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Is it a Good Idea to Invest in Cryptocurrency?

Tue Jan 31 2023
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Many people are taking an interest in cryptocurrency these days. When considering investing in cryptocurrency, you may consider purchasing and holding one or more crypto coins. A lot has been associated with the term as it continues to grow massively, including pay-to-win games, trading, crypto assets such as artwork commonly referred to as NFTs (Non-Fungible Tokens), and so on. But what exactly are these, and why are so many people obsessed with cryptocurrency nowadays? Are you thinking about investing in cryptocurrency, digital coins, or tokens? Before diving in, it is critical to study and understand cryptocurrency more thoroughly.

What is cryptocurrency?

Cryptocurrency. It's the hottest buzzword in the investing world right now, and it has only grown in popularity in the twenty-first century. But what exactly is cryptocurrency? Do you know what Bitcoin, Dogecoin, and Ethereum are? No, they aren't just toys with made-up names. They are types of cryptocurrencies or digital money. There are a lot of cryptocurrencies that have been developed in the past years, and they're everywhere these days.

Cryptocurrency, also known as crypto-currency or crypto, is any type of digital or virtual currency that uses cryptography to secure transactions. It got its name primarily because it employs encryption in all of its system's processes and transactions.

Cryptocurrencies lack a central issuing or regulating authority and instead rely on a decentralized system to record transactions and issue new units

Cryptocurrency payments exist solely as digital entries in an online database describing specific transactions, rather than as physical money carried around and exchanged in the real world. It is a digital payment system that does not rely on banks for transaction verification. It's a peer-to-peer payment system that allows anyone, anywhere to send and receive money. Cryptocurrencies are kept in digital wallets, and transactions involving cryptocurrency funds are recorded on a public ledger.

Bitcoin was the first cryptocurrency, and it is still the most well-known today. Much of the interest in cryptocurrencies is speculative, with speculators occasionally driving prices skyward. As of 2022, there were over 9,000 other cryptocurrencies in the market, with over 70 of these having a market capitalization greater than $1 billion.

How does cryptocurrency work?

Cryptocurrencies are based on blockchain, a distributed public ledger that keeps track of all transactions that are updated and held by currency holders. One common way to acquire a crypto coin/token is through crypto mining. Crypto mining is a process that uses computer power to solve complex mathematical problems that generate coins to create cryptocurrency units. Users can also purchase the currencies from brokers and use cryptographic wallets to store and spend them.

You don't own anything tangible if you own cryptocurrency. What you have is a key that allows you to transfer a record or a unit of measurement from one person to another without the assistance of a trusted third party.

Although Bitcoin has been around since 2009, cryptocurrencies and blockchain technology applications are still emerging in our economy, with more use cases expected in the future. The technology is seen as potentially something that could eventually be used to trade bonds, stocks, and other financial assets.

What are the different ways to invest in cryptocurrency?

When considering investing in cryptocurrency, you may consider purchasing and holding one or more crypto coins. Buying cryptocurrency directly is probably the most common way to add crypto exposure to your portfolio, but there are a few different ways to invest in cryptocurrency:

Buy cryptocurrency directly: You have the option of directly purchasing and storing one or more cryptocurrencies. You may choose the more established digital currencies, such as Ethereum and Bitcoin, or you may go for virtually unknown coins that are currently growing and may offer upside potential but may also never take off.

Invest in cryptocurrency companies: You might also want to consider investing in crypto companies that will manage your assets for you. These companies are investing in cryptocurrency for a variety of reasons. Large corporations see the value of investing in cryptocurrency, and it’s one way for them to diversify their portfolios and keep a reserve in crypto assets. Companies are seeing an opportunity to cater to a larger customer base as more people invest in Bitcoin, Ethereum, and other popular crypto tokens.

Become a crypto miner or validator: Mining cryptocurrency or acting as a validator in a crypto network is perhaps the most direct way to invest in it. Cryptocurrency miners and validators earn cryptocurrency rewards, which they can either keep or exchange for another currency.

