Many investors are interested in cryptocurrencies, but are Cryptocurrency Investments right for you?
Recently, there has been a lot of talk about cryptocurrencies. One could get whiplash from hearing about people who became rich overnight but then lost it all just as quickly. And it’s easy to see why: the price of a single bitcoin went from $1,000 at the beginning of 2017 to over $63,000 in April 2021, before dropping to $34,000 in late May. Dogecoin, Ethereum, XRP, and many others compete with Bitcoin, which is probably the most well-known cryptocurrency. Investors have questions about this new type of asset, which is only natural. Here are answers to five of the most frequently asked ones.
Bitcoin’s market capitalization is the same as that of almost all of the other top cryptocurrencies put together.
As of June 24, 2021, the source was CoinMarketCap.com.
What’s the deal with cryptocurrencies?
Cryptocurrencies let people store money, send and receive payments in a safe way outside of the traditional financial system, and keep their identities secret. Cryptocurrencies are based on a public, decentralised ledger called a blockchain. This is a database of every transaction that is kept up to date by all of the people who use that currency.
How do you keep track of cryptocurrencies?
Unlike so-called fiat currencies like the U.S. dollar and the euro, which are managed and backed by central banks, cryptocurrencies arek decentralized, which means that no one entity controls how they’re run. Instead, they are based on what most people agree on and how the cryptocurrency works. For example, bitcoins are “mined” by computers that are very powerful and solve very hard math problems. But by design, there can only ever be 21 million bitcoins mined. This makes them a limited resource, more like a commodity than a printed currency.
Are cryptocurrencies a real type of investment?
Bitcoin and other cryptocurrencies are very risky investments. These cryptocurrencies are basevolatility driven by supply and demand, not by their true value. Still, the cryptocurrency market has grown out of its testing phase and become a unique and large asset class with a market capitalization of about $1.5 trillion1. Because of this, a number of large companies and institutional investors have started to invest in Bitcoin.
What are the advantages and disadvantages?
As you might expect from a high-risk investment, cryptocurrencies come with significant risks, such as:
Volatility: Cryptocurrency prices have been very unstable in the past, and these changes could cause big financial losses.
Fraud: The Federal Trade Commission says that many people have been tricked into going to fake websites that look like they offer opportunities to invest in or mine cryptocurrencies. And even though login information is usually needed to get into a cryptocurrency exchange, it can be lost or stolen.
Investment saftey: If you forget or lose your login information for a regular bank account, there is usually a way to get back in. If you lose your “key” to your cryptocurrency, however, you can’t get it back. In the same way, if you can’t get to the place where you keep your key, you can’t access your cryptocurrency.
Are Cryptocurrency Investments Right for me? Should I put my money into digital currencies?
Whether or not you should use cryptocurrencies depends on your goals and how willing you are to take risks. Some traders have made money from the big price changes of Bitcoin and other cryptocurrencies, but others have learned the hard way that what goes up can almost always come down. So, people who want to invest in this risky asset shouldn’t risk more than they can afford to lose.