The Nuts And Bolts of Investing In Cryptocurrency.

Updated: Jun 22


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Cryptocurrency vs. Traditional Currency


The coins in your pocket, the dollar bills in your wallet, and the money in your account at the bank encompass traditional currency. Traditional currency is also known as fiat currency. Fiat currency (traditional money as we know it) is centralized. A country’s government and its central bank vouch for the value of its currency.

Cryptocurrency, however, is a form of digital asset/virtual currency based on a blockchain network distributed across many computers. It is secured by cryptography (hence the name cryptocurrency), making it almost impossible to counterfeit.

How is crypto different from traditional forms of currency?

Unlike traditional currency, cryptocurrency is not issued by a central authority, nor is its value backed by any government. Its decentralized structure allows them to exist outside the control of governments and central authorities. For many, this is seen as an advantage over traditional currency.

However, the price of cryptocurrencies is highly volatile. And there is high energy consumption for mining activities. Cryptocurrencies can be used in criminal activities because they lack governance, traceability, and decentralized nature.

You can mine and purchase crypto from cryptocurrency exchanges such as Coinbase, Gemini, and BitMart. There is limited use of crypto as a currency for transactions — you have to convert it to traditional money to buy things.

Types of Cryptocurrency

Bitcoin is the most popular and widely traded cryptocurrency. An anonymous person called Satoshi Nakamoto invented and introduced it to the world in 2008.


There are thousands of cryptocurrencies in the market today. Some popular names include Ethereum, Cardano, Dogecoin, and Tether. Each cryptocurrency claims to have a different function and specification.

Limitations

Because any public or private entities do not back crypto, it has not been widely adopted by global financial institutions. And acceptance of crypto by governments around the world have been mixed.

Cryptocurrencies are legal in the European Union. Japan’s Payment Services Act defines Bitcoin as legal property. China has banned crypto exchanges and crypto mining.


The US Securities Exchange Commission has said that cryptocurrency is not a security. But the Internal Revenue Services of the US views cryptocurrency as an asset and is taxable.

What you need to know.

  • They are not as anonymous as they claim to be. They leave a digital trail that allows governments or federal authorities to track the financial transactions of their citizens.

  • Cryptocurrencies are a popular tool with criminals in money laundering and illegal activities.

  • Cryptocurrencies are meant to be decentralized, and their wealth is distributed between many parties on a blockchain. In reality, ownership is highly concentrated.

  • Mining cryptocurrencies requires considerable energy, sometimes as much energy as entire countries consume.

  • Many cryptocurrency exchanges and wallets have been hacked over the years, sometimes resulting in millions of dollars worth of “coins” stolen.

  • Cryptocurrencies are very volatile. Bitcoin has increased in value by over 900% in the last five years but has dropped by almost 50% in the previous 6 months.

  • Some economists consider cryptocurrencies to be a fad or speculative bubble. It's hard to know whether this is true or not.

Investing in Crypto.

The fundamental rules for investing in anything apply to cryptocurrency. What are you hoping to achieve? Is it to make a quick buck? If you are going to invest in cryptocurrencies, use the money that you don’t need.

You must have a high tolerance for volatility./risk to invest in crypto. Are you willing to see your principal drop by 20% daily? As global governance increases for crypto, its risks may drop. For now, realize there are more stable ways to invest if that is your aim.


Jennifer Thompson wrote this article.





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