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What is Cryptocurrency?
A cryptocurrency is a digital or virtual currency that generally serves as a means of payment and exchange.
Since crypto is entirely digital, it operates using blockchain technology.
A blockchain is essentially a database or ledger of transactions that exist on a network of computers.
Blockchain is responsible for one of cryptocurrency’s defining features: decentralization.
Being decentralized means that cryptocurrencies operate independently of banks and governments. As a result, they aren’t issued by any central authority and operate largely without regulation.
Another defining feature of cryptocurrencies is security.
Digital currencies are secured by cryptography, making them highly secure. As a result, it’s almost impossible to counterfeit or double-spend crypto “tokens.”
Bitcoin is the biggest and most well-known digital currency available and was the first successful digital currency, first launching in January 2009. Today, however, there are thousands of cryptocurrencies to choose from.
Some cryptocurrencies also have the exclusive bonus of being minable.
With Bitcoin mining, for example, you compete with every other “miner” on Bitcoin’s network in a race to validate each cryptocurrency transaction through complex mathematical problems.
The first to validate a transaction (i.e., solve the mathematical problem) receives some of that currency as a reward from the cryptocurrency network.
8 Benefits of Cryptocurrency
Being such a unique asset class, there are several advantages of investing in cryptocurrency, including:
1. High potential returns
Cryptocurrencies like Bitcoin have earned a reputation for offering fantastic returns.
In 2017, for example, Bitcoin’s annual return topped 1,300%.
While it’s unlikely that returns of that magnitude will happen often, there’s still great potential.
For example, in 2020, Bitcoin’s annual return was over 300%.
Additionally, many cryptocurrencies have a finite supply.
In Bitcoin’s case, it’s 21 million.
There will be no new Bitcoins once all 21 million are circulating. Having such a limited supply has a tremendous impact on the asset’s price and is an excellent means of controlling inflation.
You can also invest your cryptocurrency, similar to how a traditional bank operates.
Fintech platforms like BlockFi, for example, allow you to deposit your crypto into a savings-like account and earn interest.
2. Low correlation with stocks
It’s difficult to gauge how crypto will perform in the event of a stock market crash, seeing as cryptocurrencies emerged as a direct result of the 2008 financial crisis.
3. The crypto market is open 24/7
Since there’s no central bank governing the crypto market, it’s generally open 24 hours a day, seven days a week.
The transactions on crypto exchanges take place directly between individuals all over the world at all times. This gives the crypto market a leg up on stock markets, which have specific trading hours.
4. Thousands of currencies to choose from
There are now over 4,000 cryptocurrencies available.
While some will be short-lived, others look to solve real-world problems and look like they’ll stick around.
For example, Robonomics aims to solve supply chain complexities by allowing people to order goods and services directly from autonomous robots capable of collaborating with each other.
5. No mediating agents
When you operate through the traditional financial system, you’ll encounter brokers, agents, paperwork, and many other factors.
Since crypto transactions take place on the blockchain network, there are no middlemen at all. This cuts down the transaction fee and processing times so that users can send money in no time for next to nothing.
6. Added security
Blockchain technology leverages cryptography, the mathematical and computational practice of encoding and decoding data. As such, when making crypto transactions, you can do so with a level of security that a traditional financial institution can’t compete with.
Another perk of cryptocurrency payments is the increased privacy. For example, unless you voluntarily publish each Bitcoin transaction, your purchases will never be associated with your personal identity, unlike a debit card or credit card payment.
Cryptocurrencies have the unique advantage of offering global accessibility, which may help in banking the “unbanked” (people without access to traditional banking services) since internet access is becoming increasingly available.
The lower transaction cost associated with using cryptocurrency as a payment option also adds to the argument that crypto could be the payment system of the future.
8. Increased use cases
While digital assets may have started as an alternative to traditional currencies like paper money (also referred to as fiat currency), many cryptocurrencies today have been designed for dozens of other purposes.
For example, Ethereum, the world’s second-largest cryptocurrency, was designed to decentralize the Internet.
It supports the building and running of Smart Contracts and Decentralized Applications (DApps) without any downtime, fraud, or interference from third parties.
Cryptocurrencies have also led to the development of NFTs (non-fungible tokens). In economics, a fungible asset is one that can be interchanged, like money. For example, you can exchange a $20 note for two $10 notes and still have the same value.
