Cryptocurrency, or “crypto,” is a digital asset that can be used for transactions and investment. It’s become increasingly popular and is often talked about in the news, but it’s still not well understood by many people. If you’re considering adding it to your portfolio, understanding the basics is crucial.
How is cryptocurrency different from traditional money? The main difference is that it’s not backed by any government or company and its value is entirely dependent on online speculation. This makes it highly volatile, and as a result, should only make up a small percentage of your overall investment portfolio.
What is blockchain technology?
Cryptocurrencies like Bitcoin are built on a blockchain, which is similar to a spreadsheet or database. But instead of storing data in one central location, it’s copied and spread across a network of computers so that all copies are identical. When a new block is added to the blockchain, all computers that have a copy of it will automatically update their version to match.
Because of this, it would be nearly impossible for hackers to change the existing blockchain or steal from other users. For this to happen, someone would need to control a majority of the network’s computers and then insert their own version of the blockchain at just the right moment. It would be very difficult to do and extremely costly if they were successful.
Another benefit of the blockchain is that it removes the need for a third party to verify a transaction or transfer. For example, consumers pay a fee when they use their credit card or a business pays a processing fee to a bank to verify checks. With cryptocurrency, those fees are eliminated because transactions are verified by a global network of computers.
Other benefits of cryptocurrencies include very low transaction costs and high security. With most cryptocurrencies, you can buy and sell them using an online exchange. Then you can store your coins in a digital wallet on your computer or phone. This wallet is secure because it uses strong encryption to protect your private keys and other information. You can also use crypto to make payments with select businesses, and you may even be able to use it to purchase real estate or cars.
Because of its riskiness, most financial experts recommend only making a small percentage of your portfolio in crypto. You should invest the rest in lower-risk assets like stocks, bonds or cash. This is especially important because crypto prices can swing wildly, and you could lose more than you invest if you’re not prepared for dramatic price fluctuations. This article will help you understand the risks of investing in crypto, so that you can decide whether it’s something you want to include in your portfolio. This guide includes tips for choosing an exchange, storing your crypto safely and understanding the different types of scams to avoid. It’s also a good idea to diversify your investments by purchasing different types of crypto.