A cryptocurrency is a decentralized digital currency built on blockchain technology. It is not governed by any one central authority but rather has a decentralized peer-to-peer network (the system of users and miners) that makes transactions and keeps track of the balances. This means that the security for your cryptocurrency is guaranteed only by the network, which means that you want to be sure that the network has strong security. This might be hard to figure out, and takes a lot of research. Some people recommend outsourcing the research, going with trading services like BitQl instead.
When considering how to invest in cryptocurrency, it’s important to take all necessary precautions. In fact, if you’re new to investing in general, we recommend a very thorough checklist of things to do before putting your money into anything. Another important thing to know is that it’s not always a good idea to put all your eggs in one basket—the more diverse the investment base, the better (generally speaking).
Some people rely on digital currencies as part of their portfolio, while others stick with one or two. Below are some notes about each of the five main qualities of cryptocurrencies that investors should consider when selecting their own investments.
When you look at a cryptocurrency’s source code, check to see whether it is open source. Open source can help prevent flaws from being introduced later in its development since anyone can view the code and point out problems. If there are no known security flaws with the code, you can rely on it being more secure than a closed-source code system.
- ‘Security features’ are an important feature of any cryptocurrency because, unlike fiat currency, cryptocurrency is not insured by any state or federal institutions—it’s all the responsibility of the currency holders themselves. This means that security measures must be taken into account at every step of the way, from initial installation and setup to each use made of a currency. For example, if you enter your private key into a website or app that has been hacked (a surprisingly common occurrence) or otherwise compromised, then your digital currency could be stolen—and there would be nothing you could do.
- “Transparency and activity”: It’s important that all transactions are recorded correctly and that your funds are kept away from malicious users who may try to steal them using malware or other tactics. Is the currency constantly being updated? Is there an active developer team behind it? How quickly is new software rolled out when needed? Are the funds stored in a virtual wallet that you control, or are they stored on an exchange where your funds could potentially be stolen? Does the currency have a strong community of users who help keep a watchful eye for new threats? If you’re not tech-savvy, does it offer easy-to-use wallets or specialized exchanges that will make your life easier?
- “Validation mechanism”: A cryptocurrency’s method of functioning is unique to its particular code, but some things to watch out for are whether it uses PoW or PoS when verifying transactions and whether it requires a lot of computing power to mine new coins or maintain the blockchain (the record of all transactions).
- “What Blockchain is it based on?”: The blockchain is what enables cryptocurrencies to exist. The blockchain is a public ledger that records every transaction ever made in a cryptocurrency. It’s shared among everyone who uses it, and data can never be erased or changed once recorded on the blockchain. In some ways, this makes cryptocurrencies very similar to cash: you have control over your money until you decide to spend it, and once you’ve spent it, there’s no way to get it back. Some blockchains are fast, and some are secure. Rarely both. Check out which one the coin you’re researching is built on.
- What wallets can you hold this coin in? IF there are no secure wallets, and you have to keep the funds on an exchange, it poses a big risk.
It’s important that you understand how the currency works so you know what factors influence its price and how you can affect it. Cryptocurrencies are a hot topic right now, and with good reason. Their value is on the rise, and they’re also a highly convenient way to send money to anyone in the world. But with so many cryptocurrencies out there, it can be hard for investors to know what to look for.