Choosing a Crypto Coin
Cryptocurrency is a digital asset that uses encryption to create and verify transactions. These transactions are recorded on a public ledger called a blockchain. A cryptocurrency’s price rises or falls based on investor demand and the perceived value of the underlying technology.
A key benefit of cryptocurrencies is their decentralized nature. This allows people to send money quickly and relatively anonymously, across borders, without the need for a third party such as a bank to approve the transaction or charge a fee. Cryptocurrency enthusiasts see this as a potential boon for global commerce and as a way to circumvent restrictive government policies.
Another appeal of cryptocurrencies is that they can be stored as an alternative to traditional fiat currencies, which are subject to inflation. Some cryptocurrencies are designed to be stable, with the supply limited indefinitely. These are referred to as “stable coins.” The prices of most cryptocurrencies, however, are volatile.
One of the reasons for this is that buyers may not fully understand how cryptocurrencies work. They may think of them as a store of value, when in fact they are often bought speculatively for their future price potential. This is similar to how stocks are viewed as investments.
Many people also purchase cryptocurrencies as a form of indirect investment in the blockchain technology that powers them. The blockchain is an encrypted, public record that carries transaction data in chunks called blocks. Each block contains information about a previous “block,” and as you move further down the chain, you can see all of the previous transactions. The computers that make up the blockchain are tasked with verifying and facilitating each block.
Because the cryptocurrency market is new and unregulated, there are risks involved in investing in it. Cryptocurrency investors should look for projects that have a proven team and are open to feedback from the community. They should also check how widely a cryptocurrency is being used. Reputable cryptocurrencies should provide publicly available metrics that demonstrate this.
Finally, they should consider whether a project is attracting high-profile investors. It’s important to avoid scams. Scammers will try to lure you in with promises of massive returns or by spreading fake news. They may use social media or messaging apps to start rumors that a celebrity has endorsed their cryptocurrency, for example.
When choosing a cryptocurrency, people should pay attention to fees and the volatility of prices. It’s essential to remember that a cryptocurrency’s price can fall dramatically between the time you buy it and the moment it’s approved for a transaction, for example. Additionally, cryptocurrency transactions are not reversible. This can be a problem if you make an error in entering information, for example sending an amount of money that’s too small to cover a purchase. Ultimately, the best way to invest in cryptocurrency is through a reputable online brokerage or robo-advisor. NerdWallet’s ratings of these services take into account over 15 factors, including account fees and minimums, investment choices and customer support.