Cryptocurrency has grown in popularity since first being introduced in 2009. Although it’s increasingly been used instead of traditional money, many are still confused about how it works and whether it’s safe.
In 2013, Forbes said an early form of cryptocurrency was a good investment. But now, people are unsure if investing in cryptocurrency is really worth it.
While the decision to swap your leather wallet for a digital one is completely up to you, it’s still wise to understand this investment type.
Continue reading to learn more about:
- Cryptocurrency investing
- The ins and outs of virtual currency
- Cryptocurrency investment’s pros and cons
- The importance of speaking to an expert before making big financial decisions
How does cryptocurrency work?
Simply put, cryptocurrency is a digital, encrypted, and decentralized way of exchange. When trading U.S. dollars for foreign money, a central authority manages and organizes the value and actions of the cash. Cryptocurrency changes this process; transactions done between internet users don't have as much oversight as traditional currency does.
Cryptocurrency, like any other form of payment, can be used to buy common goods and services. More often, though, people invest in cryptocurrency like stocks. The cryptographic proof is verified and recorded on a blockchain to keep track of these investments. Think of a blockchain as a checkbook—an open registry that documents every cryptocurrency transaction in code. The term “blockchain” derives from how these transactions are recorded: in blocks linked on a chain of previous purchases.
Every digital currency user has their own blockchain copy to help them monitor their investments. These books are also regulatory validated to prevent fraudulent activity.
Types of cryptocurrency
When you hear about cryptocurrency types, you probably think of the ones with ‘coin’ in their name. However, the coin name and type differ. There are several types of crypto that you should know about:
- Security tokens: Tokens that represent ownership of a digital asset—like a stock that’s been tokenized. If you find one for sale, you can gain partial ownership of particular art pieces and other crypto asset securities.
- Utility: Utility tokens serve specific functions on their respective blockchains.
- Transactional: This type of coin is designed to be used as a payment method.
- Governance: These represent voting or other rights on a blockchain.
- Platform: These coin types support applications built to use a blockchain.
How cryptocurrency gets its value
Digital currency is valuable because it is scarce, and people see it as useful. It becomes even more valuable when the demand is higher than the supply. Unlike government money, it doesn't have support from any institution. Instead, its value comes from people using it to buy things and keep their money safe.
Cryptocurrency mining
Unlike cash, cryptocurrency must be mined before being released into the world. While this may bring dark tunnels and pickaxes to mind, crypto mining isn’t like that. Crypto mining verifies and adds new cryptocurrency to the blockchain through a verified process that solves a complex mathematical equation.
The only similarity between the 1800s gold rush and crypto mining is the hurry miners are in to retrieve what they’re looking for. Rather than precious treasure, though, crypto miners are racing to crack the puzzle first. Whoever does receives part of the total mined currency.
To mine cryptocurrency, you need access to electricity and good computer hardware. A 2022 White House Crypto-Assets Study found that the total global electricity usage for cryptocurrency was between 120 and 240 kilowatt-hours per year, surpassing the annual electricity usage of countries like Argentina and Australia.
Although it does require a high upfront cost for equipment and makes ongoing utility bills soar, miners that find success can receive large profits. The problem is that competition is fierce. Individuals or companies with larger and more powerful hardware will beat out everyday users.
What is crypto investing?
Like making investments in conventional ways, those interested in crypto investing have a lot of options. The most common include:
Buying cryptocurrency directly
One of the most popular ways to invest in digital currency is to buy it directly from various crypto companies. Through these companies, you can select from hundreds of well-established or other less-known types.
Investing in a cryptocurrency company
Investing in companies specializing in cryptocurrency, such as mining and hardware manufacturing, or those supporting it is an option. Another option is to invest in companies that hold cryptocurrencies on their balance sheets.
Investing in cryptocurrency-focused funds
With so many companies offering cryptocurrency investments, it may be easier to invest in a cryptocurrency-focused fund. You have different choices for exchange-traded funds, such as index and future funds, and investment trusts focusing on cryptocurrency. This fund style offers a fixed portfolio of stocks and bonds as redeemable units for a specified period.
Mining or acting as a validator
To earn cryptocurrency rewards, you can become a validator on a blockchain network. This involves verifying transactions to keep the network secure. To become a validator, you must choose a network, get the right hardware and software, and manage the node that stores investment information. You can trade your rewards for other currencies or hold onto them as an investment.
Considerations for crypto investing
Before investing in crypto, it’s important to know the good and bad parts this investment brings. Don’t make a financial decision without enough information, even if it seems like a good idea.
Let’s dive into what you should know about crypto investments:
Advantages of cryptocurrency
Reduces human errors
Financial institutions sometimes struggle with human error or large crises that can negatively impact users. Because cryptocurrency doesn’t have a centralized management system like a bank, it eliminates the possibility of a single point of failure.
Makes the transfer of funds easy
Cryptocurrency exchanges don’t have to go through third-party intermediaries, so people can receive funds quicker than standard money transfers. This practice is secured using different incentive systems, like proof of work or proof of stake.
Generates profit
While the crypto market has been going up and down at very quick rates, there’s a potential for people to make a good amount of money.
Drawbacks to cryptocurrency
Allows for criminal activity
Cryptocurrency uses pseudonyms and can’t be tracked by the FBI. They are marketed as anonymous, enticing criminals to use them for illegal activities like money laundering and illicit purchases. For this reason, crypto also has become a common choice for hackers to use for ransomware activity.
Is often very expensive
As previously mentioned, mining cryptocurrency is meant to allow everyday people to gain a profit. But, the equipment and energy required often eliminate the possibility of breaking even.
Requires a leap of faith
Cryptocurrency investing has several moving parts and is often confusing to keep up with. This introduces risks and potentially negative impacts of investing in a market that may not stay on the up-and-up.
Speak to a specialist
Every person has varying financial situations, meaning what one person does shouldn’t impact what you choose to do. Before investing, speaking to your financial advisor is the most important thing you can do. They keep up with various financial trends and know what’s best for you and your unique circumstances, ultimately ensuring you’re making the right move.
