What is cryptocurrency?
Cryptocurrency is a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority. A cryptocurrency is a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.
Is cryptocurrency a good investment?
Cryptocurrency is a relatively risky investment, no matter which way you slice it. Generally speaking, high-risk investments should make up a small part of your overall portfolio — one common guideline is no more than 10%. You may want to look first to shore up your retirement savings, pay off debt or invest in less-volatile funds made up of stocks and bonds.
There are other ways to manage risk within your crypto portfolio, such as by diversifying the range of cryptocurrencies that you buy. Crypto assets may rise and fall at different rates, and over different time periods, so by investing in several different products you can insulate yourself to some degree from losses in one of your holdings.
Cryptocurrency investors should be aware of the following risks:
- User risk: Unlike traditional finance, there is no way to reverse or cancel a cryptocurrency transaction after it has already been sent. By some estimates, about a fifth of all bitcoins are now inaccessible due to lost passwords or incorrect sending addresses.11
- Regulatory risks: The regulatory status of some cryptocurrencies is still unclear, with many governments seeking to regulate them as securities, currencies, or both. A sudden regulatory crackdown could make it difficult to sell cryptocurrencies, or cause a market-wide price drop.
- Counterparty risks: Many investors and merchants rely on exchanges or other custodians to store their cryptocurrency. Theft or loss by one of these third parties could result in the loss of one’s entire investment.
- Management risks: Due to the lack of coherent regulations, there are few protections against deceptive or unethical management practices. Many investors have lost large sums to management teams that failed to deliver a product.
- Programming risks: Many investment and lending platforms use automated smart contracts to control the movement of user deposits. An investor using one of these platforms assumes the risk that a bug or exploit in these programs could cause them to lose their investment.
- Market Manipulation: Market manipulation remains a substantial problem in the cryptocurrency space, and some exchanges have been accused of manipulating prices or trading against their customers.
Different Types of Cryptocurrency:
Bitcoin is regarded as the first decentralized cryptocurrency using blockchain technology to facilitate payments and digital transactions. Instead of using a central bank to control the money supply in an economy (like the Federal Reserve in tandem with the U.S. Department of the Treasury) or third parties to verify transactions (such as your local bank, credit card issuer, and the merchant’s bank), Bitcoin’s blockchain acts as a public ledger of all transactions in the history of Bitcoin.
Ether is the token used to facilitate transactions on the Ethereum network. Ethereum is a platform that uses blockchain technology to enable the creation of smart contracts and other decentralized applications and a software development sandbox.
Tether is a stablecoin or a currency tied to a fiat currency — in this case, the U.S. dollar. The idea behind Tether is to combine the benefits of a cryptocurrency (such as no need for financial intermediaries) with the stability of a currency issued by a sovereign government.
4. Binance Coin
Binance Coin is available on the Binance cryptocurrency exchange platform, along with other digital coins that are available for trading. Binance Coin can be used as a type of currency, but it also facilitates tokens that can be used to pay fees on the Binance exchange and to power Binance’s DEX for building apps.
5. USD Coin
USD Coin is another stablecoin, and, like Tether, it is pegged to the U.S. dollar. Also like Tether, USD Coin is hosted on the Ethereum blockchain. The idea behind the USD Coin was to create a “fully digital” dollar, one that has the stability of U.S. fiat currency but doesn’t require a bank account or that the holder lives in a particular country. Rather than an investment, USD Coin is envisioned as everyday money that can be spent with merchants on the internet.