Once dismissed as a fringe interest of tech evangelists, cryptocurrencies have skyrocketed to mainstream popularity and trillion dollar valuations. While some predict crypto is a passing fad, others extol its potential to reshape finance as we know it.
If you’re thinking of investing in crypto, it’s important to weigh a few factors. Your investment goals, tolerance for risk (financial and psychological), and your time horizon all factor into whether crypto is the right fit for you. Crypto is also highly volatile, meaning its price can rise and fall quickly. If your portfolio or mental wellbeing can’t handle dramatic swings in value, it might be best to avoid.
There are many different types of crypto. Some are designed to be a store of value, while others are intended to function as a medium of exchange or a way to participate in specific software programs. One of the most popular categories, utility tokens, incentivize people to help maintain a blockchain network through a process known as mining.
A cryptocurrency’s security also factors in to its viability. Typically, a reputable project will make available metrics indicating how much its platform is used and who’s using it. It might also make a white paper available explaining its intentions and how it will distribute tokens. In general, the more thorough the information is, the better your chances of assessing a cryptocurrency’s legitimacy and success.
Some cryptocurrencies are backed by governments or monetary authorities, while others are not. These distinctions can be important for determining their legal status in various financial jurisdictions around the world. Cryptos without backing are referred to as unbacked and may be subject to regulatory scrutiny.
Cryptocurrency assets are traded on exchanges, which connect buyers and sellers. While the vast majority of trading occurs on major exchanges like Coinbase and Kraken, smaller exchanges with more niche offerings can be a good option for investors looking to diversify their exposure.
If you are new to investing in crypto, you should be prepared for volatility. You might want to keep some of your digital assets on hand for a longer period of time, or you might want to use them as a hedge against equity market losses. It is also possible to find crypto-backed exchange-traded funds (ETFs), which allow investors to gain exposure to the crypto market through their existing investments in equities.
