Cryptocurrencies are digital assets people use as investments and for purchases online. You exchange real currency, like dollars, to purchase “coins” or “tokens” of a given cryptocurrency. There are many kinds of cryptocurrencies. Bitcoin is the most famous, but Ether, Bitcoin Cash, Litecoin, and Ripple are a few others. All sorts of big tech and finance companies want a slice of crypto pie. Even Facebook has created a cryptocurrency called Libra.
The word cryptography means the art of writing or solving codes. (Sounds like the setup of an Indiana Jones movie, doesn’t it?) Each “coin” is a unique line of code. Cryptocurrencies cannot be duplicated, which makes them easy to track and identify as they’re traded.
You’ve probably heard of people making (or losing!) hundreds of thousands of dollars by investing in cryptocurrencies. It feels like a modern-day gold rush. But cryptocurrencies have actually been around for about 10 years. The earliest cryptocurrency was Bitcoin, created in 2009 by an unknown person who goes by the name Satoshi Nakamoto.
Cryptocurrencies are exchanged from person to person on the web without a middleman, like a bank or government. It’s like the wild, wild west of the digital world. There’s no marshal to uphold the law. They are decentralized: No government or bank controls how they’re produced, what their value is, or how they’re exchanged.
As a result, cryptocurrencies are worth whatever people are willing to pay or exchange for them. Cryptocurrencies operate on what is called blockchain technology. A blockchain is like a really long receipt that keeps growing with each exchange. It’s a public record of all of the transactions that have ever happened in a given cryptocurrency.
At this point, most people still see cryptocurrencies as an investment. But cryptocurrency spending could become popular as these currencies gain trust. There are online retailers, such as overstock.com, who accept cryptocurrencies. And of course, any two individuals who value the tokens can exchange them for goods or services.
4 THINGS TO KNOW BEFORE INVESTING IN CRYPTOCURRENCY
Cryptocurrencies are volatile. The value of cryptocurrencies goes through extreme ups and downs. In 2017, the value of Bitcoin swung between $900 and $20,000!2 Someone sneezes and the price drops! Investing in cryptocurrency is risky, to say the least. Of course, all investing carries a degree of risk. But you should always avoid unnecessary risks, especially when it comes to your hard-earned money. Don’t play poker with your financial future.
There are lots of unknowns. There’s still a lot that needs to be ironed out with how cryptocurrencies work. Think about it: Nobody even knows who the founder of Bitcoin is! Relatively speaking, only a small percentage of people in the world understand the system and know how to operate it. Ignorance makes you vulnerable. I always advise people that if you can’t explain your investments to a 10-year-old, you have no business investing in them to begin with. You’re setting yourself up to do something stupid.
Cryptocurrencies can be used for fraudulent activity. People who want to remain anonymous and avoid regulation from banks or the government will use cryptocurrencies to make shady deals on the black market. Money laundering is also a problem in the crypto world. Now hear me on this: I’m not saying that everyone who uses cryptocurrency is a bad person. But I am saying that if someone wants to commit criminal activity and avoid being tracked, the crypto world is an ideal place for them.
4. Cryptocurrencies have an unproven rate of return. Trading in cryptocurrency is like gambling. Because it’s exchanged peer to peer without any tie to regulatory standards, there’s no pattern to the rise and fall of its value. You can’t predict changes or calculate returns like you can with growth stock mutual funds. There just isn’t enough data, or enough credibility, to create a long-term investing plan based in cryptocurrency.
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