What You Should Know About Investing in Crypto Coins
Cryptocurrency inspires passionate opinions across the investing spectrum, from those who believe it is a transformational technology to those who worry that it’s just another fad. As a relatively new investment vehicle, many investors are still learning about cryptocurrency. Here are some things to keep in mind.
Crypto transactions are recorded on a public digital ledger called a blockchain. When Alice sends a unit of cryptocurrency to Bob, the transaction is added to a group of recent transactions that are waiting to be compiled into a “block.” Once a block is created, miners compete to solve complex math problems on their computers and add the block to the chain. The block contains a record of all the previous transactions and their current values. Anyone who has access to the blockchain can view these records.
The process is fast and can be done online or offline. In addition, there are no intermediaries like banks or credit card companies involved. This reduces costs and can provide a measure of privacy. In some cases, you may even be able to make a payment using cryptocurrency with no fee at all.
However, it is important to note that cryptocurrencies are not insured by federal deposit insurance or the Securities Investor Protection Corporation (SIPC), and they can be subject to wild price fluctuations. This volatility makes it riskier than investing in traditional stocks and bonds.
Some cryptocurrencies, such as Bitcoin, are also used in illegal activities like money laundering and to evade sanctions. Terrorist groups and criminal gangs have also been seen using them to make purchases and fund their operations.
In addition, cryptocurrencies can be subject to hacking and theft. Some of these hacks have been very serious, resulting in significant losses for some investors. In some cases, the stolen funds aren’t returned at all.
Some investors are interested in cryptocurrencies as investments, and they are traded on centralized exchanges just like stocks. Others prefer to hold their cryptocurrency on a decentralized wallet and receive interest through a process known as “staking.” This involves using your cryptocurrency to verify other transactions on the blockchain in exchange for a small amount of cryptocurrency that is awarded periodically.
While some cryptocurrencies have high market valuations, others have much lower ones. As a result, the cryptocurrency investment landscape is highly fragmented. It’s important to research each coin individually before making a decision.
Cryptocurrency investments are speculative and carry substantial risks of loss. You should only invest money you can afford to lose in this asset class. The views, opinions and analysis expressed on this page are solely those of the author and do not necessarily reflect those of Investopedia or its employees.