Cryptocurrency has become popular with a small segment of the global population, but most retail investors still aren’t making cryptocurrency investments. Many people wonder: “How do I invest in cryptocurrency?”
The crypto markets are a little different from the established financial system. While there are some centralized cryptocurrency exchanges, one of the founding principals of Bitcoin was decentralized holdings. This means that instead of a bank or broker holding your digital assets, crypto owners have direct control over their tokens.
Another question that comes up frequently is: ”Why invest in crypto?”
There are many reasons to think that cryptos aren’t just a passing fad. The fact that Facebook is looking into how it can jump on the crypto bandwagon is reason enough to learn more about the sector as a whole.
Big gains have been made in cryptos over the last few years, but cryptocurrency investing isn’t as simple as buying some shares in your favorite company.
What is Cryptocurrency?
When a person talks about owning Bitcoin (BTC), Ethereum (ETH), or any of the digital tokens we call cryptos, they are really talking about having a private key that controls a token on a blockchain.
BTC and ETH are blockchains that are stored on public computers (called ‘nodes’), which record transactions.
Ownership of cryptos means that you can send your tokens to another person, who then becomes the ‘owner’ of the token. This is more or less the same way that fiat currency works, but with cryptos there is no banking system.
Why Should I invest in Cryptocurrency?
One of the biggest reasons why cryptocurrency might be a good investment is the fact that it has a history of rising fast, and making established assets like stocks look like terrible investments by comparison.
Today, BTC is trading above the $8,000 USD level, which is 800% higher than where it started in 2017. By comparison, the S&P 500’s 30% return over the same time period looks positively anemic. Of course, BTC prices went as high as $19,500 USD, and as low as $2,500 USD in the time between January 1, 2017 and right now.
BTC isn’t the only token that has created amazing returns for both cryptocurrency investors and traders. Ehtereum, Ripple, Litecoin, and a number of other tokens have presented savvy investors with numerous opportunities over the last two years.
Another reason why cryptocurrency has become popular is that it can’t be controlled by governments or central banks. People in nations with unstable currencies, like Argentina or Venezuela, have turned to cryptocurrency as both a means of preserving buying power and making transactions.
In a sense, cryptos are like gold or silver. They simply rely on the network to keep operating and don’t require that a central authority approves of their use.
Cryptocurrency Investment Risk
Like any new technology, cryptos are a long way from perfect.
Some early BTC investors lost their fortune when a computer hard drive went dead, and their BTC disappeared forever. To be sure, custody is a major issue for cryptocurrency investment, and there are new solutions that are far safer than the storage options that didn’t exist in 2014.
The market volatility in the cryptocurrency space is also a consideration. A rise or fall of 10% in a day is normal in the major tokens, and often there is little news driving moves that would probably catch the eye of regulators in the equity markets.
Needless to say, if an investor wants to make cryptocurrency investments, they should be ready to see the value of their holdings jump violently both higher and lower as the market churns.
Hacking and counterparty risks are also worth understanding in the cryptocurrency markets.
Hackers understand how little oversight there is in the crypto markets, and routinely hack both digital wallets and crypto exchanges. There is no central authority to help investors recoup lost funds, which is another major custody issue with cryptocurrency investment.
Cryptocurrency exchanges are a gray area. Some are well run and regulated, and others may be very unsafe, with little in the way of risk management.
When an investors sends their tokens to an exchange, they are gone until the exchange sends them back. Investors in the ill-fated Mt. Gox found out how problematic this can be, and most are still waiting for their funds to be returned to them.