While often portrayed in the media with a heavy dose of speculation, did you know that cryptocurrency also has the potential to be a powerful tool for building your money and helping you achieve your financial goals?
That is if you know what you are doing.
That’s why, in this guide, we’ll tell you everything you need to know about cryptocurrency, including how it can help you with your finances – if you don’t mind a little bit of risk.
What You Need To Know About Cryptocurrency
Cryptocurrency is a digital asset that works as a medium of exchange. Unlike the more traditional currencies that are issued by governments, crypto operates on a decentralized system called blockchain, eliminating the need for central banks. Transactions are publicly recorded on this secure and transparent ledger which shows transparency, thus helping to establish trust.
There are thousands of cryptocurrencies. The most well-known crypto, Bitcoin (BTC) is often seen as “digital gold” due to its limited supply and potential for long-term value appreciation. Ethereum (ETH), another prominent player, focuses on facilitating smart contracts, self-executing agreements that power decentralized applications (dApps). And then there’s also Ripple (XRP), which, as crypto expert, Ben Beddow, points out in his XRP price prediction, “has been all over the news in the past year.” This is largely due to its speed, efficiency, and all-round safety which is making it a popular choice for crypto fans. The coin is projected to potentially reach over $2 within the next year (it’s currently around $0.50 per coin), leading to investors to take note.
In short, crypto is just about everywhere.
Crypto And Your Finances
Cryptocurrency offers several potential avenues for bolstering your personal finances:
- Investment Potential: Cryptocurrencies are a relatively new asset class with the potential for high returns. However, this also comes with risk. While some investors have seen substantial gains, others have experienced significant losses.
- Diversification: Crypto can add diversification to your portfolio, mitigating risk by spreading your investments across different asset classes. This is particularly relevant in today’s environment where traditional asset classes like stocks and bonds might be more correlated.
- Hedge Against Inflation: Certain cryptocurrencies (like Bitcoin) have a capped supply. This makes them potentially attractive hedges against inflation. As traditional currencies are printed, their purchasing power can decrease. Crypto’s limited supply, in theory, protects against this erosion of value.
- Faster and Cheaper Transactions: Crypto transactions can be faster and cheaper than traditional international money transfers. This can benefit individuals who frequently send or receive funds overseas.
- New Financial Tools: Blockchain technology, the backbone of crypto, is enabling more and more financial tools. These include Decentralized Finance (DeFi), which offers lending, borrowing, and other financial services without traditional intermediaries.
Investing in Crypto: A Step-by-Step Guide
Before diving headfirst, it’s crucial to approach crypto investing with caution and a well-defined strategy. Here’s a step-by-step guide to get you started:
- Educate Yourself: Thoroughly research cryptocurrencies and blockchain technology. Understand the potential benefits and risks involved. Resources like educational articles, podcasts, and reputable online communities can be valuable learning tools. Attending events like Token2049 can also provide invaluable insights and networking opportunities. This is by far the most important step you will take in your crypto journey.
- Set Financial Goals: Define your investment goals. Are you seeking short-term gains or long-term wealth accumulation? This will help you guide your investment strategy.
- Choose a Reputable Exchange: Select a well-established and secure cryptocurrency exchange to buy and sell crypto. Popular options include Coinbase, Binance, and Kraken. These platforms allow you to connect your bank account and purchase crypto with traditional currency.
- Start Small: Don’t jump off into the deep end. Begin with a small investment to familiarize yourself with the market and trading process. Then, gradually increase your investment as you gain knowledge and confidence.
- Consider Dollar-Cost Averaging: This involves investing a set total of money at regular intervals – regardless of the current price. This strategy can go a long way in helping you to average out the cost per coin over time, on top of mitigating the impact of market volatility.
- Store Your Crypto Securely: Crypto wallets are digital applications where you store your cryptocurrency holdings. There are two main options: custodial wallets, where the exchange holds your private keys, and non-custodial wallets, where you have complete control over your assets. (FYI: It’s generally recommended to use a non-custodial wallet for long-term holdings, because of prioritizing security over convenience.)
Real-World Examples Of How Crypto Is Making Waves
It’s not just personal finances that crypto is changing the face of. It’s also making big waves in a variety of different areas. So, to show you just how impactful cryptocurrency has been, here’s a look at some real-world examples of crypto usage:
Cross-Border Payments
Traditional international money transfers can be slow and expensive, with intermediaries, i.e. banks, taking hefty fees. Cryptocurrencies offer a faster and cheaper alternative. Bitcoin transactions, for instance, can settle within minutes at a fraction of the cost compared to bank transfers. This is particularly beneficial for freelancers, foreign nationals sending money back home, and businesses conducting international trade.
Supply Chain Management
Blockchain technology, the underlying infrastructure of cryptocurrencies, offers a secure and transparent way to track goods throughout the supply chain. By recording every step of the process on a distributed ledger, companies can ensure the authenticity and origin of products, reducing the risk of counterfeiting and improving overall efficiency.
Unbanked Population
Globally, billions of people lack access to traditional banking services. Cryptocurrencies offer an alternative financial system, allowing individuals to store wealth and conduct transactions without relying on banks. Mobile wallets make it easier for people in underserved communities to participate in the global financial system.
Gaming Industry
Cryptocurrencies are playing a growing role in the online gaming industry. There’s a growing range of Bitcoin casinos, for instance. There are also blockchain-based games that allow players to own in-game assets like virtual items or characters, which can be traded or sold for real-world value. This “play-to-earn” model incentivizes players and creates new economic opportunities within gaming ecosystems.
Funding Innovation
DeFi refers to financial services built on blockchain technology, eliminating the need for traditional financial institutions. DeFi platforms offer a range of services like lending, borrowing, and asset management, often with more competitive rates and greater accessibility compared to traditional options. This fosters innovation and opens up financial opportunities for a wider audience.
The Art World
Non-fungible tokens (NFTs) are unique digital assets that represent ownership of digital or real-world items. Blockchain technology ensures the authenticity and provenance of NFTs. This has revolutionized the art world, allowing artists to sell digital artwork and collectors to own and trade them securely.
Important Considerations and Risks
Cryptocurrency is a complex and dynamic environment. Here are some crucial points to keep in mind:
- Volatility: Crypto markets are notoriously volatile. Prices can fluctuate significantly in short periods, making it a risky investment compared to traditional assets.
- Regulation: The regulatory landscape surrounding crypto is still evolving. Governments worldwide are currently grappling with how to regulate this new asset class. Unforeseen regulations could impact the value and functionality of cryptocurrencies.
- Security Risks: Cryptocurrency exchanges and wallets can be targets for hackers. Implementing robust security measures, including strong passwords and two-factor authentication, is essential.
- Scams: The crypto space attracts scammers. Be wary of unsolicited investment advice, “pump and dump” schemes, and Initial Coin Offerings (ICOs) that promise unrealistic returns.
Final Thoughts
It’s safe to say, crypto is here to stay. Its increasing usage is one of the reasons why more and more people are delving into the cryptocurrency world to see how it could benefit them. With a bit of foresight and some careful research, there’s no reason why you shouldn’t consider using crypto as a means to improve your finances.
Just remember, as with most things in the financial world, there’s risk involved.
