In the complex world of finance, few investments are as exciting as cryptocurrency. Cryptocurrency is a disruptive new type of currency that has speculators and investors moving quickly to snap up digital “coins.” Fortunes are being made — and lost — in the fast-moving world of cryptocurrency. For individual investors, it’s an enticing but confusing venture. Should you invest in cryptocurrency? How can you do so without exposing yourself to too much risk? Here’s what you need to know about making sensible individual investments in cryptocurrency.
The basics: what is cryptocurrency?
You should never invest in something that you don’t understand, so let’s start with the basics. What is cryptocurrency?
Cryptocurrency is digital currency. That means that it’s designed to be spent and saved like U.S. dollars, Euros, U.K. pounds, and other currencies. But, unlike most other currencies, cryptocurrencies are not backed by any world government. That adds a bit to the risk, but it is also part of cryptocurrency’s potential. With no big government backing, cryptocurrency has a certain appeal to privacy-minded people and those who worry about governments’ stability.
Cryptocurrency is made possible through blockchain technology. A blockchain is a secure way of storing data. Cryptocurrencies use the blockchain to record transactions and securely track who owns what coins in a given cryptocurrency. Bitcoin, Monero, and other major cryptocurrencies all use blockchain technology. Before the blockchain was an option, digital currencies were prone to attacks from hackers and were not viewed as practical. But now, with blockchain technology in play, the future for digital currencies is looking very bright indeed, which is why there has been such a rush to invest.
How to invest in cryptocurrency
Cryptocurrency is not like other currencies. Cryptocurrencies are regulated and taxed as properties that are bought and sold rather than currencies that are just “exchanged.” Essentially, when you buy cryptocurrency, you’re just buying a possession; you may later be able to sell it, at which point you’ll pay capital gains tax.
So investing in cryptocurrency is as simple as “buying” it — exchanging another currency, like U.S. dollars, for cryptocurrency. Unlike many other currencies, the exchange rates (or “prices”) of cryptocurrency can move very fast. It’s an exciting but risky market, so you’ll want to make sure you have all the knowledge you need before you get involved. Track prices carefully on cryptocurrency news and ticker sites. A good site will tell you the price of Monero or the price of Bitcoin up to the minute.
You’ll need a cryptocurrency “wallet” to invest in cryptocurrency. When you get your cryptocurrency, it will go into that digital wallet, so be sure to keep your wallet and your cryptocurrency secure.
Sensible investing: building the right portfolio
So should you invest in cryptocurrency? Absolutely. There is a ton of potential for growth. Just make sure that your cryptocurrency investments are part of a sensible overall investment portfolio.
A good investment portfolio should feature diverse investments. Cryptocurrency holds are certainly a smart way to add some diversity, but you’ll need other holdings, too. You’ll want some “safe” blue-chip stocks, some bonds, and other investments. Keep an emergency fund in cash and then allocate your investment funds in a way that gives you holdings in both high- and low-growth areas. The low risk, low growth investments are your safety net, while the riskier holdings give you the chance to grow wealth faster.
You can also diversify your holdings within cryptocurrency. Some cryptocurrencies seem to have brighter futures than others right now; those represent the safest investments, but you can and should spread your holdings around a little bit. Don’t invest more than you are willing to lose, but do cover your bases and pick cryptocurrencies that look like winners.
Cryptocurrencies can be a powerful part of a balanced investment portfolio. Use your common sense or rely on a financial advisor for help, and build a secure financial future for yourself through cryptocurrencies and other investments.
