Cryptocurrency is digital money that doesn’t require banks or financial institutions to verify transactions and can be used for purchases or investment purposes. Transactions are verified and recorded on a “blockchain,” an unchangeable ledger that tracks assets and trades. The popularity of cryptocurrency and blockchain technology is surging. But there’s also a lot to consider before jumping in.
Cryptos can be volatile and the transactions they record are typically irreversible. Investors who buy too much, thinking they can sell for cash later, can lose money if prices go down. And they may not realize that their purchases aren’t federally backed.
A key to success with crypto investing is research. Look at a website that has metrics about how a currency is being used, and whether it is growing. You can also look at who is running the project and see if there are any major investors on board. Many mainstream companies are evaluating blockchain technology, recognizing its potential in supply chain management and other applications.
Some of the more popular cryptocurrencies are Bitcoin, Ethereum and Litecoin. But there are thousands of others. Some are created for specific functions, like mining or storing value, while others have no specific purpose other than being a form of exchange.
There are also some that are designed to solve specific problems, like the soaring cost of medical care in the United States. And some are created to meet specific regulatory requirements, like Tether, which is intended to be a stablecoin linked to the U.S. dollar.
Cryptos that are mined use up a lot of computing power. So a growing demand for them creates competition among miners to find and solve complex codes. This has been a contributing factor to the rapid price increases in some cryptocurrencies.
In addition, the use of cryptos can be a way for some people to evade government sanctions or taxes. And terrorist groups and other criminals have been known to traffic in them.
While there’s a lot to explore with crypto, it’s important to remember that it is still an emerging and risky market. A typical rule of thumb is that high-risk investments should make up no more than 10% of your portfolio. And it’s even more crucial to research thoroughly before making a purchase, especially if you’re new to the market. Watch Simplilearn’s video Cryptocurrency Explained to learn more about this exciting and challenging market. Then talk to a trusted financial advisor about how it might fit into your overall strategy. The SEC, CFTC and other regulators are monitoring the space closely. So if you plan to invest in a particular cryptocurrency, be sure to do your research and only use recognized exchanges. And be aware that if you’re a resident of the United States, some foreign exchanges may block users based here to avoid fining them for violating federal anti-money laundering regulations.
