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At its most basic, cryptocurrency is a type of digital money.
If you’ve heard of bitcoin, you already know the most popular cryptocurrency.
Just like traditional money, cryptocurrency has value and can be traded for goods and services.
Also like traditional money, cryptocurrency can be an investment.
This guide will go over the basics of cryptocurrency investment.
When we talk about investing in cryptocurrency, we are usually talking about speculation.
Speculation is when you buy something valuable hoping it grows in value. But assets can lose value, too.
Remember investing always comes with risk.
Buying cryptocurrency is riskier than most investments.
Cryptocurrency has been around for a little more than a decade and it’s not regulated like traditional currencies and other investments.
The cryptocurrency marketplace is known for volatility, which means cryptocurrency can gain and lose value fast—sometimes overnight.
Although there are thousands of cryptocurrencies, most of them are not good investments, especially for beginners.
We’ll focus on the two most popular cryptocurrencies that are safer and walk through the first steps in investing.
The value of cryptocurrency
Traditional money is regulated by governments and controlled by banks.
Cryptocurrency is different because it doesn’t need governments or banks. People can trade directly with each other.
Generally speaking, what gives cryptocurrency value is scarcity. If there is a set amount of a cryptocurrency and lots of people want to buy some, then that cryptocurrency rises in value.
There’s more to it than scarcity, but we’re going to keep it simple for now.
Next, let’s look at the kinds of cryptocurrency that are best for investing.
New cryptocurrencies come and disappear all the time without most people even hearing about them. Investing in these cryptocurrencies is usually a bad idea.
However, there are a few cryptocurrencies that have been around for years now. The two most popular are Bitcoin and Ether.
Bitcoin was the first cryptocurrency and it’s still the most widely known.
When most people hear cryptocurrency, they think bitcoin. The main goal of bitcoin is the same as traditional currency—a tradable asset that holds value.
Ether is different from Bitcoin in that it has more uses besides acting as a medium of exchange. But for the purpose of investing, we’ll stick to Ether’s value as an asset.
Both Bitcoin and Ether have been around long enough to be considered valid investments. But they are still risky.
Cryptocurrency as an investment
We should start by saying cryptocurrencies weren’t designed as investments. But enough people decided Bitcoin had value, which validated the rest of the market.
The main goal of currency investing is to buy low and sell high.
Cryptocurrency investing has the same goal. Investors try to make money by betting the cryptocurrency they buy will be worth more in the future.
When a traditional currency, like the dollar or euro, falls too low or too high, then the currency is usually regulated by a government.
Cryptocurrency is unregulated, so it’s price is completely dictated by the demand for it.
The price of cryptocurrency goes up and down quickly. So if you buy Bitcoin today, it could be worth much less tomorrow. If you have money set aside for investing, you should only use a small amount of it for cryptocurrency due to the risk.
How to buy cryptocurrencies
To buy a cryptocurrency, you’ll need a special digital wallet to store it.
Cryptocurrency wallets come in two main types: hardware wallets and software wallets.
A hardware wallet looks like a USB drive. It stores the cryptocurrency securely. The cryptocurrency cannot be traded unless moved from the hardware wallet.
A software wallet is like an online bank account that stores cryptocurrency instead of dollars. It allows you to trade cryptocurrency, but it’s considered less secure than a hardware wallet. Think of a hardware wallet as a savings account and a software wallet as a checking account.
The main way to buy and sell cryptocurrencies is through an exchange. Coinbase is one of the leading cryptocurrency exchanges. If you sign up for a Coinbase account, they will give you a free software wallet to store cryptocurrency.
Robinhood is another reputable investing platform that allows cryptocurrency trading.
Both Bitcoin and Ether can be bought using a debit card. Investing in other cryptocurrencies could be trickier and takes more research.
If you decide to buy cryptocurrency as an investment, start small.
The more popular cryptocurrencies—like the ones we discussed here—are fairly expensive. So investors can now buy fractions of Bitcoin or Ether.
Now that cryptocurrency investing is cheaper than ever, start by investing a few dollars and see where it goes.
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