What is Cryptocurrency, and is it a Good Investment?

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Many people think that crypto is going to be the biggest innovation of our generation, while many others think it it simply a scam.

So, which is it?

Cryptocurrencies have been in the news frequently over the past few years, and more people are becoming aware of them every day.

In fact, over 30% of all U.S. adults now own crypto. However, despite their growing popularity and astronomical gains in value, many people still don’t actually understand what cryptocurrencies are.

In this blog post, I will share everything you need to know about cryptocurrencies, how they work, and whether or not you should invest in them.

 

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What is Cryptocurrency?

A cryptocurrency (or “crypto”) is any peer-to-peer digital currency that uses cryptography to create and manage the money supply and confirm the transactions.

While Bitcoin (BTC) is the first and most well-known cryptocurrency, there are many others available, including:

  • Ethereum (ETH)
  • Ripple (XRP)
  • Cardano (ADA)
  • Solana (SOL)
  • The asset-backed cryptocurrency stablecoin Tether (USDT)

Most cryptocurrencies are decentralized systems based on blockchain technology, which enable transactions to be verified by the network without the need for central authorities, such as banks or governments — in other words, they are not subject to government or financial institution control.

The Difference Between Real Money and Cryptocurrencies

Real money, like the U.S. dollar, is fiat currency. That means it is not backed by a physical commodity like gold or silver but rather by the full faith and credit of the U.S. government.

In contrast, cryptocurrencies are decentralized digital assets not subject to government control or regulation. In fact, Bitcoin was created in 2009 as a peer-to-peer electronic cash system that could function without the need for a central authority.

Also, since cryptocurrency relies on public blockchains rather than banks, transaction fees are lower, allowing you to send funds across borders cheaply and quickly.

Blockchain: Proof of Work Vs. Proof of Stake

Most cryptocurrencies, including Bitcoin, follow a specific pattern called proof-of-work.

Proof-of-work requires miners to solve complex problems with large data sets to find blocks (a group of transactions) with rewards (typically the token).

The difficulty levels vary depending on the type of cryptocurrency, but some standard proof-of-work algorithms include SHA-256, Scrypt, X11, Ethash, Equihash, and Lyra2REv2.

Proof of work can necessitate a significant amount of computing power and electricity. After deducting the expenses of power and computing resources, miners may barely break even with the cryptocurrency they earn for validating transactions.

To limit the amount of power required to verify transactions, some have suggested the transition to the proof of stake verification method instead.

The number of transactions any user can verify with proof of stake is limited by the amount of crypto they are willing to “stake” in exchange for the opportunity to participate in the verification process.

Proof of stake is substantially more efficient than proof of work since it eliminates energy-intensive equation solving, allowing for faster transaction verification.

This is why Ethereum is moving towards the “Ethereum merge”, where it will switch from a proof-of-work to proof-of-stake system.

Is Cryptocurrency a Good Investment?

Since crypto’s arrival on the scene, many people have wondered if cryptocurrencies are viable as investments. Some experts say they will become a global phenomenon, while others say they are an investment bubble destined to pop.

The best thing about them is that once you purchase them, your online wallet gives you control over your assets without any third party being able to intervene. There are no intermediary collecting fees each time a transfer takes place between different digital wallets.

Another significant benefit of investing in crypto is the transparency it offers. All crypto transactions are stored on a public ledger. This means that anyone can view the transaction history of any given cryptocurrency. The identity of all the parties involved in each transaction is hidden, but we know who has made every purchase.

The consensus mechanism (e.g., proof-of-work) used to verify these transactions makes for an open, democratic system where no one party controls the entire blockchain.

Cryptocurrencies offer investors several other potential benefits, including the potential for tremendous growth, short processing time, fraud protection, and international acceptance.

However, there are also some risks associated with investing in cryptocurrencies.

Risks of Cryptocurrencies

Investing in any cryptocurrency comes with many risks, from outright fraud to exchange hacks. You may lose all of your investment or perhaps even more.

For example, Mt. Gox was a popular exchange for trading Bitcoin for fiat currencies like dollars or Euros until hackers stole $450 million worth of Bitcoin from users’ wallets! It shut down soon after, and today Mt. Gox has filed for bankruptcy protection.

