Several years ago, you might have heard about investing in cryptocurrency. You are probably one of those who did not feel secure about digital money. After all, you cannot see them and they do not feel like real currency or real money. Cryptocurrencies were fairly new financial products that they did not feel like a good investment.
These days, cryptocurrency has become more widely accepted. It has become a household name that not buying cryptocurrency means being out of trend. This has prompted many people to explore the technicalities and start including cryptocurrency in their investment portfolios. Now, you often hear people talk about Bitcoin, Dogecoin, Ethereum, or Litecoin and how profitable they are.
While they may be attractive, there are many things you need to know before you buy cryptocurrencies. It is also worthwhile to remember that making an investment, regardless of its form, is always a risky decision. There is the possibility of getting lost in the end and not getting high potential in return. At the end of the day, your financial welfare should be a priority.
Before we dig deeper into this type of investment, here is what you should know about cryptocurrency.
What is cryptocurrency?
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Cryptocurrency is a digital currency that can be used for payment of online goods and services from merchants. It is powered by blockchain technology which is a secure system of recording information and transactions in codes in a way that it is difficult or impossible to access, change, or hack.
Among the many brands, Bitcoin is the most popular cryptocurrency. Bitcoin is considered the world’s first cryptocurrency, which was created in 2008. This virtual currency gained its popularity in the Philippines in 2017, when its value jumped from $1,000 to $19,000.
While it is a medium of exchange to make purchases, many people opt to invest in cryptocurrencies as they would do in other assets like stocks. However, experts still have mixed emotions about this type of investment due to its intense price swings.
How is blockchain technology used in cryptocurrency exchanges?
Blockchain serves as the foundation of cryptocurrency transactions. Blockchain makes sure that crypto transactions are secure by serving as a public record of every transaction that happens to the digital currency, including transfer of ownership. The process and security behind crypto exchanges is also thanks to blockchain. Blockchain is also programed so that it does not need a central authority to operate.
How can you make cryptocurrencies work for you?
Price appreciation is one way to earn in cryptocurrency investing. Depositing your funds into interest-earning accounts will allow you to earn a greater yield on your assets. This is one of the methods that guarantee consistent returns even during market fluctuation. Once you have deposited your funds, you need not actively manage them. You just have to wait for your deposit to earn interest.
Another way to earn is through Bitcoin Mining. It is the process of generating new bitcoins to enter circulation, which is done via a third party or a mining operator. To do this, you only have to put some funds into a mining service provider, and the firm is responsible for investing those funds on your behalf.
Buying and holding dividend-paying tokens is also a method to earn in this type of investment. However, not all digital currencies provide dividends. It is recommended to do research before buying into them. By dividends, you are ensured that your returns are consistent and steady.
More active investing methods include day trading, staking cryptos, helping out with cryptocurrency micro-tasks, and working for cryptocurrency companies.
If you are thinking of taking a leap of faith, listed below are the advantages and disadvantages of investing in cryptocurrencies.
Factors to consider before investing
As some would say, before you decide to invest in a high-risk investment, you must consider investing in something you can afford to lose. Listed below are the pros and cons that should be known before making a decision to add cryptocurrency to your financial goals and responsibilities.
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Pros of cryptocurrency investment
Fast and inexpensive
Sending any amount of money anywhere in the world only takes a few minutes. It is usually expensive for you to be able to move your money to another part of the world. But with cryptocurrency like Bitcoin, the cost is either negligible or non-existent. On top of it all, Bitcoin has no geographical limitations.
Limited regulations of cryptocurrency
The cryptocurrency market thrives on speculation made by investors. Individuals who invest in crypto are the ones who drive the value in the market and dictate the supply and demand. This characteristic makes the currency depoliticized. This is why there are limitations as to how central banks and the government can regulate cryptos. No one has the authority to freeze, charge, or demand your coins.
Lower fraud Risks
Investing in cryptocurrency does not require buyers to disclose any confidential information to the sellers. Your real identity is safe, and you will do transactions anonymously with no boundaries. All of your data are being kept and stored safely through blockchain technology.
Here in the Philippines, the Securities and Exchange Commission (SEC) is putting so much effort into keeping the public safe from scams and fraudulent transactions. With that, SEC still emphasizing the public to be more vigilant and careful when engaging in such activities and should only transact with entities who are registered and have licenses to do business in the country.
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Cons of cryptocurrency investment
High risk of loss
Cryptocurrency can be totally gone if a hard drive crashes or a virus corrupts records, and the digital wallet file is corrupted. There is basically nothing to be done to recover all the data and existing transactions unless you are able to back up your digital wallet with a backup phrase code.
If this happens, even the wealthiest investor can go bankrupt in a matter of seconds as the coins. Starting again is simply the next step to go.
Prices are unpredictable
Because of how investors speculate in the market, the prices are unstable and can change quickly over time. These speculative bets can cause sudden inflation or a market downturn, leading to high volatility. Such cases prompt fragile investors to eventually withdraw.
Since the value of digital currencies solely depends on the supply and demand, it would require you to accept what it takes if there is always a rollercoaster ride in the market situation that might lead to gains or losses.
Insurers are not yet embracing cryptocurrency
Due to cryptocurrency’s volatile prices, insurers or a person or company that underwrites an insurance risk are still hesitant to be involved in the whole process despite the emerging market. A potential large drop in the value of cryptocurrency can leave the investors on the hook since it could affect the personal assets of a firm’s executives.
How secure are cryptocurrencies?
While the concept of investing in cryptocurrency is novel and exciting, purchasing it brings a fair share of risks and certainties. With this, it is much better for you to take on a fair amount of research to fully understand how the system works before taking any actions.
Like any investment, cryptocurrencies also has its own set of risks. Though this digital currency uses complex encryptions to verify transactions, there are points where hackers can still get in the way. A cryptocurrency service is not a bank and they do not offer the same level of security. As cryptocurrency exchanges remain unregulated, it is best to get the most information before you exchange real currency with digital currency and start trading.
Do your research first and adopt a strong mentality to only invest in what you can afford to lose. You can also opt to engage yourself in Crypto Insiders Community or forums where you can observe and base your cryptocurrency journey.
It is also important to remember that any type of investing, may it be for cryptocurrencies, stocks, or real estate, requires consideration of your risk tolerance, financial goals, and current financial situation.