This is impossible with NFTs as they are one-of-a-kind assets that can be bought and sold. Think of an NFT as a certificate of ownership for virtual or physical assets.
NFTs can be used for almost anything and can be incredibly valuable.
For example, Jack Dorsey, the founder of Twitter, is trying to sell his first tweet as an NFT.
Now that you have an idea of what cryptocurrencies are, here are two ways you can take advantage of these digital assets:
A Great Way To Trade Cryptocurrency: eToro
eToro is a social cryptocurrency trading platform.
The social aspect stems from interacting with other traders on the platform and even automatically copying their trades. This makes eToro an excellent platform for investors just getting started with cryptocurrency trading.
You can start trading with as little as $25, and your returns are dependent upon the digital asset you’re investing in. If you opt to copy the trades of professional traders, you can see their desired level of risk and the expected returns.
Opening an account with eToro is also entirely free, and there are no management or ticketing fees. There is a withdrawal fee of $5, and users are charged between 0.75% and 5% trading fee, based on the crypto coin you’re trading.
There’s also a 0.1% crypto-to-crypto conversion fee.
A Great Way To Invest Your Crypto: BlockFi
If you happen to have some cryptocurrency lying around, consider investing it through BlockFi.
BlockFi works like a bank account for your cryptocurrency.
Instead of stashing your digital assets in a crypto wallet or on an exchange, if you deposit your crypto with BlockFi, you can earn up to 8.6% APY.
Interest is accrued daily and paid monthly.
There are no hidden fees and no minimum balances. Withdrawal fees depend on the asset you’re withdrawing, but users gain one free withdrawal every month.
Additionally, you have access to BlockFi Trading, an exchange where you can trade different crypto assets on the platform and earn compounding interest while doing so.
Things To Keep In Mind When Investing In Cryptocurrencies
While investing in cryptocurrencies comes with tons of unique benefits, there are a few things you should be aware of before investing:
A. Crypto is volatile
The cryptocurrency market is still relatively new, and the prices of these digital assets are entirely speculative. Crypto derives its value on the assumption that it will be useful in the future, rather than on any real-world usage.
As a result, many cryptocurrencies are prone to wild price fluctuations. For example, on February 21, 2021, Bitcoin was trading at $57,728. Two days later, its price dropped to $46,624. By the end of the following week, the price recovered to $61,440.
This level of volatility can make trading cryptocurrency extremely risky.
B. There is minimal regulation
The lack of regulation surrounding the cryptocurrency industry has been a talking point for years and is one of the primary reasons why people are wary of investing in cryptocurrencies.
Since many crypto firms operate without oversight from the SEC or FINRA, they don’t have to abide by the same rules as other financial platforms. This can further increase the risk of your investment.
C. Cybersecurity issues
While cryptocurrencies feature high security, the platforms you buy and trade crypto on may be less secure. As a result, if hackers breach a cryptocurrency exchange you use and gain access to your crypto reserves, it’s almost impossible to recover the funds.
The best example of this is the Mt. Gox hack.
Founded in 2010, the exchange grew to become the largest in the world, handling over 70% of all Bitcoin transactions. In April 2014, however, Mt. Gox liquidated after a hack resulted in the loss of 850,000 Bitcoins, worth over $450 million at the time.
This has resulted in most modern crypto platforms taking multiple steps to minimize these security risks. It’s now common practice among exchanges to implement 2FA (two-factor authentication), which is generally a numeric code that resets every 30 seconds.
This way, if an exchange you use is hacked, the hackers can’t access your funds without this numeric code that only you have access to.
Additionally, as most investors store their digital assets in a cryptocurrency wallet for safekeeping, your digital wallet should include a seed phrase which is a list of random words used to back up and restore your digital assets.
This way, if your crypto is stolen or you lose access to your wallet for whatever reason, you can use your seed phrase to restore your funds.
For example, Bitcoin users are unable to make Bitcoin payments without a private key, which their Bitcoin wallet generates from their seed phrase.
Cryptocurrencies are a new and unique asset class that’s ever-expanding. And while it does come with some key risks, the numerous benefits make it a worthwhile investment.
If you’re interested in learning more about such alternative investments, check out the MoneyMade Investor Quiz. Answer a few short questions, and MoneyMade will suggest a list of investments that suit your investing needs!