In another case of fraud, CoinDash ICO lost out on $7 million in investor money after their site was hacked shortly before their token sale went live.

Another potential drawback is its volatility — cryptocurrencies carry a risk of big swings up or down in value, which means there is no guarantee they can be relied upon for long-term savings.

And since crypto values fluctuate so wildly — sometimes even more than once per day — they are unsuitable for most people’s needs as general spending money. They are better suited to speculative trading, much like stocks and commodities.

So even with the incredible volatility experienced so far and stories about crypto millions made or lost overnight, would a prudent investor still consider putting their money into the market?

Cryptocurrency might be a good investment for you, provided you are willing to take the chance and consider it a risky, high-reward gamble that can net you plenty of dough — but know that you can lose all of it, too.

Many people have lost thousands, or even millions, in cryptocurrency, so always ensure you are prepared to manage your investments before committing any significant amount of your wealth.

How to Start Investing in Crypto?

Many potential investors respond to crypto ads or private messages pushing “get rich quick” schemes.

Instead of making an impulsive purchase, you should use these steps to vet a cryptocurrency before buying it:

1. Research the currency.

Verify that the currency is legitimate, secure, and worth the money before providing personal or financial information.

Review the currency’s white paper.

Check the coin’s security ratings with Crypto Rating Council and CertiK, and use a third-party price tracker like CoinMarketCap to see how it has performed in the past.

2. Choose a platform

Which platform should you go with? It is dependent on how you want to use the currency.

Will you buy and hold? Will you make regular trades or cash out your cryptocurrency now and then?

Each platform charges a different fee for these activities — and some may even limit the type of transactions. Before making a decision, review the fees and limits, as well as the exchange’s security ranking.

I recommend sticking with the top few players in the market, which I have shared under the tools and resources tab.

Thing to Consider when Investing in Crypto

1. Make sure you have enough emergency savings to last at least six months.

Determine what constitutes your emergency funds — will it be six months’ worth of your expenses (for example, food, transportation, and entertainment), or will it be equivalent to six months’ allowance/salary?

Sorry for boring you, but with risk comes caution. Prioritize this and do not dive into something you do not fully comprehend.

You have heard about the one person who earned a fortune overnight with $1000, but you have never heard of the countless who saw their $1000 turn into $0.1.

2. Next, start small and manageable. Passive investing in ‘blue chip’ currencies such as BTC and ETH is safe.

Because of the volatility of cryptocurrency, this is also known as DCA (dollar-cost averaging), and you either average up or down.

A monthly budget of $50 to $100 is a great starting point.

You can also diversify your portfolio with other investments such as Exchange-traded funds (ETFs) and bonds.

Once you have more earning power, you can continue to allocate more. It can be more, depending on one’s current situation.

3. After establishing your passive investment portfolio, you can consider active investing.

Having the first two things mentioned above is critical to avoid crashing and burning. Again, start small, allocating no more than 10% of your risk tolerance to active investing.

To earn a yield on your crypto, you may look into crypto staking or other yield farming strategies. You may even consider performing leverage trading with your cryptocurrency.

These are all mid to high-risk alternatives, and you must be willing to lose them if something goes wrong.

Concluding Thoughts

Some people see cryptocurrencies as an investment opportunity, while others view them as a volatile gamble.

It all depends on what you try to get out of the market.

The cryptocurrency industry is so new that no venture has a guarantee of success or safety.

However, if you are looking for a high-risk-high-return scenario, investing in cryptocurrencies may be worth your time.

Personally, I think crypto is an exciting investment opportunity, but we should see it as a high risk, high reward type of investment.

This means that we can add it to our portfolio to boost our returns, but it should not form the bulk of your portfolio.

Now that I have shared all about cryptocurrencies as a potential investment asset, is this something you would consider adding to your portfolio?

And if you are already a crypto investor, how many percent of your portfolio have you allocated to cryptocurrency investments?

Let me know in the comments section below!

 

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If you would like to learn more about crypto & DeFi, also check out: “The Ultimate Guide to Blockchain & Cryptocurrencies”



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