Investing in a cryptocurrency can mean signing up for a wild ride, with prices up thousands of dollars one day and down again the next.
Take Bitcoin for example, which was up to more than $14,000 per coin in 2017 before plunging to less than $3,500 per coin by the beginning of 2019.
In many cases, prices for cryptocurrencies seem high — especially compared to where prices were a few years ago. But, there are still potential opportunities in the crypto market.
First, there are the potential opportunities for growth. Nearly 8 in 10 Americans are familiar with cryptocurrencies, and more than one-third expect them to be widely used in everyday transactions in the next 10 years.
Younger generations are the most open to accepting cryptocurrency, with 44% of millennials saying they’re open to using cryptocurrency, compared to about a third of Gen Xers and baby boomers.
Even as their notoriety and popularity build, cryptocurrencies can be volatile investments. As of now, it remains a largely unregulated sector in the United States.
As a result, a potential investor might want to learn as much about investing in cryptocurrency as they can before taking the leap.
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Investing in cryptocurrency
Cryptocurrency is a digital currency that’s used exclusively online. It’s created and secured through cryptography and can be used in direct financial transactions between individuals without going through a bank or other third parties.
Cryptocurrency units are known as tokens, sometimes referred to as coins. These tokens are stored in a virtual “wallet” that stores public and private keys and allows users to interface with others.
Wallets can take a number of forms, including desktop wallets that are downloaded and stored on a personal computer, online wallets that run in the cloud and hardware wallets that are like a thumb drive that can be plugged into a computer when a user wants to make a transaction.
Investors can purchase tokens or shares of tokens on major online exchanges by connecting a bank account and going through a verification process. They may also be able to invest directly through a financial entity.
And they may be able to invest in certain cryptocurrencies through special ATMs. Cash, debit cards, or credit cards can be used at these kiosks to add cryptocurrencies to their digital wallets.
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What types of cryptocurrency are there?
There are hundreds of cryptocurrencies available, and together they are worth nearly $250 billion. At the moment, there are a handful of top players, including Bitcoin, Ethereum, Ripple and Litecoin.
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By far the largest cryptocurrency with a market cap of about $160 billion, Bitcoin was the first to hit the market and is the most popular and expensive cryptocurrency.
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With a market cap of about $19 billion, Ethereum is the second-largest cryptocurrency. Also known as Ether, the main application for this currency comes from the platform in powers, which allows the building of decentralized application and the creation of smart contracts.
Ether is used to run the application on the platform and as a method of purchasing other cryptocurrencies.
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The third-largest cryptocurrency, with a market cap of about $10 billion, Ripple was created by banking institutions and provides a low-cost way to make financial transactions.
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When it came to market in 2011, Litecoin was one of the first alternative cryptocurrencies. It offers faster transaction times than other leading digital currencies.
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These aren’t the only crypto assets available
A cryptocurrency portfolio may contain one or more of these assets in addition to some of the countless other smaller currencies that are available and have much smaller market caps.
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Building a crypto portfolio
When a potential investor is ready to invest in crypto and start assembling their portfolio, there are a handful of rules they might want to consider.
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Doing the research
It can be easy to get swept up in hype, especially when friends or family are talking about how much money they’ve made by investing in a new cryptocurrency.
But before diving headlong into any investment, investors might want to learn as much about it as possible.
These websites can show currency price, how much is circulating and the currency’s market cap, or the total value of the circulating currency.
To dig deep into a cryptocurrency, investors might want to see if the company that created it has put out a white paper, like the one by Bitcoin in 2008.
These papers may explain how the cryptocurrency works and what it will be used for. White papers may also provide a roadmap for the currency and the team working on it.
Investors might want to pay special attention to how the currency will be used, and where it will get its value from. A currency that ultimately has no concrete use may not be very valuable in the future.
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Setting stop losses
Because the cryptocurrency market can be unpredictable, it might be helpful to set some guardrails around investments, such as stop losses.
Stop losses are orders to sell an asset when it drops to a certain price. Setting stop losses on cryptocurrencies could help protect investors from taking too big a hit should prices start to drop.
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Keeping your ear to the ground
Investors might do well to stay on top of news and information about cryptocurrency. Even among the most established currencies, conditions can change fast.
Staying up to date could help investors make informed decisions about buying and selling.
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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA, the SEC, and the CFPB, have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
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