INVESTMENTS

 5 Things to Know About Cryptocurrency

You’ve probably heard about cryptocurrency, even if you’re not an investor. It’s a popular topic in the news and on investment apps. There’s even whole groups dedicated to cryptocurrency on sites like Reddit.

But what is cryptocurrency? How does it work? And is it something you should consider for your investment portfolio?

Here are 5 things to know about cryptocurrency.

1. What is cryptocurrency?

A cryptocurrency (also called “crypto” or “coin”) is a digital currency that you can use to pay for goods and services. Most of the interest in cryptocurrency is in trading for profit, however. It’s a lot like betting on the rise or fall of foreign currency, except that cryptocurrency is digital and unregulated.

Cryptocurrencies work using a decentralized technology called blockchain, which spreads across many computers to manage and record transactions. A big appeal to blockchain technology is its security and its anonymity.

One way to think about cryptocurrency is to think about arcade tokens or casino chips. You trade real currency for the “crypto” or “coin” and then use that to make transactions. The big difference is that a $5 casino chip will still be worth $5 when you cash out. Cryptocurrency is highly volatile and its value changes constantly, sometimes by the second.

2. How many cryptocurrencies are there?

The short answer: a lot. In fact, according to Coin Market Cap there are more than 10,000 different cryptocurrencies being traded publicly.

And that number is likely to go up. New cryptocurrencies continue to pop up, raising seed money through Initial Coin Offerings, or ICOs.

This gold-rush mentality could be a cause for concern too. Not all these currencies will succeed. Remember AskJeeves and the dot-com boom of the 90s?

3. Why are cryptocurrencies so popular right now?

There are many reasons cryptocurrencies are gaining in popularity with investors:

• Some see cryptocurrencies, like Bitcoin, as the currency of the future, deregulated, anonymous, and decentralized. People want to buy now before the coins go up in value.
• Some people just like the technology, the blockchain, because it’s a decentralized processing and recording system that some people see as more secure than tradition payment systems.
• Then there’s the gold-rush mentality mentioned earlier. Some people just want to buy low and sell high. They have no interest in the future of the coins.

4. Are cryptocurrencies legal?

All cryptocurrencies are currently legal in the United States, but that doesn’t mean they’re a legitimate long-term investment. Due to the oversaturation of the industry, there is high-risk for fraudsters, phony coins, and a loss of your money.

Cryptocurrencies aren’t legal everywhere, though. China has banned their use, and it’s unclear if more countries will follow their lead.

5. How do you protect yourself?

If you’re looking to get in at the ground floor and invest in an ICO, make sure to read the fine print in the company’s prospectus and look for:

• Who owns the company? An identifiable and well-known owner is a positive sign.
• Are there other major investors who are investing in it? It’s a good sign if other well-known investors want a piece of the currency.
• Will you own a stake in the company? Or will you just own currency or tokens? This distinction is important. Owning a stake means you get to participate in its earnings (you’re an owner), while buying tokens simply means you're entitled to use them, like chips in a casino.
• Is the currency already developed, or is the company looking to raise money to develop it? The further along the product, the less risky it is.

It can take a lot of time to comb through a prospectus, but it’s worth the effort. The more detailed information, the better chances it’s legitimate. But again, legitimacy doesn’t mean success in the wild west of crypto.

Cryptocurrency is a new, unregulated, digital form of payment. Some people see it as the currency of the future, while other investors only see it as an in-the-moment opportunity. They’re only looking to buy low and sell high, without any concern, interest, or confidence in the long-term success of the sector.

As with any investment, make sure you do your research and are financially stable. Have a solid budget in place and an emergency savings fund before you risk your money on the market.

Want to learn more about investments or money-management? We have a lot of helpful articles here in our Learning Center.