Cryptocurrency has been around for years, but it’s become more of a mainstream phenomenon in recent years. It’s also a popular investment choice for some people, even though it’s not always a safe one. Before deciding to invest in cryptocurrency, it’s important to understand what it is and how it works.
Crypto is digital money that uses encryption techniques to verify transactions without the need for a central authority. It’s also a medium of exchange and can be traded on a variety of digital platforms. There are thousands of cryptocurrencies, and they all function differently. Some are primarily investments, while others can be used to pay for goods and services or as a means of savings. Before you invest, it’s important to have all your personal finances in order. This includes an emergency fund, a manageable level of debt and an appropriately diversified portfolio of investments.
As the popularity of crypto has grown, governments and institutions have started to regulate it in some ways. The Securities and Exchange Commission, for example, has cracked down on initial coin offerings (ICOs) during the crypto mania of 2017 and 2018. And many countries have started to adopt their own guidelines on buying, selling and trading.
While many people use cryptocurrencies to store their wealth, the vast majority of them buy and sell them to make money. This is because, like stocks and other financial assets, they can rise and fall in value. When you trade, you’re betting on whether the price of a crypto will go up or down. This is risky and should only be done by experienced traders who know what they’re doing.
If you want to buy and hold a crypto, you’ll need a wallet. There are dozens of options available, but the most well-established are digital exchanges like Coinbase and Kraken. Some traditional brokers, such as Interactive Brokers and TradeStation, offer some crypto trading, too. And a number of financial apps, such as Robinhood and tastyworks, let you buy and sell Bitcoin and other cryptocurrencies.
Many cryptocurrencies are backed by nothing at all, meaning they’re not tied to any hard assets or cash flow. This makes them more volatile than stocks and other financial assets, as they’re only worth what someone else is willing to pay for them.
The process of creating new cryptocurrency is called mining. Miners compete to solve complex cryptographic puzzles, which are added to the blockchain, a public record of all crypto transactions. The more computers that mine crypto, the higher the reward. However, this process uses a lot of energy—enough to power a small country. As a result, it’s not environmentally friendly. This has led to some concern about how sustainable crypto mining is.