Investing is an effective way to increase your wealth and secure your financial stability. The emergence of cryptocurrencies has proved to be a viable investment alternative that has attracted significant attention. Cryptocurrencies such as Bitcoin provide an alternative to traditional investments including bonds, stocks, or real estate. This article details what cryptocurrencies are and everything you’ll need to know about them.
What are Cryptocurrencies?
Cryptocurrencies are digital assets that work on a decentralized system known as the blockchain. Cryptocurrencies (or "cryptos") can be traded without the need of a third-party intermediary such as banks or governments. With the help of cryptographic methods, cryptocurrencies can be created, bought, sold, and exchanged securely.
Blockchain technology keeps a history record of transactions and monitors who owns what. Blockchains address the problem of individuals duplicating their holdings and using them twice, which existed in previous attempts at creating digital currencies.
What is Traditional Investments?
Conventional or ‘’traditional’’ investments are a long-established type of financial instrument that are widely used to generate wealth. They provide traders and investors an opportunity to take part in the success of sectors or companies offering interest, dividends, or capital appreciation.
Advantages of Cryptocurrencies
As blockchain-based, cryptos provide many benefits compared to other financial instruments. Here are some of the following advantages of cryptocurrencies:
- High-level of security: Generally, blockchain operates on a decentralized ledger network. In such a case, all the network participants possess a copy of the ledger system that monitors all the transactions on the platform. All the information is stored on blockchains through distributing them across all their nodes.
- Decentralization: By nature, blockchains are decentralized. Hence, there is no group or single entity that controls the workings of the network. Instead, all participants in the network take part in the decision-making process regarding the platform.
- Financial inclusion: Many people lack access to traditional banking systems due to their location and financial obstacles. Cryptocurrencies offer an accessible way for an unbanked population. With no banks or a formal ID, anyone can create a crypto wallet with an internet connection.
Disadvantages of Cryptocurrencies
Some of the disadvantages associated with cryptocurrencies include:
- Prone to hacks: In general, cryptocurrencies are pretty secure, but many traders don't seem to be. Most exchanges monitor users’ wallet information to establish their user IDs. Hackers usually steal this data, giving them access to the user’s account.
- Illegal transactions: It is challenging for governments to track down any individual through their wallet address or keep surveillance of their data since cryptocurrency transactions are highly secure and private.
- High volatility: Over the years, cryptocurrencies have been known to be highly volatile. In most cases, it’s common for the value of a cryptocurrency to fluctuate by double digits within a single day. With extreme volatility, investors who don't time the market accurately can experience monetary challenges. Cryptocurrencies are highly volatile. However, by regularly checking the conversion rates from BTC to USD, you can safely combat this volatility.
Endnote
Cryptocurrencies are virtual assets that operate on a blockchain. As a new technology, they are highly speculative. Before investing in cryptocurrency, it is crucial to understand the risks involved. However, you cannot ignore the benefits of cryptocurrencies that have the potential to take over the world.
Cover photo credit: Pixabay
