Cryptocurrency: How It Works and Tips for Success

Buchalter & Pelphrey Attorneys At Law

Investing isn't limited to the stock market anymore. Thanks to the internet and other technological advances, cryptocurrencies, an unregulated currency that is entirely virtual, are all the rage for new investors. So, what are cryptocurrencies, and how do you invest?

The Concept

You've probably heard of Bitcoin or Dogecoin, but what are they, and where did they come from? The answer: it's complicated.

The concept of an unregulated, virtual currency isn't new. In fact, the idea itself was constructed by David Chaum, a cryptographer responsible for producing the first digital currency transaction system. Chaum's work with DigiCash laid the foundation for others like Satoshi Nakamoto to build the cryptocurrency world as we know it.

What Is a Blockchain?

Nakamoto, a name given to the anonymous creator of Bitcoin, was the first to incorporate blockchain technology with digital cash. Blockchains are database networks that store information in blocks that are chained together.

Think of it this way: a blockchain is kind of like a game of telephone. In the game, one person comes up with a message and passes it on to the next until the message reaches the last person who says it out loud. In the same way that one person passes on a message, data is passed from one block to another.

Blocks have to be full before the data can be transferred to a new block, but once it's full, the data moves on and is stored chronologically.

So, to add all the pieces together, cryptocurrency is digital money stored within a blockchain to ensure that all transactions are private. The draw to crypto is that it is completely unregulated by a government body. This means that there are no Federal Reserves to manage the value of crypto or manipulate the inflation rates.

Cons of Crypto

Crypto sounds great, but there are some disadvantages. For starters, unregulated and unsupervised transactions are a recipe for criminal behavior. Since its release in 2009, Bitcoin has been at the center of investigations into the use of crypto on the black market.

Another issue with cryptocurrencies is the lack of centralized management. Dollars are regulated by the Federal Reserve who monitors and adjusts inflation and value to boost the economy. The Federal Reserve also has the all-important job of printing money – something Bitcoin doesn't do.

When there are limited amounts of currency, it automatically becomes more valuable to buyers. This is one of the reasons why Bitcoin prices have increased to unimaginable levels in a short period of time. There are only so many Bitcoins, and as the value increases, the likelihood of an unregulated global economy becomes more of a pipe dream.

Should I Invest in Cryptocurrency?

If you want to invest in a nontraditional way, crypto might be the way to go. However, it's important to understand that while there is freedom in decentralized currency, there is a lot of uncertainty and risk involved in buying or selling crypto.

On the other hand, big risks often come with big rewards. Successful cryptocurrency investors know when to cash in – or out – and how to manage their investment in an extremely unstable market. If you don't have experience with investments in general, crypto might not be a good first-time investment.

Additionally, those filing for bankruptcy beware: volatile investments may not be a wise decision if you're in the middle of bankruptcy proceedings. It may seem like quick cash, but crypto is a long game that takes patience and skill.

How to Invest in Crypto

Investing is complicated, but there are ways to maximize your chance of success.

  • Have a strategy. Crypto trading is challenging because of the number of fraudulent companies and traders on the market. Don't follow the herd – research your trading options and be patient.
  • Limit risk. Risk is unavoidable in the cryptocurrency world, but being cautious about your money and limiting the amount you invest can go a long way toward your success.
  • Diversify. Like stocks, it's important to diversify your crypto portfolio. In other words, don't put all your eggs in one basket.
  • Be patient. In a volatile market, it's easy to cut your losses and run, but fluctuations are natural, and the value of your crypto will change day by day. Don't panic sell – stay for the long term and reap the benefits.
  • Check user rates. The number of users on crypto can tell you a lot about how successful it may be. If the user rates are plummeting, it may be time to sell.

Key Takeaways

Crypto is complicated, but it's an excellent way for many investors to make money and be a part of something groundbreaking. If you're thinking of investing, do your research and resist the temptation to dive in.