Cryptocurrency has exploded onto the investing scene in recent years with the most well known cryptocurrency Bitcoin rising to a value of over $50K dollars per coin. While crypto has certainly exploded in value, it is always necessary to understand new investment opportunities before placing significant dollars into them. So let’s cover some crypto 101.
What is Cryptocurrency?
Cryptocurrency is a new type of “money” that isn’t backed by gold, the government, or a centralized institute of any kind. Rather, cryptocurrency is created, managed, and exchanged solely through its owners (the bank’s “customers”). How is it possible to complete all of this management without a central organization of any kind?
A technology called “blockchain”. According to the experts at SoFi Invest, rather than cryptocurrency being backed by a central tenant, it is instead “generated by a mathematical process done by a network of computers. This same network is then used to process and exchange the currency all around the world.” A currency owned and managed by the people who use it, pretty appealing right?
How exactly does it work?
Blockchain technology is a new way of storing data. The definition is in the word. A given blockchain is made up of many given “blocks” of data that are “chained” together. The “blocks” of data contain cryptocurrency transactions (i.e. one person sending Bitcoin to another) and are distributed across a network of computers. “Distributed” means rather than one central entity recording all the transactions made (such as a bank), every computer on the network has a copy of the entire history of Bitcoin transactions. This concept is known as a “distributed ledger” and was invented in the field of cryptography.
Bitcoin transactions are stored on a blockchain, and the blockchain is stored across a host of computers on the network.
So how can you buy Bitcoin (or any other cryptocurrency)?
Early in the life of crypto it required a lot of technical know-how to invest in a cryptocurrency. Bitcoin investing in 2021 more closely resembles regular stock-market investing.
Investors first need to choose a cryptocurrency exchange. Examples in the US include SoFi, Coinbase and Kraken. The financial sector’s traditional equivalent of these companies are stock exchanges such as Vanguard, Fidelity, and Etrade.
The process of setting up an account at a cryptocurrency exchange is similar to that of setting up an account at a regular exchange. Gather up personal information such as your driver’s license, bank account information, SSN card, and you’ll have everything you need to sign up.
While the “how” of crypto investing has become far simpler over time the “why” remains an important question to answer. Diversifying a portfolio to decrease risks is at the heart of any investing strategy and cryptocurrencies offer another way to diversify. By picking a safe, well known exchange such as one of the three listed above and investing a small percentage of your portfolio into cryptocurrencies you can add another dimension of diversification to your investment strategy.