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Thanks to the Bitcoin boom of 2017, the subject of cryptocurrency has come off of the dark web and into the public eye. Once thought to be some sort of interesting theory, or an alternative to money used only by social miscreants at worst, cryptocurrencies have become a legitimate vehicle for investment in the eyes of many. With so many benefits, it’s easy to see why so people are rushing to get their hands on Bitcoins, Ether and their ilk. If you’re thinking about investing in cryptocurrency, here are some things you should consider before you start.
It’s not backed by any government or physical asset
Because cryptocurrencies like Bitcoin, Ether and Zcash are not legal tender issued by any governing authority, they don’t have any extrinsic value. This means that governing bodies are not obligated to back up or accept cryptocurrencies. That said, their lack of intrinsic value also makes it difficult to determine their overall value, as they are digital and not made from some valuable substance. So, what does this mean for you as a potential investor? -Your hypothetical Bitcoin fortune is not FDIC insured, and it is highly volatile.
Cryptocurrency is highly volatile
If you’re familiar with other kinds of investments, you probably already know that volatility is the measure of a security’s risk related to the size changes in its value. For cryptocurrencies in general, volatility is quite high, which means that the risk of investing is also high. You should be aware of how much risk you can tolerate before taking on these alternatives to money as an asset.
There is a lack of regulation; at least, for now
While countries such as Australia and Japan, are blazing the trail for regulation in the wake cryptocurrency’s surging popularity, governments around the world lack the legislation necessary to regulate the industry. As a result, there are several risks involved with using and trading these alternatives to money, including a lack of transparency among companies and a high potential for market manipulation.
You need a digital wallet to store it in
Should you decide that cryptocurrency is for you, you will need to choose a digital wallet to act as your account. There are a number of cryptocurrency wallets you can choose from. These include: desktop wallets, online wallets, hardware wallets and paper wallets. Each of these options has their own advantages and disadvantages, so doing your own research to find the right one for you is highly recommended.
Your digital nest egg can be lost in a matter of seconds
If you’re thinking about investing in Bitcoin or any other cryptocurrency yourself, you should be aware that your newfound assets can be lost forever in a matter of seconds due to a scam, a security breach, or other disaster. Because cryptocurrency is essentially intangible, digital information, there are no tangible coins or bills to protect. This presents new challenges for companies and customers who use cryptocurrency, as this alternative to money is susceptible to cyber attacks, freezes and other issues, including user error. For example, should someone transfer their cryptocurrency to the wrong address, it is unlikely they will ever get it back. Other disasters, such as fire or power loss, can potentially cost you a digital fortune. As with any other asset you own, it is well-advised to be prepared for these catastrophes.
There’s a learning curve
While the rise in popularity of cryptocurrencies is due in part to the fact that they can be very convenient to use, it is worth pointing out the fact that many people do not possess the technical knowledge or computer technology to use this alternative to legal tender. For most of us, the concept of blockchain technology, which is the foundation of cryptocurrency, is very difficult to grasp.
The bottom line? Any new opportunity requires research and thoughtful consideration before diving in. As an investor, you should consider your individual circumstances and your own risk tolerance. Only after having done your homework will you come to know if cryptocurrency is a good next move for you.
Ryan Yarbrough is a small business consultant, speaker, and the manager at Davis Financial Services, a small business consulting firm.