Cryptocurrency is a form of digital currency that lets you make online payments to other people or businesses without having to go through a third-party like a bank. Records of these transactions are stored in a sequence of data blocks called a blockchain, which is stored and duplicated on thousands of computers around the world; this is how the system remains relatively accountable and transparent.
There are currently about 1,500 types of cryptocurrency, including Bitcoin, Ethereum, Ripple, and Litecoin. You can buy the coins in a variety of ways, including paying cash for them on an exchange like Coinbase; providing goods or services in exchange for the currency; or purchasing them from a Bitcoin ATM. After you’ve bought cryptocurrency, you store them in an “online wallet” or on an external hard drive, cold storage.
Initial Coin Offerings (or ICOs), which involve an investor purchasing cryptocurrency coins that aren’t part of a registered offering, but that provide the promise of a future stake in a startup venture. In these cases, the startups create their own “coins” to sell to investors.
Cryptocurrency sounds like it is super high-tech, but digital currency has actually been around, in one form or another, for years. Loyalty programs like airline frequent flier miles, hotel points, and credit card points are all forms of digital currency. The benefits you receive from these programs are not in dollars, but in the company’s self-created currency. So this is something a lot of us are familiar with already.
Some people have made really good money investing in cryptocurrency, present company included. However, one must be careful with such an undertaking. When Bitcoin launched in 2010, the price of one coin was $0.01. In December of 2017, that same coin was worth around $20,000.
The value of Bitcoin rose more than 1,000% in 2017 alone. With those kinds of returns, you’d think we’d all want to get in on the game, right? But by August of 2018, a single Bitcoin was back down to $6,000. Which brings me to one of the things I want to stress most: Cryptocurrency has been extremely volatile.
Warren Buffet, the CEO of Berkshire Hathaway and a highly respected investment guru, has said that he won’t touch Bitcoin. He believes that its dramatic rise and fall has been driven mostly by supply and demand, not because the currency has any inherent value. In other words, he views cryptocurrency as speculation, not an investment.
The distinction is important to understand. Investing involves taking a calculated risk in order to achieve an expected return based on the price and quality of what something’s worth today. Speculating, on the other hand, means buying something regardless of its value to attempt to make a profit by later selling it to someone else for a higher price.
Trading in cryptocurrency is largely unregulated. The coins are not backed by a government or a central bank, like the U.S. dollar is. And the U.S. Securities and Exchange Commission doesn’t oversee the buying and selling of this kind of currency.
In addition, even though cryptocurrencies have been designed to be theft-proof because of the blockchain sequence, there’s also a chance of fraud and cybercrime. In June of 2011, for example, the Japan-based Mt. Gox (which was then the largest Bitcoin exchange) experienced a security breach in which $450 million worth of Bitcoin was stolen. In December of 2017, the Slovenian cryptocurrency exchange, NiceHash, was hacked for a loss of $64 million.
In the case of ICOs, there’s substantially less investor protection than in traditional securities markets, with more opportunities for fraud and manipulation, and fewer protections for investors in the event of theft.
And bitcoin has a much more simple risk, called human error. You need a login ID and password to access cryptocurrency exchanges.
If you forget those or they’re lost or stolen in a hacker or phishing scam you can lose your access, and your currency. Unfortunately, with no issuing or regulating country or authority for cryptocurrencies, there’s very little recourse in cases of fraud or theft. And law enforcement often has limited ability to seize it.
Thus crypto currency comes with a number or risks, however if you believe in the phrase no risk, no reward and you have an appetite for a challenge, then you might be open to a more risky money move.
Probably the rule is, only spend money that you care to lose. Say you have money allocated in your budget for clothes, shoes, hair and makeup, if you decide to forgo spending on that for three months, and instead use that money for a risky investment, then that was money that you were comfortable parting with. That way, if all the money goes up in a cloud of smoke, you haven’t put your future in jeopardy.
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