How can you buy cryptocurrency from an exchange?

You can use a cryptocurrency exchange platform to invest in cryptocurrency directly. Here's how to purchase cryptocurrency via an exchange platform:

  1. Decide which cryptocurrency exchange to use. A reputable, well-known exchange platform with a large selection of currencies is your best bet.

  2. Open an account with a cryptocurrency exchange. To complete the registration process, you must provide personal information and verify your identity.

  3. Deposit fiat money into your account. Before you can purchase any cryptocurrency, you must first fund your exchange account with another currency, such as US dollars.

  4. Choose a cryptocurrency to purchase. You have the option of investing in one or more cryptocurrencies. Investigate your options so you can make an informed decision.

  5. Place a buy order for the cryptocurrency of your choice. Follow the exchange's instructions to submit and complete a buy order for one or more cryptocurrencies.

  6. Keep your cryptocurrency safe in a digital wallet. After you complete your purchase, the information you need to access your cryptocurrency is stored in a digital wallet. The cryptocurrency exchange or an independent wallet provider can host that crypto wallet.

What are the pros and cons of investing in cryptocurrency?

The journey of investing can be seen as a double-edged sword–to get the highest reward means facing the highest risk. Hence, it is very important to also weigh the pros and cons when deciding whether or not to invest in crypto.

Pros:

Security

Investing in cryptocurrencies comes with the assurance that assets are protected by a high security system. Other people cannot sign transactions or access your funds unless they have access to your crypto wallet's private key. However, if you lose your private key, you will be unable to recover your funds. Furthermore, the blockchain system's nature and the distributed network of computers verifying transactions adds more layers of security to transactions.

The network becomes more secure as computing power is added to it. Any network attack or attempt to modify the blockchain would necessitate sufficient computing power to confirm multiple blocks before the rest of the network could verify the ledger's accuracy. That type of attack is prohibitively expensive for popular blockchains like Bitcoin or Ethereum. Hacked cryptocurrency accounts are typically linked to lax security at a centralized exchange. It is far more secure to keep your crypto assets in your own digital wallet than on an exchange.

Transaction costs

When compared to other financial services, the cost of transacting in cryptocurrency is relatively low. A domestic wire transfer, for example, could range around $20 or more. International money transfers can be even more expensive. On the other hand, transactions involving cryptocurrencies are typically less expensive. However, you should be aware that increased demand on the blockchain may result in higher transaction costs. Even on the busiest blockchains, median transaction fees remain lower than wire transfer fees.

Transparency

All cryptocurrency transactions are recorded on the publicly available blockchain ledger. Anyone can use tools to look up transaction data, such as where, when, and how much cryptocurrency someone sent from a wallet address. Anyone can see how much cryptocurrency is stored in a wallet. This level of transparency has the potential to reduce fraudulent transactions. Someone can demonstrate that they sent money and that it was received, or that they have the funds available for a transaction.

Privacy

Because you do not need to open an account with a financial institution to use cryptocurrency, you can keep your transactions private. Your transactions have an identifier on the blockchain or your wallet address, but they contain no specific information about you.

In many cases, this level of privacy is desirable (both innocent and illicit). However, if a wallet address is linked to an identity, all transaction data is made public. To enhance the privacy of cryptocurrency, there are several ways to further mask transactions as well as several coins that are privacy-focused.

Diversification

Cryptocurrency can provide investors with an alternative to traditional financial assets such as stocks and bonds. While there is limited historical data on the price action of the crypto markets in comparison to stocks or bonds, the prices appear to be uncorrelated with other markets so far. As a result, they can be a good way to diversify your portfolio.

You can generate more consistent returns by combining assets with low price correlation. If your stock portfolio falls, your cryptocurrency asset may rise, and vice versa. Still, crypto is generally very volatile, and if your asset allocation is too heavy on crypto, it may end up increasing the volatility of your overall portfolio.

