That means that many people didn’t understand what they were or that they could become your passive income through investing. These digital assets are already revolutionizing the way we do transactions online, but there’s still time to latch onto this new and thrilling financial opportunity.
Would you like to understand exactly what cryptocurrency is, how it works and who should invest? This complete guide on the world of crypto will help you get started and make the best financial decisions when it comes to online investments. Keep reading to understand everything you need to know before starting!
What is cryptocurrency?
When the first cryptocurrency was created way back in 2008 it came as a coin that didn’t depend on a central bank. You might have heard a little bit about Bitcoin, right? That is the very first cryptocurrency created and it’s been around for more than 10 years already.
For starters, cryptocurrencies are a type of digital only coin that is protected by cryptography. This means that they are extremely secure and can’t be double-spent. They use what we call blockchain technology to operate and confirm their validity. That is: a decentralized network of computers that enforce the coin’s value through a process known as mining.
This means that cryptos aren’t subject to governments or central authorities. While many saw that as an excuse for illegal transactions, others decided it was the perfect opportunity to invest. After all, there are no borders or limits to where you could get with them!
However, we must warn beginners that crypto investing is quite complex. If this is your first time working with them, it’s a good idea to read a bit further into this article.
How does cryptocurrency work?
There are two ways to buy one of the many digital coins out there: either mining them or acquiring them from cryptocurrency exchanges. They are common enough for investors to have no trouble finding where to buy them, but really rare in everyday use. Actually, most retail sites don’t accept bitcoin or similar currencies for their transactions.
That happens because few of them actually have the technology to use them. Mining cryptocurrencies, the way that these coins are normally “born”, uses a huge network of computers to solve puzzles. Each of them proves the authenticity of transactions on the network.
It’s efficient, but slow and energy-intensive. That’s why some new cryptocurrencies are investing in newer methods that save up on energy and happen more easily, avoiding the environmental damage that this causes.
There are many cryptocurrencies in the market right now, such as:
- Bitcoin;
- Ethereum;
- Cardano;
- Litecoin;
- Solana;
- Dogecoin;
- Stablecoins;
- Others.
Ethereum, for example, is the second most used cryptocurrency. You’ll find a lot of Bitcoins out there as well, but since it’s harder to mine, its value keeps increasing and making it harder to invest unless you started early.
How does cryptocurrency work as an investment?
Much like stock trading, cryptocurrency is a sorte of high-risk investment. We can say that because unlike other assets you might have, such as a home, crypto isn’t backed by anything physical. It fluctuates based on its own concepts, rather than on the economy of a country (like buying American Dollars would be) or a company’s well-being, which would be the case of stocks.
Most crypto-assets fluctuate a lot and because of many reasons, including:
- News on the media about the assets or people related to them;
- Public announcements;
- Actions of people who already hold large amounts of these assets, be it on social media or otherwise.
For an example, let’s say you buy a certain amount of cryptocurrencies backed by a celebrity. In case this same celebrity files for bankruptcy or goes public against the currency, you’ll have assets devalued. The good part is that events that could value your investments can also happen easily, but just as unpredictably.
The ups and downs of the cryptocurrency market
Cryptocurrency certainly isn’t an investment for beginners in the trade. You’ll have to know a lot about technology and the global economy to come out on top and, even with a lot of knowledge, results are sketchy at best. The truth is that crypto isn’t such an established market yet, so not many people have the ways to come out with guaranteed success.
We hear stories of people who earned a lot of money overnight and became rich just investing in Bitcoins or Ethereum. But don’t be fooled, you’ll need a lot of patience to repeat these tales on your own investment and we’ll explain why using the topic below. Now it’s time to understand the good and bad parts of the crypto world.
Main risks of this investment
The greatest risk when it comes to crypto investment is uncertainty. Even those who are completely immersed in the cryptocurrency world have trouble knowing what tomorrow might bring. But there’s an even greater and more immediate risk: crypto coins and currencies are more vulnerable to cyberattacks.
In 2022 the crypto industry started to grow without much control, which also came with a rise in cyberattacks and hacking. Considering that these currencies are uncentralized and most transactions happen online, fraud is also on the rise. Many investors end up with their crypto wallets stolen when their identity and personal info is stolen.
There are a few ways to store these cryptocurrencies, but most investors use a centralized exchange. This also leaves the assets vulnerable to government actions that could end up freezing them and blocking access from investors.
Pros of investing in cryptos
Some people are investing in crypto in the firm belief that these online coins will soon become a type of global currency. We can’t deny that many big tech companies are already trading in crypto, but it isn’t globally used just yet.
The industry is growing stronger slowly, so if you’re thinking about investment it’s important to be aware that it’ll be a long-term one. So we recommend you forget the stories about people who bought a few coins that earned a lot of value overnight.
Let’s consider some of the pros below:
- It’s anonymous to invest, so a great choice for those who want to keep their investments private;
- Blockchain technology makes cryptocurrency info much more transparent, despite not revealing its user’s names and personal information;
- Central banks don’t issue crypto and not directly related to a federal government, which means countries’ economies don’t have such a great influence on them.
You can also diversify your investments quite a lot since there are many options of cryptocurrencies and new ones appear daily. Just remember that there isn’t a guarantee that these coins will actually gain value. Many of the new cryptocurrencies don’t actually blow up the same way as Bitcoin and Ethereum did in the past few years.
Is cryptocurrency safe against inflation?
Most cryptocurrencies, such as Bitcoin, aren’t directly connected to a central bank. This means that they aren’t influenced by inflation the same way as the dollar does, but still suffer a lot of fluctuation. The Bitcoin, for example, goes through daily changes in its value both for good and bad.
Experts don’t recommend you use crypto as your protection against inflation since its changes can be even worse. When you decide to invest in these online coins you must remember that you might lose all of it, rather than use it as your protection.
Understand how taxes work on cryptos
Let’s say you decided to invest in cryptocurrency, that’s great! But usually the decision comes followed by a question: do you have to pay taxes for it? Well, you do but not the way you’re imagining right now. At least in the US Bitcoin and other currencies are treated as property.
So transactions are taxable by the IRS whenever an event, such as buying or selling, occurs. Investors are the ones that must track and report events, so you might need the help of a tax advisor if you’re thinking about going down this path.
Who really should invest in cryptocurrency?
Are you excited about starting a brand new investment with cryptocurrency? Before you get the credit card out and start purchasing Bitcoins, we must warn you: this isn’t for everyone. Some key characteristics of crypto investors are:
- They use crypto as a long-term investment, getting rich overnight is a rarity in the market and should become even harder as it expands;
- Use disposable income to invest. It’s important to be prepared to lose everything when it comes to crypto. A coin might get a lot of value over the years, but it could also fall flat and never go beyond its current price;
- Has a high risk profile. And don’t forget that crypto is an incredibly risky market. Consider the lack of regulations by the federal governments as well as its volatility. As things evolve, investors could see huge daily fluctuations.
If you’re looking for stable passive income, the crypto is certainly not for you. Don’t think about making money fast by hopping onto the wagon of a newly released coin either. After all, you can’t know for sure if it’ll work out in the next few years. Remember that Bitcoin has been around for more than a decade.
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