Investing Basics: Cryptocurrency

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Narrator: Cryptocurrencies like bitcoin, ethereum, and litecoin are digital currencies that  can be used for internet-based electronic payments or as a store of value that is independent of a bank or credit card company.

These cryptocurrencies, sometimes called coins, use blockchain technology—which is designed to make transactions of all kinds secure, transparent, and accurate.

A blockchain is a record of digital transactions that acts as a public ledger. The ledger is maintained by a global computer network that verifies transactions by solving complicated cryptographic math problems.

It works like this: When an individual makes a transaction, a message describing the transaction is sent over the network. Then the network participants race to guess a code that opens a data container called a "block," where transactions are stored. Once the code is solved, the block is added to the chain, and a subset of pending transactions are permanently recorded in the public ledger.

This process of maintaining the blockchain is often called mining because those who pledge their computing power to the network and successfully solve new blocks receive cryptocurrency as a reward.

The mining process is one way an individual can acquire cryptocurrency or coins. Individuals can also acquire coins when they accept them as payment or buy them from a digital exchange.
Some investors see cryptocurrencies as a speculation opportunity. Others believe they can help balance risk by adding diversification to a typical portfolio.

However, investing in cryptocurrencies has many risks.

The price of cryptocurrencies can be extremely volatile and change by hundreds or even thousands of dollars in a single day. Cryptocurrency exchanges can be hacked, passwords and private keys can be lost or stolen, and transactions are irreversible. Additionally, cryptocurrencies are not stored in traditional banks and lack the regulatory protections of other types of investments.

Investors who are comfortable with the risks can buy and sell cryptocurrencies on cryptocurrency exchanges. There are also ways to gain exposure to cryptocurrencies without actually owning them.

For example, investors can buy stock in companies associated with cryptocurrencies or blockchain technology, such as those that create hardware used for mining. Investors can also purchase trusts or funds that provide direct or indirect cryptocurrency exposure, and qualified clients can trade bitcoin futures.

These types of investments allow investors to speculate on the direction of cryptocurrency prices but still have unique and significant risks to consider.

No matter how you choose to participate in the cryptocurrency market, remember that as with any asset, it's important to determine your risk tolerance, conduct thorough research, and monitor your positions carefully.

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