Cryptocurrencies, or digital currencies, have been all over the news lately.
These new forms of money are growing in popularity as more people purchase them and use them to make transactions.
But with this growth also comes a lot of questions about what is going on.
We’re here to answer those questions for you!
In this blog post we’ll explore 10 things that you need to know before investing in cryptocurrency so that you can be informed when deciding whether or not it’s right for your needs and goals.
Table of Contents
1) What is Cryptocurrency?
Cryptocurrency is a form of digital money that uses cryptography to secure the transactions and to control the creation of additional units.
A cryptocurrency’s security depends on this encryption because it makes counterfeiting impossible, so there are no physical coins in sight.
If you want something tangible, here’s an analogy: think about how difficult it would be for someone to counterfeit your dollars if they can’t use ink or paper!
2) How Does It Work?
Cryptocurrency works by using a combination of public and private keys.
The public key is used to encrypt the coins so that they can be safely transferred from one person or entity to another, while still maintaining their security.
The private key is what allows for you to access your currency – if someone else has it then there’s no way for them to use it (so don’t lose yours!).
The blockchain technology provides cryptocurrency with its decentralized nature: this means that transactions are not processed through any central authority like a bank, but instead participants in those transactions provide validation on the validity of their peers’ transaction records.
This cuts down on costs associated with traditional financial institutions because people do all the work themselves! There have been some concerns about the technology’s scalability, but it is a very promising and new way of managing currency.
3) What can you Actually Do with It?
One of the main reasons people are attracted to investing in cryptocurrency is because they can use it. There are a variety of things that you can do with cryptocurrencies, including online purchases through various websites and apps, or at brick-and-mortar shops (such as gift cards for Amazon).
You could also invest your money into purchasing more cryptocurrency.
4) Bitcoin is not the only cryptocurrency out there
There are many different types of cryptocurrencies, and Bitcoin is not the only one. In fact there are over 1320 coins out in circulation today! Some other popular coins are: Ethereum, Ripple (XRP), Cardano (ADA) and Litecoin. Read more about the best cryptocurrencies to invest in here.
Similar to stocks, people can invest into these other currencies if they want more diversity with their portfolio. If you don’t like how your investment performs, you could sell it for any other type of cryptocurrency that may have done better during this time period.
Alternatively, just because a coin has been doing really well doesn’t mean it will continue to do so indefinitely; we recommend diversifying as much.
5) Cryptocurrencies are volatile and can rapidly fluctuate in price
When it comes to investing, cryptocurrencies are volatile and can rapidly fluctuate in price.
For example Bitcoin was worth less than $1000 USD at the beginning of 2017 but spiked over $19000 by December ‘17! This means if you invested early on your investment would have performed well for that time period.
However, this also means that there is a chance of losing money too, so we recommend diversifying as much as possible with different types of coins (not just Bitcoin) because they all behave differently from each other when it comes to how they react during periods like these.
6) Staying safe during cryptocurrency investing
When investing in cryptocurrencies, there are a number of things you should always do to stay safe. They include:
Never share your private keys or passwords with anyone
This includes posting them online and sharing on public chat rooms!
If someone asks for this information then they’re most likely trying to scam you or hack into your account so it’s important that you never provide these details.
It could also be worth setting up two-factor authentication which requires another layer of security like an SMS message before accessing the app/website where the funds are stored.
Research your wallet
Always research what type of wallet is best suited for storing cryptocurrency because not all wallets offer the same level of security.
7) Fractional cryptocurrency investing
Because popular coins like Bitcoin (BTC) or Ethereum (ETH) are continuing to grow year-over-year, buying 1 whole BTC or ETH also becomes more pricey.
However, this shouldn’t be a reason for you to not get started with cryptocurrencies, as you can buy a fraction of a coin.
Maybe you don’t have enough to buy 1 whole ETH, but maybe you do have enough to buy 1/10th of ETH (0.1), or 1/1000th of a BTC (0.001). No problem!
Alternatively, some altcoins (like DOGE) have a very low nominal value. In January 2019, 1 DOGE was $0.0024, so for $240, you could have bought 100,000 DOGE then and now (at the time of writing this article DOGE is at $0.288) would have more than 100xed your investment.
8) What about investing in bitcoin mining?
Bitcoin mining is a process of solving complex mathematical problems to validate transactions on the blockchain, and in return you earn bitcoins. This was once profitable when bitcoin prices were high, but now it requires more electricity than even households can afford. Mining also takes up much too much time for what little profit there is left.
9) Could it be a bubble?
In the short term there are some risks that it could be a bubble.
There is no way to know for sure but people should always do their research and take care not to invest more than they can afford to lose.
The longer answer would depend on how quickly cryptocurrency becomes adopted by business, if it does then the price of Bitcoin will rise in line with demand as has been seen so far.
This is because Bitcoin is still mined at its fixed rate which means that when there are new Bitcoins minted every ten minutes, their value increases accordingly.