The crypto world is roaring nowadays as prices take a massive growth since the last two months. But before getting a hand of it, what are the cryptocurrency risks you should be aware of?
In this post, I'll get to you the necessary things to get familiar with firsthand and dive deeper into other things especially the cryptocurrency risks to remember before investing.
What is a Cryptocurrency?
To put it simply, cryptocurrency is a form of digital currency that is widely circulating in the investing world. It uses cryptography to create decentralized and secure transactions. This form of “digital currency” was created with the intention of being used like physical cash or money in the form of electronic data.
What is it used for? Cryptocurrencies can be traded for goods or services with people who accept them as payment (like currency exchanges). They're usually not backed by companies or governments but instead use algorithms as a way to prove that they have value and are easy to move around. Companies can also create their own cryptocurrency tokens and sell them to raise funds, usually referred to as an ICO .
As this technology gains popularity, cryptocurrencies will become more widely accepted and gain value over time.
A Brief History of Cryptocurrency
The first ever cryptocurrency was Bitcoin created in 2009 by an anonymous developer (or group of developers) that go by the name Satoshi Nakamoto. It was used to buy things electronically with no bank or government intervention.
In 2010, another form of cryptocurrency called Litecoin was created using a different algorithm from Bitcoin. Like Bitcoin, it's also based on blockchain technology. There are many other cryptocurrencies like Ethereum, Ripple, and Dash. In fact there were over 1,000 types of cryptocurrencies as of 2016 but only a handful have any real value. Each has its own unique purpose and methods for use depending on how they're coded during creation by their respective developers.
Cryptocurrency Risks: The Do's and Don'ts in Cryptocurrency Investing
While this form of electronic cash has some obvious benefits, it comes with a lot of risks. Here are the most important things everyone should know about cryptocurrency investing:
Understand How It Works First
Before you dive into investing in cryptocurrency, you have to fully understand how it works. There's no handbook on this subject so study as much as you can on your own time before purchasing.
This is especially true if you plan to invest significant sums into cryptocurrency because these currencies aren't regulated by financial institutions like banks or governments, which means they're highly risky investments that are best suited for experienced investors who want to try high-risk, high-reward options.
As mentioned earlier, cryptocurrency is basically digital cash that's not backed by banks or governments but instead uses an algorithm to prove its value and make it easy to move around. You can think of it like a decentralized database for storing data (usually financial information) with encryption technology in place so no one else can use or edit the data without using your unique password.
As you probably guessed from the name there's also a blockchain involved which is essentially a public ledger that records all transactions made on the network—in this case cryptocurrencies. These blockchains are secured cryptographically making them unhackable because everything stored on them is encrypted and permanent unless intentionally erased. Some examples of blockchains include Bitcoin's blockchain and Ethereum's blockchain.
What Are the Benefits of Cryptocurrency?
There are many benefits to using cryptocurrency instead of other forms of payment like cash, bank transfers, or credit/debit cards. For one thing, it helps protect your identity because there aren't any personal details tied to transactions used with cryptocurrencies. This makes them good options for doing anonymous business online and in certain situations where you might not want a paper trail (i.e., purchasing illegal products).
They're also easier to send across borders since they don't have to move through banks before arriving at their destination. And depending on how you use them, they can sometimes be cheaper than traditional payments too. Some companies charge fees as low as .05% per transaction while others can be as high as 4% per transaction.
But the biggest benefit of cryptocurrency is that you can make money by trading it just like with other investments. For instance, if a currency's value goes up or down against a traditional currency like EUR, USD, or JPY you can sell your cryptocurrency holdings to take advantage of its price fluctuations and then buy back in later when the market changes direction (you might want to do your research before doing this).
This is much easier than trying to time the stock market which moves very quickly once major news hits so there are fewer risks involved—though also less rewards unless you're really skilled at trading cryptocurrency. However note that some cryptocurrencies have no real purpose or use cases attached to them so they're not investable, and many newer currencies are only worth investing in if you can find a promising use case for them.
Other Things to Remember When Investing in Cryptocurrency
There's a lot more information you should consider whenever you're thinking about investing your money into cryptocurrency.
Here are some things that might help:
- There isn't any official government backing of any currency—though some claim this gives them more freedom and others think it makes them even riskier than normal investments;
- Cryptocurrency is sold at various price points known as exchanges, which usually charge transaction fees since they're using their own proprietary software to perform transactions;
- Keep in mind that cryptocurrencies have been hacked before, so be sure to store your holdings somewhere safe like your own PC. You might also want to use a wallet designed especially for holding cryptocurrencies like Jaxx or Exodus ;
- While many people claim that cryptocurrency transactions are anonymous, if you try hard enough you can usually work out who sent them and how much they were worth. So you should probably avoid sending transactions from services that require personal details like your name and address;
- As mentioned earlier, remember that not all cryptocurrency is “investable.” Many newer currencies have no real use cases attached to them so it's unlikely they'll rise in value anytime soon (and some of them are downright scams). If this is the case with a currency you hold then just sell up before the price drops instead of trying to get rich quick;
- Some newer cryptocurrencies are designed as “tokens” instead of currency, which means they have to be spent on an application or service in order for you to make any money from them. They're usually not exchangeable for fiat currencies (or other cryptocurrencies) either so buy these with caution; and
- Cryptocurrency exchanges can get hacked too, and when this happens it's often because someone's personal details have been leaked (so don't store your holdings with a cryptocurrency exchange unless you intend to trade them). Keep in mind that some exchanges also fail due to poor management, lack of funds etc. —and there might be no way for you to recover your cryptocurrency if this happens.
Now is the Time to Invest in Cryptocurrency
Despite everything I've just mentioned, if you know what you're doing (and you have enough money to afford the financial risks) then investing in cryptocurrency now could be one of your best decisions ever. Remember that many people think cryptocurrency is like the Internet during its early day , so it has a lot of potential to grow even more than it already has in the not-too-distant future.
If this happens then those who invested big into cryptocurrency at an early stage will be laughing all the way to the bank. So if you can afford to take on some risk and invest $10, $100 or more into cryptocurrencies like Bitcoin or Ethereum right now—then do it! If nothing else, it'll probably make for an interesting story a few years from now.
Read the Entire Cryptocurrency Investing Series
- How to Buy Cryptocurrency Safely | Step-by-Step Guide
- Unboxing the New Bitcoin Credit Card | Why You’ll Want One
- Road to Financial Freedom: Steps to Take to Be Financially Secure
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.