Cryptocurrency is a digital form of money that’s not tied to a central bank or financial institution. You can hold it as an investment or use it to make purchases. Its price fluctuates widely, and it can be difficult to understand how much you’re actually investing in it if you don’t know what the market looks like from the inside.
Some people believe it’s a transformational technology, while others worry it’s a fad. Regardless, cryptocurrency inspires passionate opinions from investors and the general public alike. Here are some things to consider if you’re thinking of adding it to your portfolio.
Blockchain
The technology behind crypto is a series of digital checks and balances, or a ledger, that verifies transactions. This eliminates the need for a third party, which makes it more secure. It also reduces the risk of fraud because a transaction can’t be reversed.
As an investment, crypto can be a part of your portfolio in the same way as stocks, bonds or real estate. However, it’s important to note that cryptocurrencies are not insured by the federal government like funds deposited in bank accounts. This means that they’re more susceptible to regulatory changes or crackdowns than traditional investments.
Speculation
Cryptocurrencies are highly speculative and can be very volatile. As such, they’re often more suitable for short-term trading strategies than long-term holdings.
Regulation
The regulatory status of cryptocurrencies is evolving rapidly, with governments grappling with whether to treat them as securities, currencies or both. A sudden change in regulation could impact the market significantly.
Scarcity
Because only a limited number of cryptocurrencies can be mined, the assets have a perceived scarcity that drives their value. In addition, most cryptocurrencies aren’t yet widely accepted as a medium of exchange, which can reduce their value.
Reliability
The underlying blockchain infrastructure of many cryptocurrencies is resilient, but they’re not foolproof. A cybersecurity breach could expose your private keys, which can give thieves access to your funds. You can minimize this risk by using strong passwords and backing up your wallet in multiple places.
Portability
Cryptocurrency isn’t tied to a single financial institution or government, making it easy to transfer between platforms. This gives you more control over your finances and can be useful if you travel internationally. It’s even possible to become a “crypto nomad,” traveling with only digital currency and cutting out the need for expensive money exchange fees.
Irreversibility
Unlike credit card payments, which can be reversed if the merchant feels they were defrauded, cryptocurrency transactions are permanent and irreversible. This helps prevent fraud and can make commerce cheaper by reducing the amount of time and resources needed to verify a payment.
You can buy a variety of goods with crypto, from hardcover books to Barnes & Noble gift cards. You can even use it to purchase Lamborghinis, Ferraris and classic cars from dealerships such as RM Sotheby’s, Ducati Indianapolis and Taabo Imports. However, remember that most of these purchases require an additional step of exchanging your cryptocurrency into dollars or another fiat currency to complete the purchase.
