When it comes to your investment options, there are numerous choices as to where you can allocate your spare funds. Investment types include stocks, bonds, real estate, options and derivatives, cryptocurrency and funds. Depending on your appetite for risk some investment types will appeal more than others.
With all the hype surrounding cryptocurrencies in recent years, many people have jumped onto the bandwagon without fully understanding the nature of this investment. If you are looking to diversify your portfolio and venture into the relatively new field of cryptocurrency, then read on for all the information you need to invest wisely.
What Is Cryptocurrency?
Cryptocurrency is a digital form of currency that allows you to buy goods and services or which you can trade for a profit. Cryptography ensures the security of transactions and its decentralized structure allows crypto to operate beyond the control of governments and central authorities.
Unlike physical money, cryptocurrency is not linked to anything of value such as gold or silver and, therefore, has no intrinsic value. This is also why there is such volatility in its value.
This electronic form of money uses a technology known as ‘blockchain’. Blockchain is an online ledger that records every transaction ever executed and as it is constantly reviewed by a network of computers, it makes it very difficult to hack.
Types of Cryptocurrency
There are currently more than 6,000 types of cryptocurrency with the following five being some of the most popular and widely traded:
· Bitcoin (BTC): the original and most popular cryptocurrency, Bitcoin was created in 2009 by Satoshi Nakamoto who capped the number of bitcoin to 21 million, making the supply of Bitcoin scarce. It first started trading in July 2010, at around $0.0008 to $0.08 per coin. Today it is worth around $60,000 per coin. Since its creation, Bitcoin has branched off into many other products, such as Bitcoin Cash (BCH) and Bitcoin SV (BSV).
· Ethereum (ETH): the second-largest cryptocurrency , Ethereum was created in 2014 by Vitalik Buterin and Gavin Wood. Ethereum is the most commonly used blockchain platform worldwide and it has its own cryptocurrency known as Ether. Unlike Bitcoin, Ether’s supply is unlimited, however, a maximum amount of 18 million Ether is issued each year.
· Litecoin (LTC): created by Charlie Lee in 2009, shortly after Bitcoin, Litecoin is known for its faster transactional time. With new blocks generated every 2.5 minutes, this makes it four times faster than Bitcoin which creates blocks approximately every 10 minutes. Similar to Bitcoin, Litecoin’s supply is capped at 84 million Litecoin tokens.
· Cardano: Founded in 2015 by Charles Hoskinson, co-founder of Ethereum, Cardano’s cryptocurrency is a digital coin called ADA. It’s supply is limited to 45 billion coins.
· Tether (USDT): Unlike other cryptocurrencies such as Bitcoin or Litecoin, which are solely virtual in nature. Tether is known as a stablecoin as it is backed by the US Dollar, Euro, and the Chinese Yuan in an effort to keep its valuations free from extreme volatility.
Cryptocurrency accounting can be confusing so it is best to consult a specialist business accounting firm that can advise you on such matters if you do decide to invest.
Is Cryptocurrency a Safe Investment?
There is no doubt that cryptocurrencies offer the potential for remarkable growth, but compared to other options such as investing in stocks, they also come with considerable risk. Some of the main risks posed by cryptocurrency are:
· Cryptocurrency exchanges are vulnerable to being hacked and security breaches have resulted in significant losses for investors who have had their cryptocurrencies stolen. In February 2014, Japan-based cryptocurrency exchange Mt Gov was targeted by a hacker who stole a large amount of Bitcoin from its customers as well as the company itself. This amounted to roughly $460 million at the time.
· The fact that the cryptocurrency industry is unregulated and operates without any government oversight may leave it open to regulation in the future, which cracks down on the entire industry. This is especially the case if governments form the view that cryptocurrencies are a threat to financial stability.
· Cryptocurrency doesn’t physically exist, unlike other tangible assets such as gold, silver or commodities. It has no intrinsic value of its own, only its trading value which makes cryptocurrency a highly speculative investment.
· Cryptocurrencies are one of the most volatile assets and prices can move dramatically in seconds. Unlike sophisticated investors who have a strong understanding of the market and trends, new investors lack the skills and technology needed and may end up being wiped out by the volatility. In November 2013, Bitcoin went from $3,000 to an all-time high of $23,770.85 on December 17. Conversely, after the World Health Organization announced the Coronavirus pandemic on March 12, 2020, termed ‘Black Thursday’, the value of Bitcoin plunged 40%, from $7,969.90 to $4,776.59.
With the information in this article, you can now make an informed decision as to whether cryptocurrency should form part of your investment strategy.