While there are differing opinions about Bitcoin and other cryptocurrencies, this asset has catapulted in popularity and is gaining widespread demand from individual and institutional investors alike.
If one thing is for sure, cryptocurrency is not going away and is rapidly becoming mainstream. As more businesses accept cryptocurrency and the blockchain technology that facilitates its operation, you may inevitably have to learn the dynamics of the crypto world and even consider investing in it.
Here’s what you need to know about this asset class:
- What is cryptocurrency?
- How to invest in cryptocurrency.
- What to consider before investing in cryptocurrency.
- How to make money with cryptocurrency.
What Is Cryptocurrency?
Cryptocurrency is any digital currency, secured by cryptography, which is used as a medium of exchange that allows peer-to-peer transactions.
Bitcoin, the first blockchain cryptocurrency, is a form of digital currency invented in 2009 by an anonymous founder using the pseudonym Satoshi Nakamoto. Cryptos aren’t managed by a bank or public agency. Instead, transactions of cryptocurrency tokens are typically recorded on a public blockchain – comprised of digital information stored on a database.
Blockchain technology is used to keep an online ledger of all the transactions, and it provides a data structure for the ledger that is considered secure.
Unlike fiat money (government-issued currency), which is controlled by central banks, cryptocurrencies do not require banks to verify transactions and are independent of a central banking authority.
There are many different cryptocurrencies but Bitcoin is the most well-known. At the time of this writing, this cryptocurrency is valued at more than $61,000 and is up more than 760% year over year. Other popular cryptocurrencies include Ethereum, Litecoin and Cardano, among many others.
While cryptocurrency is a newer phenomenon, it is revolutionizing the financial system and how we think about money.
“Cryptocurrency is a new asset class that is at the foundation of the cryptoeconomy – an entirely new set of financial services, commerce, and global payments that will be built on top of this new technology,” says Max Branzburg, vice president of product at Coinbase (ticker: COIN).
James Putra, senior director of product strategy at TradeStation Crypto, says cryptocurrencies are opening retail investors to “a world of global capital as opposed to what they can access through the U.S. market.
How to Invest In Cryptocurrency
Cryptocurrency trading beginners may want to consider things like transaction fees, the type of cryptocurrencies available on the platform, special offerings like resources for education and other features that align with your interests and goals.
TradeStation, Coinbase, eToro and Gemini, among others, offer an easy, accessible and secure platform to own and transact Bitcoin.
Experts say it’s best to take a balanced approach toward investing in cryptocurrencies. Putra says a small portion between about 2% and 5% can be allocated to crypto in your investment portfolio because the volatility of this asset can cause its value to change dramatically. Cryptocurrency is still growing and evolving. That said, there is still speculation, resulting in heightened volatility.
For investors who want to use cryptocurrency as a way to diversify their portfolio, Putra says cryptocurrencies, are one of the least correlated assets to stocks, bonds and a mix of other asset classes.
Investors may choose cryptocurrency as an inflation hedge. Putra says that since bonds are not keeping up with inflation and are no longer an inflation-protected asset, you can turn to some cryptocurrencies as a bond alternative.
“Because of the low interest rates across bonds, there is a reshuffling of capital on a macro level out of bonds and into other assets that are more inflation-protected,” Putra explains.
Some cryptocurrencies like Bitcoin or Ethereum can provide some stability to your portfolio, he says. “Even though they have some volatility, they are inflation-protected,” he says.
What to Consider Before Investing In Cryptocurrency
Investing in cryptocurrencies is very speculative.
Despite stories of investors making millions, investing at an inopportune time can result in rapid and extreme losses. In early April 2020, one unit of Bitcoin traded for roughly $7,000, and the currency has more than doubled its current value since early January.
Although the chance of striking it rich by investing in cryptos is enticing, this market is extremely volatile. Anything that can rise so quickly is also prone to equally severe drops.
Another risk: As for any market, the future of cryptocurrency is not guaranteed. Some countries that allow the use of Bitcoin include the U.S., Canada and Australia, to name a few. South Korea is pushing regulation on cryptocurrency, while China has essentially banned cryptocurrency.
Calculating the intrinsic value of cryptocurrency may be more difficult than for a publicly traded company, but learning about the asset and how it performs might help prevent you from investing at a peak.
By incorporating industry knowledge and developing an understanding of the digital currency market, you will become a more educated cryptocurrency investor.
How to Make Money With Cryptocurrency
There are several ways investors can increase the value of their assets and secure a profit when investing in cryptocurrency.
“You can get more out of your money with cryptocurrency than with other traditional assets,” Branzburg says.
The first method he points to is staking. Staking lets you earn income with your crypto by participating in the network of a particular asset. When you stake your crypto, you make the underlying blockchain of that asset more secure and more efficient. And in exchange, you get rewarded with more assets from the network, like a yield you would get from a savings account but for cryptocurrency.
Some cryptocurrencies that offer staking rewards include Ethereum 2.0, Tezos, Algorand and others on a variety of exchanges.
Another opportunity Branzburg mentions is lending your crypto assets for yield.
“You can lend the assets that you have in your portfolio into decentralized finance protocols to generate yield as well,” Branzburg explains.
Lending through decentralized finance, or DeFi, Branzburg says, allows users to “tap into a global liquidity pool.” By lending your crypto assets into a decentralized money market, other users have access to borrowing your assets, allowing you to generate yield off of this lending process.
Cryptocurrency is a new and exciting way to think about money. But experts say the first and most important step is to educate yourself on these emerging digital currencies and the technology it uses in order to understand the risks and rewards.