Cryptocurrency, or “crypto,” is a digital currency that uses encryption to verify transactions. It isn’t tied to any bank or government, making it a decentralized form of money that can be transferred from one user to another without the intervention of a third party. Crypto is also often less expensive than sending money overseas because it doesn’t require a middleman.
It’s important to do your homework before investing in any crypto, just as you would with any other investment. Research companies thoroughly, looking at their financial reports and SEC filings, for example. With thousands of types of crypto, all with different features and functions, it’s especially vital to understand exactly what you’re investing in before making a purchase.
While many people invest in crypto as an opportunity to make money, others use it as a store of value or a way to reduce transaction fees. Because crypto is so new, its future is still unclear. Some experts believe it could be the next big thing, while others see a bubble about to burst.
Like any investment, crypto can be a great way to grow your wealth, but it’s not for everyone. It’s riskier than other asset classes, so it’s best for investors with a long-term time horizon and who can afford to lose some of their initial investment. Before investing in any cryptocurrency, you should have your personal finances in order, with an emergency fund, a manageable level of debt and a diversified portfolio that includes low-risk investments.
Crypto is based on blockchain technology, which is a decentralized ledger enforced by a network of computers. Because of this, it’s designed to be secure and virtually impossible to hack. Each computer that supports the cryptocurrency’s network has a copy of its blockchain, and every transaction is recorded on it in chronological order. This makes it extremely difficult to alter or double-spend the coins, and any attempts at fraud are immediately spotted as fraudulent by other users of the network because their copies of the blockchain won’t match.
Some cryptocurrencies’ values are based on demand and supply, how useful people expect them to be in the future, and whether they’re backed by real-world assets or utility. Other cryptos’ prices can be influenced by news about how companies plan to use them, and world events. Stablecoins are a type of cryptocurrency that attempts to address this volatility by pegging their values to existing currencies, such as the US dollar. Some even keep physical dollars in reserve to back their value, which can provide some stability. Other cryptocurrencies offer passive income opportunities through a process called staking, in which you earn rewards by using your crypto to help verify transactions on the blockchain.
