6 Things to Know About Investing in Cryptocurrency

You’ve probably heard of Bitcoin. About three-quarters of adults are aware of cryptocurrencies, and nearly 20% own some, according to a survey by HBUS, a digital currency trading marketplace. In fact, ownership has more than doubled since 2018.

But do you really understand what it is, how it grows, and the risks and rewards of investing in it? Here's the rundown:

What is Bitcoin?

Bitcoin is essentially virtual money: a type of cryptocurrency. You can buy things with Bitcoins, but there aren’t many retailers yet that accept them. (A few that do: Overstock, Newegg and CheapAir.) However, you can use Bitcoin to purchase gift cards from other retailers, on platforms like Gyft. And now you can even donate Bitcoins to charities, such as BitHope and the American Red Cross.

Bitcoins live in a digital “wallet” on an app on your phone or computer. From there, you can send Bitcoins to other people’s digital wallets or receive them to yours. All Bitcoin transactions are logged in a master list called the blockchain. "Blocks" store information about verified transactions—date, time, amount, and participants—and are added, one by one, to the "chain" that forms a kind of public cryptocurrency ledger. (Curious? You can see the blockchain here.)

To get Bitcoins, you can buy them (with money), sell things for Bitcoins, or create them using a computer. Creating Bitcoins via computer takes a long time and requires a powerful computer, so it’s not for the average virtual investor.

Bitcoin is the most prevalent and perhaps the best-known cryptocurrency, but it isn’t the only one. Other popular cryptocurrencies include Ethereum, Ripple, Litecoin and Bitcoin Cash.

How Does Cryptocurrency Grow?

In terms of sheer growth, people called “miners” set up their computers to process transactions in order to receive Bitcoins. Mining has become increasingly time and power intensive, and Bitcoin growth—in terms of the finite number of Bitcoins—has slowed from 9.8% in 2015 to 4.3% in 2017.

Bitcoin and other cryptocurrencies get their value from their market—how many people want it, what they’ll pay for it, and what other competing cryptocurrencies are doing. There's also a supply issue; the number of Bitcoins in circulation will be capped at 21 million, and there are nearly 18 million Bitcoins in existence now. At some point, there will be no way to mine more Bitcoins, which will affect supply and demand numbers—and, presumably, price.

What Should You Know About Investing in Cryptocurrency?

Cryptocurrency isn’t regulated. Bitcoin and other virtual currencies aren’t part of the central banking system. There are no protections in place if you make a bad purchase, and if a computer crashes and wipes out a store of cryptocurrency, there’s no way to recover it. Additionally, typical economic markers that affect regular currency do not apply here.

Experts consider it risky. Cryptocurrency is based on no physical company or product and isn’t regulated by the banking system or federal government. It's also not insured by the Securities Investor Protection Corporation like traditional brokerage accounts.

Price fluctuations can be significant. Bitcoin was valued at more than $17,000 in late 2017, but at the time of this writing, it was priced at just over $8,300. (Yes, that is the price for one Bitcoin, although it's possible to buy fractional shares.)

It’s not like buying a stock. A Bitcoin isn’t a company or a piece of a company. It’s basically like buying a virtual piece of money on the belief that at some point, someone else will pay more for that piece of money than you did.

There are frequently new players. Although some of the more popular types of crypto have been around a while, initial coin offerings (ICOs) introduce new types to the market on a regular basis, creating extensive competition. (You can buy Ox, Auger, Dai, Zcash, Chainlink, Tezos or EOS, among others.)

There are specific ways to buy cryptocurrency. To trade Bitcoin and other cryptos, people must use exchanges such as Coinbase and Coinmama, or they can use broker Robinhood to invest in it. Investors can also buy Bitcoin from other Bitcoin owners on sites like Bisq and Bitquick.

The Bottom Line

Cryptocurrency is gaining in both awareness and popularity. That said, it's not a tangible investment like a stock or bond, it's not regulated, and wild price fluctuations are commonplace. Only time will tell what the future holds for cryptocurrency and its investors.