It feels like the world has gone crypto-crazy in the past few years. Sometimes not even a week goes by without some big story coming from the cryptocurrency market. So, what are cryptocurrencies, and should you invest in them?
What Are Cryptocurrencies?
Cryptocurrencies are the latest advancement in fintech, designed to improve transparency for users. Cryptocurrencies such as bitcoin and Litecoin aim to improve financial transparency. Most of these currencies are based on a “blockchain,” which is a system used to store transaction data.
The blockchain is what makes cryptocurrency so appealing. Blockchains are decentralized and public ledgers that store data using unbreakable encryption algorithms. While the blockchain first started to record financial transactions, there are now blockchains for everything from tracking goods and services to exchanging documents. The original blockchain that we know, and love is tied to bitcoin and acts as a complete record of every bitcoin transaction ever made.
The power of this blockchain comes from the fact there are no central databases that some could hack or alter. Rather, the blockchain is open to everyone. Anyone who uses it has complete access to it and can see updates almost as soon as they process.
Mining for Bitcoin
Mining for bitcoin is the process of verifying transactions and adding them to the overall blockchain. Those who dedicate their computer power for the process are paid transaction fees and, if they get lucky, “earn” bitcoins or another cryptocurrency. It takes a lot of computer power to mine bitcoin and the process only becomes more complex as time passes. The system is designed to become even more complex until all 21 million bitcoins are mined.
Cryptocurrencies are built on a blockchain to facilitate financial transactions between users. There are currently over 700 coins available. Bitcoin is the most popular option, but it isn’t the only one. Another thing to know about cryptocurrency is that these currencies have no physical form. They are entirely digital. They also have no central bank or government that they are controlled with.
Too Successful for its own Good
It would be fair to say that bitcoin exists in something of a bubble. The price is always fluctuating wildly. The value for bitcoin was around $1,000 per coin at the start of 2017. It exploded to $19,000 by the start of 2018, was down to $3,500 by the end of 2018, and then shot back up again in 2019.
You can buy many things with bitcoin, including computers and even international flights. Though the currency is still known for being the currency of choice on the dark web. This image is changing as cryptocurrencies get more mainstream adoption. Some people use crypto because they don’t trust fiat currencies or their national government that controls those currencies.
Of course, currencies must be stable. It’s difficult to use a currency where the value changes all the time. Cryptocurrency values must stabilize if they are ever going to be taken seriously as, well, currency. Is cryptocurrency the future? Maybe, but things need to change first.
Should You Buy Crypto?
If you were to search something like “should I buy cryptocurrency?” on Google, you’ll be inundated with results. There’s plenty of people predicting the eventual demise of cryptocurrency while others herald it as the future. Some people have made incredible returns on investment with crypto and you can’t ignore that kind of success.
As with any investment, you should be aware of the tax implications and how you can include returns on investment as taxable income. Certainly, there isn’t a lot of information for whether you can include crypto in an ISA or in your personal savings account, for example. Cryptocurrency day trading could be your best shot – if not only shot – at trading crypto.
We always recommend that you learn as much about cryptocurrency as you can before investing. Keep in mind that the value changes all the time. This is a volatile investment. However, you should be fine so long as you never invest more than you can afford to lose. The right investment in the right coin can go a long way.