Chances are you’ve heard about cryptocurrency in the news. You may be familiar with names like Bitcoin or Ethereum, but it’s perfectly reasonable if you don’t fully understand how these currencies change in value. This blog will give you a brief overview of what cryptocurrency is, why it is becoming so popular, and leave you with a better understanding of this growing investment trend.
What is a Cryptocurrency?
In the simplest terms, cryptocurrency is a collection of data that represents digital money to be exchanged for goods and services over the Internet. A single unit is described as a token or “coin.” Bitcoin was the very first and remains the widest-known name in crypto today, but there are over 10,000 different currencies in existence.
Unlike traditional currencies (also referred to as fiat money) which are issued and controlled by a central authority or government, crypto is entirely decentralized. It isn’t based on actual dollars or even gold but is generated by mathematical processes along a large, shared network of computers called a blockchain. The blockchain also acts as a public ledger and keeps a record of all transactions of the cryptocurrency. Because blockchain is split across all the computers of a network, there is no central storage to be lost, stolen, or manipulated.
Each form of cryptocurrency is encrypted and created through its own unique process, and the act of using computing power to empower the blockchain is referred to as “mining.” Mining power helps new coin creations and exchanges along the blockchain network, which in turn rewards you with coins for sharing your processing power.
Why Is It So Popular?
Supporters of crypto predict it is the future‒but is this dramatic? Perhaps not. Blockchain technology is only in its infancy and is still being engineered for new uses. Security is a major concern with online communication and payments, and blockchain technology is proving to be safer than traditional methods. If it takes on major adoption, prices and value will be rising.
How Does Investing in Cryptocurrency Work?
Like any traditional investment, people try to purchase coins when they are valued at a lower price and then wait to sell them when they’re worth more to turn a profit.
Like anything, prices are affected by the laws of supply and demand. Cryptocurrency is minted in fixed releases, so the supply can only grow so fast even if demand is high. Prices can be affected by market speculation, rising costs to the mining process, new currencies entering the market, and changing regulations.
The biggest factor is speculation. Typically currencies grow in value as more and more people learn about them and choose to invest, but dips can also occur based on changing attitudes or regulations. Even if people believe a price drop is coming, the act of everyone selling off their coins will ensure the value lowers.
Cryptocurrencies are considered a highly volatile investment because their prices can rapidly fall or rise, and they are not directly tied to any business success like a typical stock or fund. The news loves to talk about people who have realized huge gains which is also pushing a growing public curiosity and adoption. Trading crypto has very low fees compared to traditional trading, and with their high-profit potential, they can be very appealing to newer, less patient investors.
Should I Be Investing in Crypto?
One thing is for sure: cryptocurrency is not going away, and will likely only continue to become more popular. The big names like Bitcoin and Etherum have become mainstream terms and big financial companies have been reported to be investing in them. This all points to a positive future for crypto.
So should you join in? Overall we say it’s your choice but it does appear to be legitimate. Crypto can be another way to diversify your investment strategy, but should not be the bulk of your portfolio. Traditional stocks, ETFs, and mutual funds are all much more stable investments, but it is okay to include some risk in your portfolio.
If you’re ready to get started with crypto there are many trading platforms specifically for crypto, and there you can trade traditional USD for coins such as Bitcoin, Ethereum, Dogecoin, and more. Some reputable companies include Coinbase and Binance. You should also consider speaking with one of our financial advisors at UFirstFinancial. Set an appointment to speak with one today! They specialize in retirement, investments, estate planning, insurance, tax management, and much more.