Over the last few years, cryptocurrency has been one of the most discussed topics in the financial world. With the rise in popularity of Bitcoin and other digital currencies, many investors are considering adding them to their portfolios.
However, as with any investment, there are advantages and disadvantages to purchasing crypto. Before you buy cryptocurrency, you must evaluate the benefits and risks. This article covers different types of digital currencies. You will also learn about the pros and cons of investing in cryptocurrencies.
Types Of Cryptocurrency
Before you figure out what cryptocurrency to buy, it’s best to understand all the different types of digital coins. Many have heard about Bitcoin, Ethereum, Tether, and other coins, but not everyone knows that these three types of currencies are entirely different. Thus, cryptocurrencies are of three main types, as follows:
- Bitcoin-like cryptocurrencies
- Ethereum-like cryptocurrencies
There are also other digital currencies, like privacy-focused Monero and Zcash, which use advanced cryptography to disguise transaction data and give increased privacy and anonymity.
Two smaller groups are utility tokens and security tokens. The first group is used as payment for products and services within a specific ecosystem or platform. The second group reflects ownership of real-world assets such as real estate or stocks. However, let’s focus on the three main big groups of currencies in detail.
Bitcoin was the first decentralized cryptocurrency and continues to be the most popular and well-known among regular users and big investors. It employs a Proof-of-Work consensus mechanism. According to this mechanism, miners solve complex mathematical algorithms to validate financial operations within the blockchain and earn new currencies as a reward.
Bitcoin-like cryptocurrencies, or altcoins, are cryptocurrencies that are structurally and functionally similar to Bitcoin. Litecoin, Bitcoin Cash, and Bitcoin SV are a few examples of such Bitcoin-like altcoins.
Ethereum is a decentralized platform on which smart contracts and decentralized applications (dApps) can be developed and launched. Ethereum was a Proof-of-Work-based in the past, but recently the entire blockchain switched to a Proof-of-Stake consensus mechanism due to sustainability issues and electricity consumption related to the first mechanism.
The Proof-of-Stake mechanism has validators or stakeholders instead of miners. These validators are selected based on the amount of cryptocurrency they possess and are willing to “stake” as collateral. The process is called staking rather than mining.
Ethereum-like cryptocurrencies, or ERC-20 tokens, are cryptocurrencies that are structurally and functionally similar to Ethereum. Binance Coin, Chainlink, and Uniswap are a few examples of such Ethereum-like currencies.
These are cryptocurrencies that maintain a stable value in relation to another asset. It means that a typical stablecoin is backed by another asset, similar to fiat currency. However, some stablecoins are controlled by complex algorithms that maintain their stability.
Simply put, stablecoins accomplish stability by tying their value to the underlying asset’s price via various processes, such as collateralization. Tether, USD Coin, and Dai are examples of stablecoins.
Pros And Cons Of Buying Crypto
You may be wondering where to buy cryptocurrency, but a more important aspect is why should you buy cryptocurrencies. There are multiple benefits to purchasing digital coins; the most prominent one is the potential to get high returns.
However, there are also a few significant drawbacks to investing in such a volatile asset. Thus, let’s see what are the pros and cons of investing in crypto.
Cryptocurrencies have grown in popularity in recent years. More people start investing in them, hoping to profit from big and even small price swings. The following are some of the advantages of investing in cryptocurrency:
- High profits. Cryptos have previously demonstrated the potential for enormous growth. Some popular coins witnessed massive gains in short periods. It’s due to the fact that cryptocurrencies operate in a highly speculative market in which their value can vary dramatically.
- Reduced transaction fees. When compared to standard payment options like credit cards and bank transfers, cryptocurrency transactions often have lower fees since there is an absence of any intermediates in the process.
- Cryptocurrencies are available and accessible because they can be purchased and sold online from anywhere in the world. This makes investing in them simple for anyone with an internet connection and knowledge of how exchanges work.
- More privacy. Cryptos provide greater anonymity than traditional payment methods. While transactions are recorded on the blockchain, personal information is not linked to them, ensuring greater anonymity. However, keep in mind that anonymity in the crypto world is not a thing. It’s pseudo-anonymity, which means that people can connect the owner of an asset with their identity.
- Digital coins and tokens are a great addition to a well-diversified investing strategy. They provide a distinct asset class that is unrelated to typical assets like equities and bonds, which can help spread risk and potentially boost returns.
- The decentralized nature of cryptocurrency is one of its primary advantages. Unlike traditional currencies, digital ones aren’t governed by a single entity. As a result, they are immune to government intervention, inflation, and other external variables that can impact the value of fiat currency.
- Potential for the future. Cryptos are still in their early phases, with plenty of possibility for growth and innovation. As blockchain technology advances, there is the possibility for new and inventive cryptocurrency applications, which might lead to higher adoption and growth.
Still, if you’re seeking cryptocurrency to buy now, it’s advised to be aware of all the risks such an investment poses. Despite all mentioned benefits, a bad investment can undermine all your progress.
Before figuring out how to buy cryptocurrency based on all the amazing advantages mentioned in this article, let’s see the disadvantages of investing in digital coins:
- Cyber risks. Cryptos are vulnerable to cyber attacks, and hackers often target exchanges and personal wallets. There is no way to reclaim an investor’s cryptocurrency if stolen.
- Digital coins and tokens are notorious for their price volatility, with prices fluctuating quickly and unpredictably. This leads to large gains or losses in short periods, making it a high-risk investment.
- Lack of regulation and proper legislation worldwide. Because cryptocurrencies are not regulated by any central authority, investors do not have the same level of protection as they do with regular assets. This absence of control has the potential to lead to market manipulation and fraud. For instance, when groups of individuals create hype around a specific crypto, people buy it in bulk, which leads to a price increase, and then these people sell the coin for a higher price.
- Lack of wider acceptance. While the number of retailers accepting cryptocurrencies is increasing, they are still not commonly recognized as a payment method.
- Cryptocurrencies can be complex and difficult to comprehend, especially for individuals not technologically skilled.
- Lack of intrinsic value. Cryptocurrencies, unlike traditional investments like stocks or real estate, have no inherent value. Their value is solely determined by market demand and speculation. Thus, crypto value is volatile because it’s not backed by real assets. The only exception is investing in the stablecoin, which is still not ideal as stablecoins are influenced by the crypto market price swings, as shown in late 2022.
Overall, buying cryptocurrency is a risky investment, although one which can bring profit. It’s critical to ensure you understand everything about the cryptocurrency you invest in and that you keep an eye on this investment.
Price swings mean that crypto isn’t suitable as an asset that you buy and forget about. Instead, you must keep an eye on the global economy and the crypto market.