If you own bitcoin, you’re probably feeling a little poorer this morning.
The world’s largest digital currency lost about 10 percent of its value in the wake of a report that Goldman Sachs has canceled plans to open a trading desk for cryptocurrencies. Another popular cryptocurrency — ethereum — was down 13 percent.
The plunge was a reminder of the risks of trading in cryptocurrencies. I talked about this subject recently in the video below.
If you are wondering if now is the time to “buy low” by investing in cryptocurrencies while they are down, watch the video. Or, if you prefer, read the transcript below.
For more information, check out “Bitcoin for Dummies” and “The 10 Golden Rules of Becoming a Millionaire.” You can also go to the search at the top of this page, put in the words “bitcoin” or “investing” and find plenty of information on just about everything relating to this topic.
Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by MoneyTalksNews.com, serving up the best in personal finance news and advice since 1991.
Today’s question comes to us from William:
“Should I invest in cryptocurrency? How do I do it?”
Well, William, I’ve got three things for you:
Thing No. 1: What exactly is cryptocurrency?
Let’s understand what cryptocurrency is. It’s confusing at first.
One way of thinking about it: It’s like peer-to-peer lending, where you lend money directly to other people through the internet. When you do that, there’s no bank involved.
Cryptocurrency is kind of similar. You, me and thousands of other people create our own money. It’s decentralized: There’s no bank or government involved. We limit the supply to a finite number of available units, called tokens, then establish an auction market to determine what its value is.
There are many forms of crypto. Two of the most popular are bitcoin and ethereum. But whatever the form, it’s a medium of exchange created from computer code. The code is developed using a technology called blockchain.
Blockchain is what cryptocurrency is based on, but the technology behind it is also being used for all kinds of other interesting things. In fact, blockchain is so revolutionary that many are lauding it as the next internet.
Thing No. 2: What determines the price?
The same system that determines the prices of everything from grain to gold also establishes the price of cryptocurrencies: There’s an auction market — with buyers and sellers — and prices reflect supply and demand.
There is one big difference, however, between this market and other more well-established auction markets: The trade for bitcoin and other cryptocurrencies is super-volatile. It’s also unregulated, which means it’s possible for nefarious things like market manipulation to occur.
In 2013, bitcoin was at $76. In 2017, it got as high as $20,000. As I speak, it’s now around $8,000. Needless to say, this is volatile stuff. Prices may settle down as months go by, they may remain volatile, or cryptos may even disappear altogether.
Thing No. 3: Should I buy cryptocurrency, and if so, how?
I did a story on bitcoin about four years ago. Since I wanted to understand exactly how it worked, I personally bought $250 worth, then pretty much forgot about it. By last December, that $250 was worth about $8,000. I sold half of it and am now using that money to fool around with ethereum. So far, I’m doing OK, although not great. Of course, since I’m playing with the house’s money, it’s not a big deal.
There are a number of exchanges you can use to buy and sell cryptocurrencies. I use one called Coinbase. You set up an account, then transfer money from your bank to buy any of several available tokens.
And now the big question: Should you buy cryptocurrency? If you’ve got the money and guts to gamble, sure. As I said, I’ve got $8,000 in cryptocurrency, but that’s a very small percentage of my net worth. Here’s the bottom line: Don’t put money into cryptocurrency that you can’t afford to lose, because you certainly could.
As far as which cryptocurrencies to invest in, I personally use bitcoin, which is by far and away the most popular cryptocurrency. As I mentioned, I also have some ethereum. Ripple is another popular one, although I have no personal experience with it.
What should you do next? Read all about it! We have some articles on MoneyTalksNews.com, and there’s plenty more out there. I had to read several articles before I could wrap my mind around this new investment. You probably will too. But I encourage you to at least explore, if not invest in, cryptocurrencies, and especially blockchain. It’s fascinating stuff.
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I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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