Inflation protection

Many people believe that Bitcoin and other cryptocurrencies provide inflation protection. The total number of coins that will ever be minted in Bitcoin is strictly limited. As the money supply expands faster than the Bitcoin supply expands, the price of Bitcoin should rise. There are numerous other cryptocurrencies that use supply-control mechanisms and can act as an inflation hedge.

High risk and the potential for high rewards

There are over 10,000 cryptocurrencies on the market today, each with its own unique set of characteristics. However, all cryptocurrencies share a few characteristics, such as their proclivity for sudden price increases (and decreases). Prices are primarily determined by the supply of coins from miners and the demand for them from buyers, and these supply-demand dynamics can result in substantial profits. From July 2021 to December 2021, the price of Ethereum, for example, nearly doubled—a huge payday for investors who got in early.

Cons

It takes time and effort to understand cryptocurrency.

It can take some time to understand cryptocurrency. If you aren't a digital native, the concept of cryptocurrency (let alone the blockchain) can feel foreign. And attempting to invest in something you don't fully understand is a risk in and of itself. There are numerous online resources to assist you, but you will still need to devote some time to truly understand the benefits and drawbacks of investing in cryptocurrency.

Newcomers to cryptocurrency are vulnerable to security risks. Cryptocurrencies may not have the risks associated with using central intermediaries, but that doesn't mean they're completely secure. As a cryptocurrency owner, you risk losing the private key that allows you to access your coins—and thus all of your holdings. Then there's hacking, phishing, and all the other malicious attempts to gain control. This is something that seasoned investors are aware of, but newer investors are more vulnerable to these types of traps.

Cryptocurrency has significant scalability issues.

You could be forgiven for thinking that digital currencies operate at breakneck speed—and, to some extent, they do. However, at some point, they run into major issues that make large-scale implementation difficult. Cryptocurrency providers acknowledge this is a problem, with Ethereum developers claiming that the blockchain has reached "certain capacity limitations" that slow the rate at which transactions can be processed. This can be a frustrating experience for transaction participants, let alone the potential financial losses.

Cryptocurrency is a high-risk investment.

While the price of a cryptocurrency can skyrocket to dizzying heights, it can also plummet to terrifying lows in an instant. So, if you're looking for consistent returns, this may not be the best bet. The cryptocurrency market is built on speculation, and its small size makes it more vulnerable to price fluctuations. This, in turn, can have a negative impact on the value of coins, which is one of the major disadvantages of cryptocurrency.

Cryptocurrencies have yet to be proven as a long-term investment.

While cryptocurrencies have grown in popularity, it's important to remember that they've only been around for a little more than a decade. The concept only became widely known after the publication of a white paper on Bitcoin in 2008. Stock markets, on the other hand, can trace their roots back centuries. For example, the London Stock Exchange was established in 1801. For millennia, gold has been a reliable store of value. But what about cryptocurrencies? Nobody knows what will happen to cryptocurrencies in the future, and as an investor, you must be brave to venture into these uncharted waters.

Conclusion

For new investors, cryptocurrency can be a minefield. It's a topic that takes some getting used to, from unfamiliar terminology to complex technology. Trading cryptocurrencies, like everything else, has advantages and disadvantages, and so it is critical to educate yourself first—and Plentina blogs can help. We can show you all the benefits and drawbacks of cryptocurrency, whether you want to use it to pay for everyday necessities or to diversify your investment portfolio.

Moreover, it is important to bear in mind that there is no single cryptocurrency that is significantly better than the others. Although it is one straightforward approach to select the market leader, which, in this case, is Bitcoin, as it is the original cryptocurrency as well as the one with the most information, it still all comes down to personal preference. There are a few things to keep an eye out for. Consider your personal risk tolerance–can you afford to lose a significant portion of your investment if the value of your chosen coin falls? Do you intend to use the coin solely to generate returns, or do you also intend to use it to pay for things? Is it only about the money, or do you want to invest in a coin that will have a broader social or environmental impact? These are just some of the important questions and considerations that one must be aware of when deciding whether or not to invest and delve into the realm of cryptocurrency.

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