In December 2016, the well-known cryptocurrency Bitcoin was worth about $780. One year later, Bitcoin has skyrocketed in value, surpassing $16,000 at one point before falling back to the $13,000 range. Needless to say, Bitcoin has caught investors’ attention. But, what are cryptocurrencies? The cryptocurrency and others like it are still extremely volatile.
If you’re trying to get great returns on your investments, then investing some funds in cryptocurrencies might be an option. However, there have been murmurs of a “Bitcoin bubble” forming in the cryptocurrency market. Due to the newness of this type of currency, nobody really knows if cryptocurrencies are close reaching their peak values before crashing, or if they’ll continue to rise several thousands of dollars over the next few years.
What are Cryptocurrencies
If you’re considering an investment into cryptocurrencies, here are a few things to know before diving into this market:
How are Cryptocurrencies Different?
Cryptocurrencies are decentralized forms of currency, “mined” by people instead of produced by federal institutions like the U.S. Federal Reserve. Fiat money like U.S. dollars is controlled by the government and could be subject to seizure by law enforcement. Cryptocurrencies are not backed by the government. And, they’re extremely difficult for law enforcement to seize, because the currency exists as an encryption designed to protect the owner’s anonymity. This is why cryptocurrencies are commonly associated with dark web transactions.
Since the value of cryptocurrencies is not backed by a governmental institution, the price fluctuations over the past year alone have proven to be highly volatile. Confusion over the actual value of cryptocurrencies has been compounded by their projected production rates, which are designed to gradually decrease over time to limit the quantity of cryptocurrency in circulation. Similar to precious metals, there is a finite amount of Bitcoin that can ever be mined, which is 21 million.
How does Mining Work?
Investors can acquire cryptocurrencies through mining or paying for it with fiat money like U.S. dollars. Mining cryptocurrencies involves an expensive, time-consuming process that takes up an enormous amount of electricity. Bitcoin mining in 2017 alone consumed more energy than 159 countries.
As Investopedia explains, Bitcoin miners essentially verify transactions utilizing Bitcoin. To make money, a miner must verify 1MB worth of transactions then be the first miner to provide the right answer to a numerical problem. However, this does not involve complicated math, but it does require advanced technologies such as graphics processing units (GPUs) or individual graphics cards. In other words, you need to be pretty tech-savvy to get very far with cryptocurrency mining.
Where can you Buy and Trade Cryptocurrencies?
If cryptocurrency mining sounds too difficult, then you can simply invest in cryptocurrencies with Coinbase, which is the most popular platform for trading virtual currencies. Coinbase only offers a small fraction of the overall cryptocurrencies in existence.
Given the explosive popularity of cryptocurrency investing as of late, there are certainly scams you should watch out for. Fortunately, the SEC is starting to crack down on cryptocurrency fraud, but the threat of initial coin offering (ICO) scams still exist. When faced with something that might be a fraudulent cryptocurrency situation, here are a few things to watch out for.
- Wallet scams. Cryptocurrency encryptions are stored in digital wallets, which are susceptible to hacks. Avoid this by researching reputable cryptocurrency wallets with top-notch security for users.
- Email scams. Beware e-blasts from individuals or groups claiming to be from a cryptocurrency provider. They’ll typically ask you to log in to a fake website designed to capture your authentic log-in information to deplete your funds on the real site.
- Fake cryptocurrency exchanges. Since cryptocurrencies are still pretty new, stick to Coinbase until more legitimate alternatives arise.
What are Bitcoin Futures?
As if cryptocurrencies weren’t complicated enough, Bitcoin futures are starting to roll out, too. Cryptocurrency futures will function similarly to traditional futures investments. You exchange assets at a specified price based on the projected value of the asset at a future date. Cboe Global Markets is the first exchange to offer cryptocurrency futures. However, many other players will likely join the futures marketplace very soon.
It has also been reported that Amazon is entering the cryptocurrency market after the company bought several domain names related to cryptocurrencies. So, Amazon virtual currencies will likely come out sometime in the near future.
Investing in cryptocurrencies is not like investing in stocks. While stock trading has been going on for decades, cryptocurrencies are still very new and very much unregulated. For someone just getting started in investing or someone with limited funds to invest, cryptocurrencies might be too volatile for the time being.
However, if you can manage the risk of a potential crash in the future, then investing in cryptocurrencies through reputable websites and apps like Coinbase could potentially ramp up your returns on investments as cryptocurrencies become more commonplace in our economy.
What about you? Do you know what are cryptocurrencies? Have you invested in them yet? I’d love to hear your experience investing in Bitcoin and other cryptocurrencies.