There is a lot of talk nowadays about online currencies and all of their benefits, but what exactly is cryptocurrency?
Simply speaking, it is digital money. Unlike paper currency, cryptocurrency comes in digital form only.
While many people discuss the immense benefits of cryptocurrency, much of the talk surrounding it revolves around people investing in it for a profit. In essence, it is traded on the market much like other stocks are.
But is cryptocurrency something you could invest in? Let’s take a little deeper dive to understand more about it.
What is cryptocurrency?
Cryptocurrency is a digital form of money that can be used online to make purchases of goods and/or services. You might be inclined to ask why cryptocurrency is so attractive since you can use a credit or debit card for the same purposes. Well, keep reading to understand what makes it unique.
The biggest differentiating factor of cryptocurrency is that it is decentralized (which means there is no one single organization or country that controls it). Since it is an internet-based way of money exchange, it is not bound by any country’s currency, and this could make things easier, especially when conducting foreign transactions.
Besides, cryptocurrency also provides transparency and immunity, in theory, to the potential interference of governments.
Cryptocurrency can be sent from one person to another with a key that is either public or private. There are little, if any, fees for processing, which is another positive compared to fees charged by financial institutions for online transactions.
The technology that makes all this possible is called blockchain.
And what is blockchain?
In the simplest of terms, it’s a safe way to record and manage transactions without the need of a middleman to approve the transaction.
Let me explain myself, when you make a transaction, a bank or a financial institution is always in play. For example, when you pay with your credit card, the bank needs to approve the purchase. This happens with all online transactions involving money, they need to go through or be approved by the bank.
That’s where blockchain comes in. It is a database of transactions (each one called a block) that helps verify the authenticity of each individual involved.
Transactions using blockchain are conducted directly from one party to another. They don’t go through a bank or other third-party financial institutions.
And while it may not sound like it, the process can be safer than traditional transactions thanks to cryptography, which is used to protect the data from tampering.
This makes cryptocurrency highly secure, which is another of its very attractive features.
What are the different types of cryptocurrencies?
If you are planning to use cryptocurrency, or if you intend to invest in it, it’s important to understand that there are different types.
In fact, there are more than 2,200 types of cryptocurrencies that are publicly traded, with a total value of about $246 billion. But most of them can be categorized into 3.
The most popular cryptocurrency is bitcoin, which is worth about $136 billion alone. That’s why it has its own category.
One Bitcoin was worth as much as $20,000 as of December 2017, compared to the $200 it was worth only two years before, theoretically making it a great way to invest.
Another popular type of cryptocurrency is called altcoins, which are just an alternative to bitcoin. There are also more than 1,000 types of altcoins, which can get kind of complicated. Some of these altcoins work similarly to bitcoin: they are used as a replacement for traditional currency.
Other forms of altcoins, though, such as NEO and Ethereum, are used so that people can build their applications.
The third type of cryptocurrency is based on tokens. These are based on decentralized applications (or dApps), that don’t use blockchain.
Some companies create tokens, which are their form of cryptocurrency, which can then be used to “pay for” the goods and/or services. You buy these tokens, or cryptocurrency, using real money.
All in all, some of the best and most popular cryptocurrencies are Bitcoin, Ethereum, Ripple, and Litecoin.
How to invest in cryptocurrency
But what is cryptocurrency in terms of investing? Is it a good or a bad idea?
They have become a hot button topic to talk about and invest in because cryptocurrency can fluctuate both up or down in a short period.
It is, therefore, considered by many to be a speculative investment that can be quite risky.
Because cryptocurrency itself doesn’t generate any cash flow on its own, the only way that you can make money off of investing in it is if someone is willing to pay more for it than you originally paid for it. This is why many investors consider it speculative.
Just know that if you plan to invest in cryptocurrency that it can fluctuate a lot.
In December 2017, one bitcoin traded at almost $20,000. But, it dropped to a low of $3,200 only one year after, and in May of this year, it was valued at $8,000.
To invest in cryptocurrency, you need to know where to purchase it. The easiest way to do this is through a cryptocurrency exchange. The most popular are called GDAx, Coinbase, and Bitfinex.
At these cryptocurrency exchanges, you can purchase bitcoins and other cryptocurrencies using your debit card. To purchase other forms of cryptocurrency, such as altcoin, you may need to buy bitcoin first and then purchase altcoin. Some types don’t allow you to purchase with “normal” currency.
One thing to note is that you will pay a fee at these cryptocurrency exchanges to make a purchase. It’s very similar to fees you might pay at a brokerage.
You will then need to store your cryptocurrency in a digital wallet, which is a secure place that will handle your entire portfolio. You will need to purchase (although some are free) a software wallet, which will enable you to buy and sell it.
You could also opt to purchase a hardware wallet, which is similar to a USB drive. These are more secure since you have a physical device.
When you want to sell your investment, you need to just go back to the cryptocurrency exchange to do so.
Should I invest in cryptocurrency?
Whether you should invest in cryptocurrency or not depends a lot on your belief in it as a stable future form of currency and also on whether you can handle the potential large swings (both up and down) in its value.
As mentioned before, cryptocurrency can be very volatile, so you’ll want to make sure you understand that, as an investment, it’s not as stable as, say, government bonds.
If you are OK with risk, though, it could be a great way for you to invest because of the potential positives.
Ultimately, you need to know what your potential return on investment might be, and also how willing you are to lose the money you invested – or at least have it reduced in value substantially. That’s not that different from other types of investments, although cryptocurrency may be more volatile.
Another positive of investing in cryptocurrency is that you also don’t have to purchase an entire bitcoin, for example, as you could buy fractions of coins.
Like any investment, just make sure you understand the risks involved and decide for how risky you are willing to be.
Make a Sound Investment in Your Future
Cryptocurrency is undoubtedly one of the hottest-button topics in the investment world, and also one of the most misunderstood. It can make for a great way to invest and earn some money, in addition to being a solid alternate form of currency to buy and sell goods and/or services online.
As with any investment, you must understand both the risks and the potential benefits involved before diving headfirst into it.
Of course, some investments are safer than others, and if you want to secure your future, investing in your own small business to help it grow could be what you’re looking for.
One way to have enough cash to invest in your business would be to get a loan from Camino Financial. It’s a great way to get an affordable loan on good terms without having to provide a lot of information or hoops to jump through.
By using our online business loan calculator, you can figure out how much your loan would cost you, including the monthly payment and the total cost of the loan. Helping businesses make sound investments is just one way in which we live up to our motto of “No Business Left Behind.”