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February 26, 2021

What to Know Before Investing in Cryptocurrency

The risks and rewards of investing in cryptocurrency

Cryptocurrency can seem like an exciting investment opportunity. There are over 6,700 different types of cryptocurrency, and some, like Bitcoin, have become mainstream. But what is it? How safe of an investment could it be? Before you dive into the world of cryptocurrency, here are few things you should know.

What is cryptocurrency?

Cryptocurrency (or crypto) is a form of digital currency that can be used to buy goods and services online. Many companies have issued their own cryptocurrency that can be traded specifically for the goods and services they provide. Crypto can be understood as something like casino chips or arcade tokens that are exchanged for real money.

It can be volatile

With cryptocurrency, timing is everything. It can be volatile and unpredictable. Over the last few years, the value of crypto has fluctuated wildly with extreme ups and downs. For many professional investors, trading crypto is equivalent to gambling as there is no pattern to its value. Unlike traditional stocks, mutual funds, or other investments, you cannot reliably predict changes or calculate returns. If you want to dive into the world of cryptocurrency, do some research to figure out when is the right time to invest.

Cryptocurrency is a favorite for criminals

The IRS does not recognize cryptos as currency. Thus, it is not regulated, taxed, or realistically traceable. This anonymity and lack of regulation of crypto allows individuals to easily pay for small purchases online and makes it easy to be used to fund illegal transactions. This does not necessarily mean that everyone who uses crypto is engaged in illegal activity, but if someone wanted to avoid being tracked or regulated, crypto could be an option. This could increase the risk of using cryptocurrency as an investment vehicle.

Watch out for false leads

If you are looking into investing in cryptocurrency, you should get plugged into a community. Crypto is a popular topic so there are many active communities communicating around the clock. This allows you to learn more about the trends in cryptocurrency in real time. However, watch out for scammers on social media who make exaggerated claims about the rise of a certain crypto. Just like with traditional investments: if it seems too good to be true, it likely is. Cryptocurrencies are not immune to Ponzi schemes and other scams.

Keep these tips in mind before you start investing in cryptocurrency. All investments carry a degree of risks but steer clear of unnecessary risks. Do your research and avoid gambling with your finances. If you need advice or help finding a reliable investment strategy, reach out to your personal banker today.