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November 05, 2021

A cryptocurrency (or "crypto") is a digital currency that can be used to purchase goods and services, but uses an online ledger with strong cryptography to secure online transactions. Much of the interest in these unregulated currencies is in trading them for profit, with speculators sometimes driving up prices.

The most popular cryptocurrency, Bitcoin, has had volatile price swings this year, reaching nearly 65,000 $ in April before losing nearly half its value in May. By mid-October, the price had risen rapidly again: It reached an all-time high of over $66,000 before falling back slightly.

1. what is cryptocurrency?

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Cryptocurrency is a form of payment that can be exchanged for goods and services online. Many companies have issued their own currencies, often called tokens, which can be traded specifically for the good or service the company offers. Think of these currencies like arcade or casino chips. You must exchange real currency for the cryptocurrency to gain access to the good or service.


Cryptocurrencies work with a technology called blockchain. Blockchain is a decentralized technology spread across many computers that manages and records transactions. Part of the appeal of this technology is its security.


2. How many cryptocurrencies are there? What are they worth?

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According to CoinMarketCap.com, a market research website, more than 13,000 different cryptocurrencies are publicly traded. And cryptocurrencies continue to multiply by raising money through Initial Coin Offerings (ICOs). The total value of all cryptocurrencies was over $2.5 trillion as of October 22, 2021, having reached an all-time high of over $2.6 trillion days earlier. The total value of all Bitcoins, the most popular digital currency, was pegged at around $1.2 trillion.


3, Why are cryptocurrencies so popular?

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Cryptocurrencies appeal to their followers for a variety of reasons. Here are some of the most popular ones:


Proponents see cryptocurrencies like Bitcoin as the currency of the future and are trying to buy them now, presumably before they become even more valuable


Some proponents like the fact that cryptocurrencies free central banks from managing the money supply, since over time those banks tend to reduce the value of money through inflation


Other proponents like the technology behind cryptocurrencies, the blockchain, because it is a decentralized processing and record-keeping system and can be more secure than traditional payment systems.


Some speculators like cryptocurrencies because they increase in value and have no interest in the long-term acceptance of the currencies as a means of transferring money


4. are cryptocurrencies a good investment?

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Cryptocurrencies may be rising in value, but many investors view them as pure speculation rather than true investments. The reason for this? Just like real currencies, cryptocurrencies don't generate cash flow. In order for you to profit, someone has to pay more for the currency than you do.


This is what is known as "the greater fool" theory of investing. Compare that to a well-run business that increases its value over time by increasing the profitability and cash flow of the operation.


Some notable voices in the investment community have advised potential investors to stay away. Most notably, legendary investor Warren Buffett compared Bitcoin to paper checks, saying, "It's a very effective way to transmit money, and you can do it anonymously and so forth. A check is also a way to transmit money. Are checks worth a whole lot of money? Just because they can transmit money?"


Those who see cryptocurrencies like Bitcoin as the currency of the future should keep in mind that a currency needs stability in order for merchants and consumers to set a fair price for goods. Bitcoin and other cryptocurrencies have been anything but stable for much of their history. For example, while Bitcoin was trading at nearly $20,000 in December 2017, its value fell to about $3,200 a year later. Then in December 2020, it was trading at record levels again.


This price volatility creates a conundrum. If Bitcoins could be worth much more in the future, people are likely to spend and circulate them less today, making them less viable as a currency. Why spend a bitcoin when it could be worth triple next year?


5. How can I buy cryptocurrency?

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While some cryptocurrencies, including Bitcoin, can be purchased with US dollars, others require you to pay with Bitcoins or another cryptocurrency.


To buy cryptocurrencies, you need a "wallet," an online app that can store your currency. Typically, you create an account with an exchange and can then transfer real money to buy cryptocurrencies like Bitcoin or Ethereum. Learn more about how to invest in bitcoin here.


Coinbase is a popular exchange for trading cryptocurrencies, where you can create a wallet as well as buy and sell bitcoin and other cryptocurrencies. A growing number of online brokers also offer cryptocurrencies, including eToro, Tradestation, and Sofi Active Investing. Robinhood offers free cryptocurrency trading (Robinhood Crypto is available in most but not all US states). For Swiss users, Swissborg is a good option to get started!


6. are cryptocurrencies legal?

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There is no question that they are legal in the United States, although China has essentially banned their use, and ultimately whether they are legal depends on each individual country. Also, consider how to protect yourself from scammers who see cryptocurrencies as a way to defraud investors. As always, buyer beware.


7. how can I protect myself?

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If you want to buy a cryptocurrency in an ICO, you should read this information in the fine print of the company's prospectus:


Who is the owner of the company? An identifiable and known owner is a positive sign.


Are there other large investors investing in the company? It is a good sign if other well-known investors want a share of the currency.


Do you own a stake in the company or just the currency or tokens? This distinction is important. An equity stake means you share in the proceeds (you're an owner), while buying tokens just means you're entitled to use them, like chips in a casino.


Is the currency already developed, or is the company trying to raise money to develop it? The more advanced the product, the less risky it is.


It can take a lot of work to sift through a prospectus; the more detailed it is, the better the chances that it's legitimate. But even legitimacy doesn't mean the currency will succeed. That's a whole other question that requires a lot of market knowledge.


But aside from those concerns, just owning cryptocurrencies puts you at risk of theft, as hackers try to break into the computer networks that manage your assets. One well-known exchange filed for bankruptcy in 2014 after hackers stole hundreds of millions of dollars in Bitcoins. These are not typical risks for investing in stocks and funds on major U.S. exchanges.

Should you buy cryptocurrencies?


Cryptocurrencies are an incredibly speculative and volatile buy. Stock trading in established companies is generally less risky than investing in cryptocurrencies like Bitcoin.

Have you bought cryptocurrencies? If so, what was your experience?


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