You can now buy almost anything with digital coins. From virtual real estate to vintage comic books, you can use digital tokens to buy practically anything. Even so, the market is filled with skepticism about the current boom in cryptocurrency investments. There are good reasons for that wariness. The value of almost all cryptocurrencies has soared this year, led by the shooting star that is bitcoin. The digital token started the way below but has since rocketed above $69,000 and pulled back. For many casual observers, it might appear as if anyone who got in early on these newfangled currencies stands to make a small fortune. But as we’ll see in this article, investing in these fledgling assets comes with plenty of risks and pitfalls.
What Is a Cryptocurrency?
A cryptocurrency is a digital or virtual asset designed to work as a medium of exchange. It uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. Most cryptocurrencies are decentralized systems based on blockchain technology, a distributed ledger maintained by a network of computers that cannot be altered or hacked. The first cryptocurrency to gain significant traction was bitcoin, which was created in 2009 by a person (or group) who went by the pseudonym Satoshi Nakamoto. While it’s still unclear who Nakamoto is, or where he is, his invention has since inspired countless imitators. Some of these coins have added functionality. For example, ether (the native token of the Ethereum platform) can also be used to create decentralized apps on the Ethereum network.
The Problem with Cryptocurrency Investments
While there aren’t many things that have gone up as much as cryptocurrencies in recent years, the underlying technologies are still very much in their infancy. There are now more than 1,300 different cryptocurrencies in existence. The vast majority of them are what are referred to as “altcoins,” or alternative coins, to bitcoin. This means that most of these digital coins are highly speculative and don’t have any real-world use cases yet. They’re also extremely volatile, making them unsuitable for long-term investments. For these reasons, it’s best to think of cryptocurrencies as short-term trading opportunities rather than long-term investments.
Why Are People Investing in Cryptocurrencies Anyway?
Cryptocurrency investors are betting on a very specific outcome — namely, that the underlying technology will catch on, and that the price of their token will increase as a result. This is obviously a risky bet, but it’s one that could pay off handsomely if the technology really catches on. For example, if blockchain technology is adopted by Wall Street as a way to speed up transaction settlement times and cut costs, the price of bitcoin could soar as demand for the token rises. This could prompt widespread adoption of the technology behind cryptocurrencies, both in the financial sector and in other industries. It could also prompt the creation of new cryptocurrencies.
How to Invest in Cryptocurrencies
If you decide to invest in cryptocurrencies, buy only what you can afford to lose. Since many of these digital tokens are extremely risky, investing in them is not for the faint of heart. Because cryptocurrencies are decentralized, virtual currencies don’t trade on traditional exchanges, like stocks, bonds, and commodities. Instead, you buy them through brokers or specialized digital exchanges that buy and sell these assets. There are now many companies that let you invest in bitcoin and other digital tokens. These “tokenized” investment funds pool money from many investors and buy a diversified portfolio of digital tokens. But make sure that any fund you invest in is fully regulated by a government financial regulator.
