What is Cryptocurrency?

Cryptocurrency is a digital and decentralized type of currency that has no central authority. While the euro and dollar are managed by central authorities, cryptocurrencies are managed by its users. These alternative investments have been around since 2009 and are becoming increasingly attractive to investors. However, they’re also considered risky investments for many reasons, which will be mentioned below.

How Does Cryptocurrency Work?

Cryptocurrency is a type of decentralized and digital currency that doesn’t rely on banks to verify transactions. Instead, it uses encryption to verify transactions.

When crypto funds are transferred, those transactions are recorded on a public ledger known as a blockchain. In terms of how each cryptocurrency unit is produced, it’s done through a process known as mining. During the mining process, transactions are verified and new coins are created and circulated.

Also known as crypto, these digital currencies enable people around the globe to facilitate transactions between one another and can be used to purchase goods and services. To make purchases using Bitcoin, people usually need a digital cryptocurrency wallet. Aside from being used for purchases, many people also invest in cryptocurrency as they would any other security. However, it is deemed a speculative investment, meaning it’s a volatile high risk asset.

Types of Cryptocurrency

There are multiple types of cryptocurrencies out there, but some of the most common include bitcoin and ethereum.
Bitcoin
Bitcoin was founded by Satoshi Nakamoto in 2009 and was the first to be created. It also happens to be one of the most popular types of cryptocurrency.
Ethereum
Developed in 2015, ethereum differs from bitcoin since it’s a blockchains platform used to record transactions. Etheruem also has its own cryptocurrency, which is called Ether or Etheruem.
Litecoin
This fast-growing crypto alternative was created in 2011 by Charles Lee, a former Google engineer. Litecoin is an innovative crypto form that has helped improve digital transaction processes and enabled quicker payments.

Risks of Investing In Cryptocurrency

Cryptocurrency is known as a risky investment due to its volatility and the lack of centralized regulation. For this reason investors should tread carefully before pouring money into the asset.

An example of crypto volatility is with the 2022 crypto crash. A number of factors contributed to the crash, including Celsius Network, a major US cryptocurrency lending company, freezing withdrawals and transfers in June 2022 due to “extreme” conditions. Additionally, in November 2022, FTX, a global cryptocurrency exchange crashed-the company went bust due to mismanagement of funds. These news bombs in addition to other negative stories and threats of regulation led to the crypto market taking a nosedive. Bitcoin peaked at almost $69,000 per coin in November 2021 but plummeted to around $16,000 by November 2022.

Aside from general volatility, other risks of investing in crypto include that many crypto projects are untested, environmental concerns considering how much power is consumed during the mining process, and the overall lack of regulation.

For these reasons, some finance professionals don’t recommend investing in cryptocurrencies. Investors who are drawn to the currency should consider only allocating a small percentage of their portfolio to the currency. Always consider your individual financial goals and risk tolerance before investing.