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Cryptocurrency is a virtual asset that can be purchased, sold or traded digitally. Whilst transactions are organized by a decentralized system, crypto can be invested in both via a decentralized or centralized exchange. 

This guide will delve deeper into the crypto world and provide tips on the best ways to invest in cryptocurrency, and the pros and cons of doing so.

 

What is Cryptocurrency?

 

Crypto is a digital currency that can be traded without the intervention of a centralized authority such as a bank. Whilst this is a decentralized system, cryptography is used to secure transactions in a safe manner.

Individual units of cryptocurrency are known as tokens or coins. They can be used as a unit of exchange transferred for goods or services, as a central store of value or to help run computer networks dealing with complex financial transactions. 

 

What Are Examples of Cryptocurrency?

 

Examples of cryptocurrency include Bitcoin, Litecoin, Cardano and Ethereum. Other popular currencies include Tether, Zcash, Solan and Stablecoins to name a few. 

Most cryptos, including Bitcoin, are built on blockchain. This protects transaction records and details cryptocurrency ownership. Digital currencies without blockchain have struggled in the past as the lack of protection meant it could be tampered with and users could make copies of what they owned and try to spend them more than once.

 

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How Can I Invest in Cryptocurrency?

 

There are many ways users can invest in cryptocurrency including:

1. Centralized exchanges

Centralized exchanges tend to be the most common way for purchasing cryptocurrency.  This third-party intermediary monitors transactions and secures assets on traders’ behalf, giving buyers and sellers confidence that they are trading safely and securely, and getting what they paid for. A typical exchange will sell a currency at the market rate and then make money through frees from the service they provide.

Examples of well-known crypto exchanges include Coinbase, Bithumb, Kraken, Gemini and GDAX. Centralized exchanges are simple and easy to use, with a great selection of cryptocurrencies and storage solutions. The only weaknesses are perhaps that you can only deal in crypto, there are no traditional assets like stocks or bonds, and hackers pose a threat due to the large volume of cryptocurrency that flows through the exchanges everyday.

 

2. Traditional brokers

Some traders feel more comfortable going through a traditional brokerage. Many online brokers exist who offer access to both crypto and stocks. Examples include Trade Station, Weebull and Robin Hood. 

 

3. Decentralized Exchanges

Advanced users may prefer to go through decentralized exchanges since they offer lower fees than a centralized exchange. Whilst they are more technical, they may offer security benefits since there is no single point of entry for a hacker using a cyber attack. There is also the option to directly trade crypto through peer-to-peer transactions with someone you know.

 

How Do I Pay For Cryptocurrency?

 

Once you have chosen how to invest, you will need to pay for your crypto. In centralized exchanges, cryptos are usually paid for via normal money or Fiat currency, a government-backed currency similar to the US dollar. However, if you are an experienced trader who has been using crypto for a while, you may be able to purchase currencies through your own cryptocurrencies. 

As always, it’s important to read all of the information provided to check if you will be charged any transaction fees.

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How Do I Keep My Cryptocurrency Safe?

 

After purchasing your currency, you will need to think about the best way to keep your crypto safe. All crypto-assets require a private key that proves your ownership of the asset – losing your key would mean that your crypto would be gone. It’s imperative to keep your private key safe as if someone gets access to it, they can trade or spend your crypto.

You can use a digital wallet to store your crypto securely. Options include cold wallets which are an offline physical device such as a hard drive or USB that are physically impossible to access unless someone takes control of the device. There is also a hot wallet which has a degree of online connectivity which makes it easier to use but could lead to security vulnerabilities. Traders can weigh up the pros and cons of both wallets, and may even wish to store their crypto across multiple places to reduce the risk of losing them from one method.  

Another possibility is on-platform storage. Keeping your cryptocurrency on the exchange or platform you purchase it from can be much more convenient, especially since complications are dealt with by an experienced third party. The only danger is if the exchange gets hacked, your crypto could be at risk if your individual credentials are exposed.

 

What Are The Advantages And Disadvantages Of Investing In Cryptocurrency?

 

There are undoubtedly both strengths and weaknesses of investing in cryptocurrency, with some pros and cons mentioned in the table below. 

Advantages of Cryptocurrency

Weaknesses of Cryptocurrency

  • The underlying technology and the blockchain are sound. The existence of private keys, wallets and on-platform storage helps to keep currency safe.
  • Some cryptocurrencies have not been extensively tested and are created quickly and perhaps in too much haste due to the hype surrounding other coins. 
  • Crypto offers a good alternative that familiarizes consumers with the idea of using a decentralized system which could potentially be used for more products in the future.
  • Huge fluctuations in the value of coins reduces their credibility as a stable long-term investment. Some may argue that it’s not worth the risk and that it’s more sensible to invest elsewhere.
  • Communities who feel that they have been neglected by traditional financial systems, such as banks or credit unions, see crypto as a way to get into the new financial system. 
  • Some crypto investors have been attracted to the idea of fast cash and whilst some have been successful, others have lost money due to buying right before a crash.
  • Having no central governments or banks involved in managing the money supply is appealing to many. Supporters often argue that banks can decrease the value of Fiat currencies over time due to inflation.
  • Government oversight and inability to regulate crypto could cause it to have issues in the future. For instance, the banning of Bitcoin mining in China led to a significant drop in the value of crypto.
  • Crypto is attractive since it has gone up in value. Some investors see cryptos such as Bitcoin and Ethereum as the currencies of the future and so want to buy it now as they believe it will become increasingly important over the years and decades to come. 
  • Cryptocurrency can have a negative impact on the environment. For example, Bitcoin mining uses up a significant amount of energy, with Cambridge University’s study showing that mining Bitcoin globally uses more than double the power it takes to light up the whole US. Other cryptocurrencies’ technology uses less energy but it is still significant.

 

Whilst there is no guarantee on the future of cryptocurrency, it’s important to do research and know as much as possible about the different coins before considering investing in them.

Justine Gray

Justine is a full-time writer, specializing in household income and consumer finance across the US.

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