While cryptocurrency has been the subject of a lot of buzz and speculation in recent years, many people still don’t have a clear picture of exactly what cryptocurrency is and how it works.
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What Is Cryptocurrency?
There are hundreds of different kinds of cryptocurrency, from popular varieties like bitcoin and ethereum to more obscure options. Essentially, cryptocurrency is a form of decentralized, encrypted digital currency. Because cryptocurrency isn’t backed by any government or organization, it can be much more volatile than other forms of currency, and can fluctuate wildly based on public perception. Cryptocurrency can be a risky investment, but also has the potential for high rewards.
How to Invest in Cryptocurrency
As with any investment, it’s important to do your research before you decide to invest in a particular kind of cryptocurrency.
Pick an Exchange
There are a variety of different exchanges that you can choose from. These fall under three main categories: trading platforms, direct trading, and brokers. Trading platforms are exchanges where investors are able to exchange cryptocurrencies for other currencies, including other types of cryptocurrencies, as well as traditional currencies. Direct trading allows individuals to trade directly with one another and set their own prices. Brokers sell cryptocurrency to investors at fixed prices.
When deciding what form of exchange to use, it’s important to consider their potential risks and benefits. Different platforms may have related fees, accept different forms of payment, and have different exchange rates. In addition, some platforms may have better reputations than others.
Pick a Currency
There are also a variety of cryptocurrencies to choose from, each of which have different risks and benefits.
- Bitcoin: Bitcoin is one of the most common and best-known varieties of cryptocurrency — as of this writing, it’s the most valuable. Created in 2009 by Satoshi Nakomoto, bitcoin uses blockchain technology to facilitate encrypted transactions between individuals. Bitcoin is decentralized and anonymous.
- Ethereum: Ethereum is a distributed computing platform and operating system that uses blockchain technology. Ether is ethereum’s cryptocurrency. Ether was created in 2015, and is one of the better-known cryptocurrencies besides bitcoin.
- Ripple: Ripple is both a cryptocurrency and a payment network that allows individuals to quickly and securely transfer money. Ripple was created in 2012; it allows any type of currency to be exchanged, including traditional currencies like dollars and euros, as well as other forms of cryptocurrency.
- Litecoin: Litecoin is a type of cryptocurrency similar to bitcoin. Founded in 2011, Litecoin shares many of the same features as bitcoin, including an open-source platform, decentralization, and encryption.
- Other cryptocurrencies: In addition, there are a variety of other alternative cryptocurrencies, also known as altcoins. These smaller currencies usually require investments to be made in other forms of cryptocurrency, such as bitcoin or ethereum.
Create a Cryptocurrency Wallet
When you buy cryptocurrency, you also need a place to put your investment. While a cryptocurrency wallet allows investors to keep track of their funds, cryptocurrencies aren’t technically stored in cryptocurrency wallets. Instead, cryptocurrency wallets allow investors to keep track of the records of transactions that are stored in the blockchain.
Cryptocurrency wallets usually take the form of either hardware wallets or software wallets. Hardware wallets are physical devices similar to USB drives, and are usually more secure than software wallets. This type of wallet stores your investment offline, making them safer but less flexible than their software wallet counterparts. Software wallets enable investors to actively trade and are more accessible than hardware wallets, but also come with increased risk of hacking or theft.
Diversify Your Cryptocurrency
Because cryptocurrency is typically volatile and unpredictable, it’s a good idea to invest in a variety of different types of cryptocurrency in order to diversify your investment and to protect against risk. Consider investing in several different popular varieties of cryptocurrency like bitcoin and ethereum, as well as lesser-known, up-and-coming alternatives. This protects you in case any one form of cryptocurrency proves to be a less successful investment.
Cryptocurrency Investment Tips
If you’re interested in investing in cryptocurrency, it’s important to do your research and be prepared. Here are a few things to keep in mind if you’re thinking of exploring the world of bitcoin, ethereum, and more:
- Be prepared for risk: Cryptocurrency is a risky and volatile investment, so it’s important to be aware of the potential downsides of an investment. Only risk as much money as you can afford, and don’t bet everything you have on cryptocurrency.
- Beware of scams: Because cryptocurrency is a new and largely unregulated industry, scams are particularly prevalent. Make sure to avoid multi-level marketing schemes, and do your research to ensure that the cryptocurrency you are investing in is legitimate.
- Consider other investments: While cryptocurrency is an exciting new development in the world of finance, it’s still unpredictable. It’s a good idea to diversify your investments and invest in other areas besides cryptocurrency, such as stocks and bonds.
- Seek professional help: If you’re considering investing large sums of money, or just want a professional opinion on your investments, there are a variety of financial advisors who can help. Look for a reputable, well-reviewed advisor who has worked with cryptocurrency investments in the past.
- Stay informed: The world of cryptocurrency is constantly changing, and it’s a good idea to stay up to date if you’re looking to invest. New developments in cryptocurrency, as well as new, alternative forms of cryptocurrency, may affect your investments.
Cryptocurrency represents an investment alternative outside of the central banking system. As such, it’s not backed by governments. For that reason, it’s important to be careful when investing in cryptocurrency.
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