A cryptocurrency sometimes called just “crypto”, is a digital currency. Though cryptocurrency “coins” can be exchanged for goods and services just like a regular currency, most investors look to cryptocurrencies as a way of making investment income.
In recent years, and particularly during the Covid-19 pandemic, speculation in cryptocurrency has been pushing the price of popular currencies higher and higher, and this has led to claims that investing in crypto is a good way of making fast investment income.
In this article, we’ll take a balanced approach, and explain everything you need to know about cryptocurrency – what it is, why it is enjoying such popularity at the moment, and whether you should invest in it.
What is cryptocurrency?
At the most fundamental level, a cryptocurrency is a form of payment that can be used online. You can think of cryptocurrencies as similar to casino chips or arcade tokens, albeit ones that are accepted by a growing number of companies.
There are some differences, however, between cryptocurrencies and regular currencies. Instead of being issued by a central bank, the system that governs cryptocurrencies is distributed, and transactions are recorded by every computer connected to the “blockchain” network that runs the currency.
The blockchain ensures the security of the cryptocurrency system, but it also confers other advantages. The distributed nature of cryptocurrency means that it is unregulated by central banks – for enthusiasts this is one of the primary selling points of crypto, but for investors looking for long-term stability, it may be less attractive.
How many cryptocurrencies are there?
The technology behind cryptocurrency – the blockchain – has been around for decades, and the first cryptocurrencies were launched more than ten years ago.
The first, and still the dominant cryptocurrency on the market, is Bitcoin. That said, in recent years a number of challengers have started to undermine this dominance – Ethereum and Binance Coin are catching up, but remain far smaller.
Alongside these dominant cryptocurrencies, there is a very broad range of cryptocurrencies. It is relatively easy to launch a cryptocurrency, and doing so does not require the founders to apply for permission from the SEC or any other body.
As a result, the number of cryptocurrencies has exploded in the last few years, and there are now more than 13,000 cryptocurrencies that are actively traded, according to CoinMarketCap.com, a market research website.
Very few of these make a good investment for the average investor, and many of them are private cryptocurrencies only accepted as payment by one company. This has not stopped the market from growing rapidly, though, and along with it the number of cryptocurrencies.
Why are cryptocurrencies so popular?
There are several different groups of people who invest in crypto, and each has their own reasons for doing so. These reasons range from the idealistic to the purely profit-driven:
- Some investors, and particularly those with early involvement in crypto, see the technology as a revolutionary force, removing control of currency from governments and creating a more democratic, more equitable world.
- Others believe that cryptocurrencies will eventually become the standard currency in use around the world, and want to establish a position in what they see as the future of money.
- Some investors value cryptocurrency for another reason – security. The blockchain technology that underpins cryptocurrency can help to keep investments secure, and transactions on the blockchain are anonymous.
- Finally, some investors see an opportunity to make money. The recent rapid increase in the value of cryptocurrencies has given the impression that huge gains can be made from cryptocurrencies over short time periods. This is true in some cases, but the volatility of the market also makes them a very risky investment.
Are cryptocurrencies a good investment?
Investors and analysts are split as to whether cryptocurrencies are a good investment. On the one hand, the value of most of the major cryptocurrencies has increased dramatically over the past decade.
On the other, this rise has been characterized by extreme volatility, with cryptocurrencies sometimes losing 90% of their value over the course of a year, only to rebound a few years later.
This creates something of a problem for those who believe in cryptocurrencies as an alternative currency, or even as a long-term store of wealth. Extreme volatility means that careful investors and prudent companies do not have significant cryptocurrency holdings, and this lack of support drives further volatility.
The best advice when it comes to investing in cryptocurrency is to assess your risk tolerance. There are gains to be made, but investing in cryptocurrencies remains highly risky, and investors should be prepared to see major losses as well.
How do I buy cryptocurrency?
While some cryptocurrencies, including Bitcoin, are available for purchase with U.S. dollars, others require that you pay with bitcoins or another cryptocurrency.
To buy cryptocurrencies, you’ll need a “wallet,” an online app that can hold your currency.
Generally, you create an account on an exchange, and then you can transfer real money to buy cryptocurrencies such as Bitcoin or Ethereum.
Coinbase is one popular cryptocurrency trading exchange where you can create both a wallet and buy and sell Bitcoin and other cryptocurrencies.
Also, a growing number of online brokers are now offering cryptocurrencies to their clients.
The Bottom Line
Despite the hype, cryptocurrencies are still a high-risk investment, and may not be suitable for every investor. On the other hand, there are major gains to be made investing in these currencies for those willing to ride out their extreme volatility.