What to know before investing in cryptocurrency
Cryptocurrency, like bitcoin, has evolved from a niche payment system in 2009 to a popular investment option today.Bitcoin and other cryptocurrencies are digital currencies bought and sold without traditional banks. “Crypto, and bitcoin in particular, was really started as a payment system that was intended for people just to go shopping with,” said David Yermack, a finance professor at NYU Stern School of Business. “It has morphed into an investment.” Bitcoin can be purchased through cryptocurrency exchanges, stockbrokers, ATMs, exchange-traded funds, money transfer apps and wallet software. It can also be mined. “What happens every 10 minutes is that people around the world gather together all the bitcoin that have been transferred in that window of time and then validate the transactions using the codes that are internal to the system,” Yermack explained. “You sort of have to solve a puzzle by trial and error to mine a block successfully.”The first miner to solve a block broadcasts it to the network, where it’s verified and added to the blockchain. “That’s actually the creation of new money,” Yermack said.This “new money” is stored in a digital wallet made up of a unique set of numbers and letters. Wallets can be online, on your computer, or on an external hard drive.While some see bitcoin as a safe haven like gold, Yermack cautions against that assumption. “There are a lot of people who think bitcoin is sort of a safe haven — an alternative to gold or an alternative to the dollar and the euro and regular currencies,” he said. “There’s no real evidence that this is actually true.”Should you invest in cryptocurrency? Yermack advises, “Nobody should be investing in this who can’t afford to lose their investment.” He also recommends treating it like any other asset. “An investor should be diversified and really try to own a little bit of everything,” he said.Scams are a significant concern, with cryptocurrency fraud costing $9.3 billion last year, according to the FBI. Be skeptical of unsolicited investment offers promising guaranteed returns.To protect your holdings, enable two-factor authentication with a secure app and store long-term investments in a hardware wallet.PHNjcmlwdCB0eXBlPSJ0ZXh0L2phdmFzY3JpcHQiPiFmdW5jdGlvbigpeyJ1c2Ugc3RyaWN0Ijt3aW5kb3cuYWRkRXZlbnRMaXN0ZW5lcigibWVzc2FnZSIsKGZ1bmN0aW9uKGUpe2lmKHZvaWQgMCE9PWUuZGF0YVsiZGF0YXdyYXBwZXItaGVpZ2h0Il0pe3ZhciB0PWRvY3VtZW50LnF1ZXJ5U2VsZWN0b3JBbGwoImlmcmFtZSIpO2Zvcih2YXIgYSBpbiBlLmRhdGFbImRhdGF3cmFwcGVyLWhlaWdodCJdKWZvcih2YXIgcj0wO3I8dC5sZW5ndGg7cisrKXtpZih0W3JdLmNvbnRlbnRXaW5kb3c9PT1lLnNvdXJjZSl0W3JdLnN0eWxlLmhlaWdodD1lLmRhdGFbImRhdGF3cmFwcGVyLWhlaWdodCJdW2FdKyJweCJ9fX0pKX0oKTs8L3NjcmlwdD4K
Cryptocurrency, like bitcoin, has evolved from a niche payment system in 2009 to a popular investment option today.
Bitcoin and other cryptocurrencies are digital currencies bought and sold without traditional banks. “Crypto, and bitcoin in particular, was really started as a payment system that was intended for people just to go shopping with,” said David Yermack, a finance professor at NYU Stern School of Business. “It has morphed into an investment.”
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Bitcoin can be purchased through cryptocurrency exchanges, stockbrokers, ATMs, exchange-traded funds, money transfer apps and wallet software. It can also be mined. “What happens every 10 minutes is that people around the world gather together all the bitcoin that have been transferred in that window of time and then validate the transactions using the codes that are internal to the system,” Yermack explained. “You sort of have to solve a puzzle by trial and error to mine a block successfully.”
The first miner to solve a block broadcasts it to the network, where it’s verified and added to the blockchain. “That’s actually the creation of new money,” Yermack said.
This “new money” is stored in a digital wallet made up of a unique set of numbers and letters. Wallets can be online, on your computer, or on an external hard drive.
While some see bitcoin as a safe haven like gold, Yermack cautions against that assumption. “There are a lot of people who think bitcoin is sort of a safe haven — an alternative to gold or an alternative to the dollar and the euro and regular currencies,” he said. “There’s no real evidence that this is actually true.”
Should you invest in cryptocurrency? Yermack advises, “Nobody should be investing in this who can’t afford to lose their investment.” He also recommends treating it like any other asset. “An investor should be diversified and really try to own a little bit of everything,” he said.
Scams are a significant concern, with cryptocurrency fraud costing $9.3 billion last year, according to the FBI. Be skeptical of unsolicited investment offers promising guaranteed returns.
To protect your holdings, enable two-factor authentication with a secure app and store long-term investments in a hardware wallet.