Cryptocurrency sounds like a foreign language, but it’s just a digital currency you can use to buy goods or services or invest in. Most people trade crypto for profits, but before you do, it’s important to understand how they work.
While we don’t recommend investing just in cryptocurrency, there could be great value in diversifying your portfolio with this latest asset. Here’s everything you need to know before you get started.
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What Is Cryptocurrency?
Cryptocurrency is digital money that eliminates the middleman (aka banks, credit card companies, etc.). Cryptocurrency uses blockchain technology, which is decentralized, unlike our traditional monetary system. In other words, we don’t need one entity confirming transactions, any and every computer can confirm them.
The original cryptocurrency was Bitcoin, but today there are more than 6,000 currencies. When you invest in cryptocurrency you’re not buying money, but rather investing in the technology behind it. The transactions are encrypted and no one can read them.
How Do You Buy Cryptocurrency?
To buy crypto, you’ll need a digital ‘wallet,’ similar to a bank account. Just like you store your money in your bank account, you store crypto in your wallet. Before you choose a wallet, make sure it’s secure. Unlike money in the bank, crypto deposits aren’t secure - if someone hacks your account, you lose the money.
Before you choose a wallet, make sure it can hold your specific cryptocurrency. For example, if you want to invest in Bitcoin, you need a wallet that can store Bitcoin. You have hundreds of options today.
Buying Cryptocurrency at Exchanges
The easiest way for beginners to buy crypto is at a cryptocurrency exchange. These are just online websites that work as an exchange. You turn in your currency (dollars) for crypto. Typically, you fund your crypto exchange with an electronic bank transfer, credit card, or PayPal.
Today there are many exchanges, so before you register for one, know what to look for including:
- Fees - Like any financial transaction, look at the fees to see what they charge as that takes away from your profits
- Security - Research this heavily because like we mentioned above cryptocurrency isn’t guaranteed, if you’re hacked, you lose the money
- Verification time - Some exchanges verify you right away and others take a bit longer
- Types of crypto - Each exchange offers different types of crypto, know what you want to invest in, and see which exchanges offer it
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Cryptocurrency Exchange Options
You have many cryptocurrency exchange options, but here are the most common.
Coinbase is one of the larger exchanges. They are one of the most secure platforms on the internet today and include the following features to ensure your security:
- Store your assets in offline storage to lower the risk of hacking
- Offers insurance coverage for your investments
- Always implementing new security measures
Coinbase supports 100+ countries and has 43 million users. It takes just minutes to get set up and you can trade the most popular cryptocurrencies available. Coinbase has a mobile app and offers the option to set up recurring buys so you slowly invest your money rather than buying it all at once.
BlockFi is the perfect exchange for investors of any level. Whether you’ve never invested in crypto or you're an expert, they have a level of support for everyone. BlockFi takes security seriously, with a best-in-class compliance program that ensures your assets are safe.
It takes just minutes to open an account and BlockFi offers the following features:
- Pays interest on your crypto, up to 8.6% APY. The interest accrues daily and BlockFi pays you monthly.
- You can make immediate trades and start earning interest right away.
- You can borrow against your crypto investments with a 4.5% APR.
- BlockFi is transparent with its fees.
It’s quick and easy to open an account. You can fund it with US dollars, crypto, or stablecoins. BlockFi is backed by some of the biggest names in the industry and is a great starting point for any investor.
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Is Cryptocurrency Safe?
Cryptocurrency is one of the hottest commodities today, but it has its risks. With a higher likelihood of hacking, and criminal activity, it’s important to only work with legit exchanges that take security seriously.
Fraud is also a big risk, so make sure you know the exchange you’re working with and that you aren’t being taken advantage of by a phishing scam.
What Are the Risks?
Like any investment, there are serious risks you take with cryptocurrency including:
- Volatility - All investments are volatile, but crypto has a higher risk of incredible increases and decreases in value. Diversifying your investments is the best way to avoid this risk.
- Errors - Since there is very little human involvement in cryptocurrency, there is the risk of glitches or errors that may get overlooked since there isn’t any regulation.
- Hacking - As discussed above, there is a large risk of hacking or other cybersecurity risks that could put your investment at risk
- Tax issues - Tax regulations aren’t clear for cryptocurrencies quite yet and depending on the country you trade, the regulations could differ causing more complications.
Is Crypto Legal?
In the United States, cryptocurrency is legal. In certain other countries, including China, however, it has been banned. Like any investments, working with a licensed advisor will ensure that you choose lucrative, legal, and attractive investments so you don’t get taken by a scam or invest in something illegal.
Should You Trade Crypto?
Cryptocurrency isn’t a sure thing, no matter how big of a deal someone makes of it. Yes, there can be profits, but there can be profits in any investment today. The key is to do your research and know what you’re investing in - don’t just operate on a whim based on the buzz around cryptocurrency.
Find a reputable exchange and know what you’re investing in when you choose your currency. Today there are more options than ever, but there are just as many hackers and fraudulent exchanges out there. Proceed with caution and you could diversify your portfolio with one of the hottest assets available today.