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As the world continues to recover from the financial crisis of 2008 and the recession that followed, central banks and governments have sought new ways to monitor and control money. As a result, digital currency has emerged as an increasingly viable option for consumers worldwide. The emergence of blockchain technology has also made possible a new type of digital token — commonly called cryptocurrency — which can be exchanged over decentralized networks at a manageable cost. Consequently, these tokens have found growing use among investors and traders as an alternative asset class. This article explores everything you need to know about cryptocurrency to invest wisely and responsibly in this emerging market. Whether you’re just getting started with cryptocurrencies or you want to understand them better, this guide will help you know the ins and outs of investing in virtual tokens as a piece of your investment portfolio and discover the benefits of buying cryptocurrency.
What Is Cryptocurrency?
Cryptocurrency is a digital or virtual currency that uses a decentralized network to track and verify transactions. These digital currencies use cryptography, or a computer-generated code, to track and verify transactions and create new tokens. Crypto transactions are verified by decentralized networks — such as blockchain — rather than a central bank or government. Because they aren’t tied to a physical, government-issued asset, they aren’t subject to the same regulations as more traditional fiat currencies. Crypto can be bought and sold on decentralized exchanges or through virtual “wallets.” The most common way to refer to a specific cryptocurrency is by its symbol. The most famous example is bitcoin, which is a type of cryptocurrency and a form of decentralized payment network. Crypto symbols are like stock symbols — they’re a shorthand way to refer to a specific asset. But unlike stocks, which are listed on centralized exchanges, cryptocurrencies are listed on decentralized exchanges.
Why Invest in Crypto?
The most straightforward reason to invest in crypto is that you believe that the token will appreciate in value and perhaps become worth more than you paid for it. Of course, this reason is also the most speculative. If you’re looking for a more direct investment, you might consider an index fund or a low-cost, diversified ETF that tracks a particular index, such as the S&P 500. Crypto tokens are also often paired with other products or services, such as an exchange that facilitates trading a specific type of token. If you’re looking to build a blockchain business, you might want to purchase tokens that will help develop the network of users or help to fuel the decentralized network that your company relies upon. Finally, cryptocurrencies are also sometimes used as a form of payment. You can even find online casinos that started to work with crypto as early as 2014. This reason is a little more obscure and nuanced, but it’s still an essential factor to consider.
How to Buy and Store Crypto
Once you’ve decided which token(s) you want to purchase, you’ll need to set up an account with a centralized exchange. Centralized exchanges are web-based marketplaces where you can buy, sell, and store your tokens. Examples include Coinbase, Binance, and Kraken. Most centralized exchanges require that you provide government identification and have your account verified before you can make your first trade. You can also buy tokens from other people who have listed them for sale through a decentralized exchange. Decentralized exchanges are similar to centralized exchanges in that they allow you to trade one token for another or buy tokens from other people. The primary difference is that decentralized exchanges don’t require you to provide identification or verify your account. Instead, you send payment to an account address, and the tokens are held in a virtual wallet that you control.
Ongoing Warnings for Investors
Although crypto has grown into a multi-billion dollar industry, the field is still very new and hasn’t been tested by any significant economic downturns yet. As such, it’s critical to understand that investing in crypto is highly speculative and comes with a high risk of losing money. Furthermore, there’s currently no regulatory framework in place for investing in cryptocurrencies, as it is a field that operates outside of government oversight. If you lose money on a crypto investment, you may have no way to recover it. Given the hype surrounding the crypto industry, it’s also possible that you might fall victim to a scam or fraudulent token. If you’re considering investing in cryptocurrencies, be sure to research your options carefully and understand that you’re taking a high risk with your money.
Why You Should Care About Blockchain
Simply put, blockchain is the decentralized ledger that underlies cryptocurrencies. It’s a decentralized network of computers — often called nodes — that track, analyze, and verify transactions before writing them to a single, shared ledger. While many people only consider the token associated with a given blockchain, there are several other benefits to investing in the underlying technology:
- There’s the fact that blockchain is decentralized. This makes it far more difficult for a centralized authority to interfere or shut it down. Governments have struggled to regulate blockchain because it’s challenging to access.
- Blockchain is highly secure. The decentralized network verifies transactions and tracks data, making it extremely difficult for hackers to break in and steal information, data, or tokens.
- Blockchain is scalable.
Thanks to the way it’s designed and its technology, blockchain can quickly and efficiently process large amounts of information without slowing down or becoming overwhelmed.
How to Commit with Crypto: Long and Short Strategies
Part of understanding how to commit with crypto is understanding how tokens function. Most tokens are designed to be used as a form of payment, a service, or a utility. For example, if you want to use an online messaging service, you might pay for the privilege of using tokens associated with the blockchain that runs the service. Some tokens also track indices and commodities. These tokens are designed to increase or decrease in value with the rise and fall of their related index or commodity. Other tokens are designed to appreciate in value over time, like a type of investment. These are referred to as tokens that are committed to an index. For example, if you buy tokens committed to the S&P 500, you’re hoping that those tokens will increase in value as the S&P rises. Conversely, you can also short a token. For example, you might short tokens committed to the S&P 500 if you think that the S&P 500 is going to fall and you want your tokens to decrease in value.
The Bottom Line
Cryptocurrencies are a new and exciting investment opportunity, but they’re also a highly speculative market full of risk. Before you invest in a token, make sure you understand the fundamentals of that token—and the blockchain it’s built on top of—and do your research thoroughly. It’s also important to remember that unlike stocks, which can be bought on regulated exchanges, cryptocurrencies are bought and sold on decentralized exchanges. You’ll need to be extra careful to avoid scams and verify that your tokens are legitimate before you make your purchase.