When it comes to the future of currency, you’ve likely heard about various forms of cryptocurrencies, and you may feel like you’re missing out. Perhaps now is the time to diversify your investment portfolio and get some crypto into your digital wallet.
However, before you do that, it’s essential that you familiarize yourself with some of the key risks of investing in cryptocurrency. In this piece, we’ll not only define cryptocurrency and take a look at some of the most popular ones available, but we’ll also break down the highest risk factors. This way, you can rest easy knowing you’re making the most informed investing decisions possible.
What Is Cryptocurrency?
Cryptocurrency is a digital or virtual currency secured by cryptography. This security process makes it practically impossible to double-spend or counterfeit. In general, cryptocurrencies are not issued by any one central authority and they are run across a network of multiple computers. This decentralization makes cryptocurrencies essentially untouchable when it comes to government interference.
What Types of Cryptocurrencies Are Available?
When it comes to your investing in cryptocurrency, your options are more or less endless. Each year, new cryptocurrencies emerge on the market, providing investors with even more opportunities to diversify their portfolios. Here are some of the top traded cryptocurrencies you may want to consider as a starting point:
What Are the Biggest Risks?
Now that you understand the basics of cryptocurrencies, it’s time to explore the risks associated with investing in them. While there are several risks linked to any form of investment, we’ve rounded up our top two you need to be aware of.
Earlier, we mentioned that there is no central authority issuing and controlling cryptocurrencies. While that’s part of the appeal for many investors, it also creates one of the biggest risks. Since there is no single entity responsible for stabilizing cryptocurrencies, they are inherently volatile. You’ll likely see massive swings in the value of a cryptocurrency due to a number of factors beyond your control.
For example, back in 2018, Tesla CEO Elon Musk tweeted that Tesla would resume Bitcoin transactions when miners verifying transactions use more renewable energy. From that single tweet, Bitcoin spiked by 9.8% to $39,035.47, adding $3,492.71 to its prior close.
Another risky aspect about cryptocurrencies is their intangibility. While they are a digital asset, you can’t see or touch cryptocurrencies. The only reason it has value is because there are people trading and investing in it who say it has value. However, in reality, there are very limited tangible resources to back them up. If the market were to ever decide that cryptocurrency no longer has value, your investments would be invalidated. As a result, cryptocurrencies are an inherently high-risk form of investment.
If you’re hoping to add something new to your investment portfolio, cryptocurrencies could be a great option for you. Before investing, it’s important to remember these risks. By familiarizing yourself with these potential missteps, you’ll have a better idea of where your money is going and where it could potentially end up.