With Bitcoin prices toying with the idea of topping $20,000, it and other cryptocurrencies are hot topics in the world of finance.
But just because an investment is trending doesn’t mean it’s for everyone. To help you decide if it’s right for you, let’s explore what cryptocurrencies are, the three major types and where to invest. We’ll also discuss some of the pitfalls that are unavoidable with these investments.
What is a cryptocurrency?
Cryptocurrencies function much like any other currency. The difference is that cryptocurrencies are purely digital and there’s nothing backing it. The U.S. Dollar, on the other hand, is backed by the full faith and credit of the U.S. government.
That said, cryptocurrency is much more difficult to counterfeit than other currencies because it’s created and secured using complex coding.
Some people like cryptocurrencies like Bitcoin because of their anonymous nature — it’s tough to trace transactions back to their source. Also, because there’s no central authority that issues the currency, there’s no chance for government influence or manipulation.
The 3 major types of cryptocurrency
Over the past few years, several cryptocurrencies have emerged, giving investors the chance to put their eggs in more than one basket. Here are the top three to know.
The cryptocurrency that started it all, Bitcoin was created in 2009 by an anonymous person or group of people going by the name Satoshi Nakamoto.
Since Bitcoin is the most well-known cryptocurrency, it’s also the most valuable. As of December 17, the price of one Bitcoin is just above $19,000.
Launched in 2011 by former Google engineer Charles Lee, Litecoin was one of the first cryptocurrencies to follow in Bitcoin’s footsteps.
The main differences between the two are that Litecoin’s network can accommodate up to four times as many coins, and Litecoin offers a much faster transaction processing speed. It’s also much more affordable, with a price of $318 as of December 17.
Ethereum was initially released in 2015 by Vitalik Buterin, then a 21-year-old Russian-Canadian programmer. Ethereum transactions are confirmed even faster than Litecoin.
But the biggest difference is that Ethereum’s primary role isn’t to act as an alternative to regular money. Rather, it’s a platform that facilitates contracts and applications using its own currency as a basis.
Where you can invest in cryptocurrencies
Investing in Bitcoin, Litecoin and Ethereum isn’t like investing in Apple or Disney stock. Websites like CoinBase and CoinMarketCap act as online exchanges where you can buy and sell cryptocurrencies.
But once you own a cryptocurrency, you have to find a place to store and secure it from hacking. You can do this using “wallets”, but the right wallet can depend on which cryptocurrency you buy. A couple of multi-currency wallets to consider are Jaxx and Ledger Nano.
The drawbacks of investing in cryptocurrency
Despite being around for almost a decade now, cryptocurrencies are still fairly new to most investors. To help you get the full picture, here are some cons to consider.
1. They’re extremely volatile
Cryptocurrencies are a much riskier investment than investing in individual stocks and mutual funds. This is mainly due to that fact that nothing is backing them. In contrast, a company’s stock is backed by its intrinsic value, or the value of the company itself.
As a result, the price of a cryptocurrency is largely driven by perceptions. Bitcoin, for instance, topped $11,000 on November 29, and just two and a half weeks later it’s zeroing in on $20,000. This spike likely has a lot to do with the general investor excitement over the cryptocurrency’s prospects.
But on the flip side, investor sentiment can also force cryptocurrency prices into the opposite direction, and fast.
2. Steep learning curve
Warren Buffett once said, “Never invest in a business you cannot understand.” For someone who isn’t well versed in computer programming, cryptocurrencies are extremely complex. If you don’t understand the technology behind it and how to secure your investment, you could become an easy prey to hackers.
3. Uncertain future
Although Bitcoin and other cryptocurrencies are riding the popularity wave now, there’s no guarantee that they’ll catch on in the long term. If it doesn’t enter the mainstream market, your investment could go bust.
Also, while cryptocurrencies aren’t currently subject to regulations, that could change down the road.
Should you invest in cryptocurrency?
There’s no right or wrong answer to this question. Whether or not you should invest in a cryptocurrency depends on your risk tolerance and understanding of the investment. The important thing is that you do your due diligence and take some time to research your options so that you’re making an educated decision.
Editorial Disclaimer: Information in these articles is brought to you by CreditSoup. Banks, issuers, and credit card companies mentioned in the articles do not endorse or guarantee, and are not responsible for, the contents of the articles. The information is accurate to the best of our knowledge when posted; however, all credit card information is presented without warranty. Please check the issuer’s website for the most current information.