It’s predicted that the cryptocurrency market will grow by 56% between 2019 and 2025. It couldn’t be a more exciting time to invest.
However, as with all newer technologies, cryptocurrency can be a bit of a mystery to new investors. We’re here to guide you through what is cryptocurrency and whether or not it’s a safe investment.
What Is Cryptocurrency?
Cryptocurrency is a digital asset. You can use it as an investment or exchange it online for services and goods.
To buy cryptocurrency, you exchange real money like you would to get any other currency. You can think of them as casino chips or arcade currency as instead of getting a real physical currency back, you get a designated amount of coins or tokens of your chosen cryptocurrency.
Each coin or token is a unique line of code, which cannot be duplicated. These codes are managed using a technology called a blockchain. Blockchain is a secure technology that records transactions spread across many different computers.
Part of the big appeal of cryptocurrency is the security of the technology it uses. The currencies are easy to identify and track when traded thanks to blockchain technology.
The first cryptocurrency, and still the most famous, was bitcoin. It was created in 2009 by an anonymous person, or persons, who uses the pseudonym Satoshi Nakamoto. Since bitcoin, the market has exploded to include a huge amount of different cryptocurrencies.
How Does Cryptocurrency Work?
Cryptocurrencies are decentralized. This means they’re not controlled or regulated by any government or bank. Nobody dictates their value, or how they’re exchanged.
This is why you see such big fluctuations in their value. Cryptocurrencies are worth whatever people pay for them in a given moment.
A record of value is managed by the blockchain technology we mentioned above. It’s basically a never-ending receipt. It’s completely public and records all the transactions that have happened for that specific cryptocurrency.
Like with physical currency, you keep your cryptocurrency in a wallet – it’s just a digital one. This is within an app or on the vendor site you purchased your cryptocurrency coins with.
Your wallet comes with a unique, private code that you’ll enter when purchasing. This keeps the record of legitimate exchanges.
How Many Cryptocurrencies Are There?
More than 7,000 cryptocurrencies now exist. Everyone from Facebook to Google wants a slice of the pie. The most popular cryptocurrencies now are:
- Bitcoin (BTC)
- Ethereum (ETH)
- Tether (USDT)
- XRP (XRP)
- Bitcoin Cash (BCH)
- Binance Coin (BNB)
- Chainlink (LINK)
- Polkadot (DOT)
- Litecoin (LTC)
The worth, or market cap, of these currencies is in the hundreds of billions. Bitcoin alone has a market cap of $240 billion currently, and the current price of bitcoin is more than $12,000 dollars.
What Can You Buy With Cryptocurrency?
Cryptocurrency is becoming more mainstream. While it was originally regarded as untrustworthy and mainly used in online black markets, this is no longer the case.
Major brands like Microsoft, Starbucks, and Whole Foods now accept popular digital currencies like Bitcoin.
However, the vast majority of those exchanging cryptocurrencies still see it as an investment.
Are Cryptocurrencies a Good Investment?
This is the million, or billion, dollar question and a rather contentious debate among investors. Whether you’re investing in bitcoin or ethereum, it’s still a potential risk.
As with all investments, it’s a gamble. Investments need to be made wisely. Unless you’re debt-free and financially secure, you should not be investing large amounts of money into a volatile market.
Taking the above into account, there are clear pros and cons to the cryptocurrency market.
Benefits of Investing in Cryptocurrency
Many investors see cryptocurrency as the currency of the future. This is more of a personal belief than a grounded fact. Those who do believe it’s the currency of the future are investing heavily now, to save investing when they’re more valuable in the future.
However, those investing heavily now aren’t always firm believers in the currency as a viable long-term concept. Some people invest based on how much the value has already gone up.
A prime example of this is bitcoin. Bitcoin was worth literally nothing when it was made in 2009. Today, a single bitcoin is worth $12,000 dollars. Makes you wish you’d invested a decade ago, doesn’t it?
Other investors like that cryptocurrency is decentralized. Without regulation and control by banks, this means cryptocurrencies aren’t reduced in value via inflation. Additionally, the decentralized blockchain technology means cryptocurrency exchange is generally more secure than traditional payment systems.
Disadvantages of Investing in Cryptocurrency
The same decentralization that we mentioned as a benefit above, can also be a detriment. The lack of regulation means the cryptocurrency market is extremely volatile. It’s a high risk, high reward investment — but only if it pays off.
And believe us, it doesn’t always pay off. In December 2017, bitcoin reached a peak of $19,783 per coin.
Five days later, it lost 45% of that value, falling to below $11,000. Over the following months that value halved to $6,000. This crash has been widely written about but goes to show if you haven’t got the money to lose, cryptocurrency markets can be brutal.
The market also has an unknown rate of return. This is why many investors won’t touch it. It rarely follows market patterns and is unpredictable.
This means you can’t plan for investments, nor plan for a return on them. If you’re looking for a secure investment you know will reap returns, stick to growth stock mutual funds.
Similarly, while the new technology can be a pro, it can also be a con. A lot of people who invest don’t fully understand blockchain technology, or how it works. This lack of knowledge can make you vulnerable to poor investments and scams.
On the topic of scams, cryptocurrency has had its fair share of scandals. While it’s moved on from its dark web roots, cryptocurrency is still widely used by those who wish to remain anonymous to commit fraudulent or criminal activity. This may not necessarily affect your investments, but it goes to show how unregulated the market is.
How Do You Buy Cryptocurrency?
If you’re still set on investing, cryptocurrency is relatively easy to buy now.
With some cryptocurrencies, you can purchase them with US dollars, while others will require you pay with another cryptocurrency. You’ll need the digital ‘wallet’ we referred to earlier. You can get one of these with an app that holds cryptocurrency, or by creating an account on an exchange.
Now you know everything there is to know about cryptocurrencies, from what is cryptocurrency through to how to buy it. Remember to invest wisely, and never spend more money than you’re willing to lose.
You can read more about cryptocurrency trends for 2020 on our blog.