Individual units of cryptocurrencies can be referred to as coins or tokens, depending on how they are used. Some are intended to be units of exchange for goods and services, others are stores of value, and some are mostly designed to help run computer networks that carry out more complex financial transactions.
One common way cryptocurrencies are created is through a process known as mining, which is used by Bitcoin. Mining can be an energy-intensive process in which computers solve complex puzzles in order to verify the authenticity of transactions on the network. As a reward, the owners of those computers can receive newly created cryptocurrency. Other cryptocurrencies use different methods to create and distribute tokens, and many have a significantly lighter environmental impact.
For most people, the easiest way to get cryptocurrency is to buy it, either from an exchange or another user.
How to buy cryptocurrency safely
Buying cryptocurrencies securely involves four basic steps:
1. Decide where to buy it
There are many ways to buy cryptocurrency safely, though the most accessible method for beginners is likely to be a centralized exchange. Centralized exchanges act as a third party overseeing transactions to give customers confidence that they are getting what they pay for. These exchanges typically sell crypto at market rates, and they make money on fees for various aspects of their services.
If you're more accustomed to traditional brokerage accounts, there are a few online brokers that offer access to cryptocurrencies as well as stocks. Of the online brokers reviewed by NerdWallet, these include Robinhood, Webull, SoFi Active Investing and TradeStation. If you're looking for an exchange that operates solely within the cryptocurrency world, look for pure-play crypto exchanges. These platforms, such as Coinbase, Gemini and Kraken, won't give you access to core assets like stocks and bonds, but they typically have a much better selection of cryptocurrencies, and more on-platform crypto storage options.
Though centralized exchanges are relatively easy to use, they also can be an attractive target for hackers given the volume of crypto that flows through them.
For more advanced users, there are decentralized exchanges whose fees can be lower than those charged by centralized platforms. Those can be more difficult to use and demand more technical know-how, but they may also offer some security benefits because there is no single target for a cyberattack. Cryptocurrencies can also be traded through peer-to-peer transactions.
2. Choose how you'll pay
While there are thousands of cryptocurrencies being traded around the world, you'll find that the most popular options are widely available for purchase in fiat currencies such as the U.S. dollar. If you're a first-time buyer, you'll very likely have to use regular money to buy cryptocurrency.
If you're a more experienced investor, you may want to trade some of your existing crypto holdings for another type of cryptocurrency — for instance Bitcoin for Ethereum.
3. Add value to your account
Depending on how you choose to pay, you may have to fund your account before purchasing any crypto. If you're using fiat currency, most exchanges allow debit and bank transfers. Some also allow you to fund a purchase with your credit card, though this can be a risky move with a volatile asset like cryptocurrency because interest costs can deepen your losses if your investments decline in value.
If you already own cryptocurrency, you can transfer it into your account from a digital wallet or another platform, then use it to trade. Just be sure to verify that your crypto exchange allows trading between the assets you're looking at. Not all cryptocurrencies can be directly traded for one another, and some platforms have more trading pairs than others.
Another thing to note is that exchanges’ fees vary depending on what you're buying and how you're buying it, so review these details carefully.
4. Select a cryptocurrency
There are many options for cryptocurrency investors, though there are none that are likely to be right for everyone. Before you buy, ask yourself what your goals are for this investment. Are you hoping it will increase in value? Are you interested in carrying out transactions using cryptocurrency? Are you interested in using the underlying technology via decentralized apps? These may help you make your decision.
Keeping crypto safe
Once you've decided to buy crypto and determined which cryptocurrencies you want to invest in, your next decision will be how you want to store it safely.
This is an important choice. Crypto assets require a private key, which proves ownership of cryptocurrencies and is necessary for carrying out transactions. If you lose your private keys, you've lost your cryptocurrency. If someone gets your private keys, they can dispense with your cryptocurrencies however they want.
Crypto owners use digital wallets to store their holdings securely. There are multiple options to consider when it comes to digital wallets.
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On-platform storage: Some people choose to keep their cryptocurrency on the exchange or platform where they got it. This has some advantages. It outsources the complexities to a third-party that brings some expertise to the table. You don't have to keep track of your own private keys; all the information is right there when you log in. The drawback is that if the provider has a security breach outside of your control, or if someone hacks your individual credentials, your cryptocurrency could be at risk. On-platform storage is often used by people who think they might want to trade their crypto soon, or who want to participate in exchanges' staking and rewards programs.
» Compare: Best exchanges to store your cryptocurrency
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Noncustodial wallets: Because of the threat of hacking, it can be risky to leave large balances on crypto exchanges for longer than necessary. If you're ready to dive into storing your own crypto, there are many options on the market. They are generally divided into two categories: hot wallets and cold wallets. Hot wallets have some online connectivity, which may make them easier to use but could expose you to some security vulnerabilities. Cold wallets are offline, physical devices that would be unreachable to anyone who does not have them in their material possession.
Pros and cons of cryptocurrency
Cryptocurrency inspires passionate opinions across the spectrum of investors. Here are a few reasons that some people believe it is a transformational technology, while others worry it's a fad.
Cryptocurrency pros
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Supporters see cryptocurrencies such as Bitcoin as the currency of the future and are racing to buy them now, presumably before they become more valuable.
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Some supporters like the fact that cryptocurrency removes central banks from managing the money supply since over time these banks tend to reduce the value of money via inflation.
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Other advocates like the blockchain technology behind cryptocurrencies, because it’s a decentralized processing and recording system and can be more secure than traditional payment systems.
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Some speculators like cryptocurrencies because they’re going up in value and have no interest in the currencies’ long-term acceptance as a way to move money.
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Some cryptocurrencies offer their owners the opportunity to earn passive income through a process called staking. Crypto staking involves using your cryptocurrencies to help verify transactions on a blockchain protocol. Though staking has its risks, it can allow you to grow your crypto holdings without buying more.
Cryptocurrency cons
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Many cryptocurrency projects are untested, and blockchain technology in general has yet to gain wide adoption. If the underlying idea behind cryptocurrency does not reach its potential, long-term investors may never see the returns they hoped for.
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For shorter-term crypto investors, there are other risks. Its prices tend to change rapidly, and while that means that many people have made money quickly by buying in at the right time, many others have lost money by doing so just before a crypto crash.
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Those wild shifts in value may also cut against the basic ideas behind the projects that cryptocurrencies were created to support. For example, people may be less likely to use Bitcoin as a payment system if they are not sure what it will be worth the next day.
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The environmental impact of Bitcoin and other projects that use similar mining protocols is significant. A comparison by the University of Cambridge, for instance, said worldwide Bitcoin mining consumes more than twice as much power as all U.S. residential lighting. Some cryptocurrencies use different technology that demands less energy.
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Governments around the world have not yet fully reckoned with how to handle cryptocurrency, so regulatory changes and crackdowns have the potential to affect the market in unpredictable ways.
Culled from nerdwallet.com
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