Cryptocurrencies have surged in popularity, but many people don’t understand what they are or how they work. Some experts worry about cryptocurrencies being used for scams, money laundering, or funding illegal activities; others are concerned about their enormous electricity consumption (Bitcoin, for example, burns through more power than some countries); and still others are worried that some of the systems are centralized and could be susceptible to hacking.
While cryptocurrencies have seen tremendous gains over the past few years, it is important to remember that they are a new investment and like all investments can lose value. Cryptocurrency prices are extremely volatile, meaning their value can move up and down quickly and dramatically. This volatility can make investing in them difficult and can expose investors to significant losses.
There are a number of different ways to invest in cryptocurrency, including buying and selling them on exchanges or using wallets. Purchasing them on an exchange requires you to provide some form of identification and verify your account. You can also buy them directly from a broker, though you must pay taxes on any gains. Once you own cryptocurrency, you can store it in a digital wallet that protects your private key, which is needed to sign transactions and record them on the blockchain. Unlike the banks that back traditional currency, cryptocurrency wallets are not insured against loss by any government or financial institution.
Cryptocurrency investors typically buy and sell in hopes that the price of a particular coin will increase over time. While some investors are simply speculating, others believe that cryptocurrencies offer unique characteristics that make them attractive investments. Some of these characteristics include that they are inherently scarce (because there is a finite supply), hard to counterfeit, and decentralized. In addition, some experts compare cryptocurrencies to gold, as they are both fungible, durable, and have a known value.
Some of the most popular cryptocurrencies are Bitcoin, Ethereum, and Tether. While Bitcoin was created primarily as a form of payment that isn’t controlled by any central authority, Ethereum software enables other blockchain innovations, such as smart contracts and non-fungible tokens. Tether is a stablecoin that attempts to reduce the volatility of other cryptocurrencies by pegging its value to existing currencies, such as the US dollar.
If you’re thinking about investing in cryptocurrencies, it’s important to research the project behind each coin and its team. Most reputable coins will have a public white paper that explains how they will work and what they’re trying to achieve. It’s also a good idea to look at how widely a cryptocurrency is being used. If it’s being used at a large number of merchants, this is a positive sign that it has the potential to grow in use and value over time. It’s also worth noting that cryptocurrencies are not diversified and may be more volatile than other asset classes. As a result, they should only make up a small portion of your overall portfolio.