buying digital coins and tokens backed by a company with an agenda. For example, Ethereum's goal is to build a decentralized internet. Investing in their cryptocurrency helps to fund that goal. Bitcoin, the original cryptocurrency, generated coins by having computers solve complex equations. These coins are now one of the most popular cryptocurrencies.
How to Buy Cryptocurrency
Like the New York Stock Exchange and stocks, cryptocurrencies have their own exchanges that trade in digital currencies. A well-known exchange for cryptocurrency is Coinbase. Others include LocalBitcoins and CEX.IO. Most of these exchanges work the same way. You open an account with your email address, set up a secure password, then link a form of payment such as a credit or debit card, bank account or wire transfer. Once your payment method and identification are verified, you can start buying and selling any cryptocurrency that is offered on the exchange. Once you have your cryptocurrency, you should use a secure crypto wallet to keep it safe from the risks and fluctuations of the exchange.
Different Types of Cryptocurrency
Although bitcoin is the best -known cryptocurrency, there are many others. Some cryptocurrencies stand the test of time while others come and go quickly. Most cryptocurrencies are based on blockchain technology. A blockchain uses software to record transaction information without needing to use an intermediary such as a credit card processor. Many different cryptocurrencies use the blockchain to record transactions and fund their projects. Some well-known cryptocurrencies include bitcoin spinoffs such as Litecoin and bitcoin Cash, as well as Ripple, NEO and Dash.
Risks of Cryptocurrency
Like any new investment vehicle, cryptocurrency comes with significant risks. As early as 2014, the Consumer Financial Protection Bureau issued a warning about the high risks of cryptocurrency. The volatility of this market means that you should only invest money that you are prepared to lose. Many cryptocurrencies and exchanges have gone out of business and left their investors empty-handed. Because exchanges aren’t regulated nor guaranteed, you can become overwhelmed by fees, exchange rates and markups that can deplete your profits. Additionally, the cryptocurrency market is a great target for hackers and other fraudulent systems trying to capitalize on the surging popularity of this market. The lesson here is to do your research, proceed with caution and keep security in mind if you want to broaden your investment portfolio to include cryptocurrency.