Investing in cryptocurrency has been in the news a lot — and it seems like it's all the rage. But that doesn’t mean it’s the financially responsible choice for everyone. 

This week, we want to give you a brief primer on cryptocurrency — what it is, why it's so volatile, and explore the question of whether it’s a good idea to invest in what has been called by some the “money of the future.”

What is cryptocurrency?

Cryptocurrency is digital money people use as investments and for online purchases. The investor exchanges real currency, i.e. dollars, to buy “coins” or “tokens” of a type of cryptocurrency. This digital money can only be used at select retailers and vendors, though that number is constantly growing. Or, you can sell your tokens or coins for dollars.

Cryptocurrency is unique because it’s decentralized and is not regulated by any government or institution. Instead, every cryptocurrency transaction is verified through blockchains, a database of complex, unique codes. Cryptocurrency is stored in a digital wallet that can be accessed through a “key,” that is another unique code.

What are the most popular cryptocurrencies?

There are approximately 10,000 kinds of cryptocurrencies, but you’ve likely never heard of most of them. Here are the top contenders:

• Bitcoin. The first and most valuable cryptocurrency by far, Bitcoin was created in 2009 by an anonymous person who goes by the code name Satoshi Nakamoto.
• Ethereum. The second-most popular cryptocurrency is also mineable, which means it allows its users to use computers to solve complicated math problems to verify when other crypto transactions are complete. Miners are paid in Ether coins.
• Dogecoin. The crypto that started as a joke back in 2013 has been dominating financial headlines since the start of the year, thanks to its incredible gains — and incredible losses.

Which retailers accept cryptocurrency as payment?

Most people still regard cryptocurrency as an investment in the future, but there are some major retailers that already accept crypto coins as payment. These include Whole Foods, Nordstrom, Etsy, Expedia, PayPal and more. Of course, cryptocurrency can also be used to pay for goods or services provided by any private vendor that accepts this type of digital money.

Why is cryptocurrency so volatile?

Cryptocurrency’s decentralization also makes it extremely volatile; with no regulation, demand and supply can drive the price of a cryptocurrency through the roof or plummeting to the ground, practically overnight. Recently, viral tweets by billionaire investors, as well as new regulations by the Chinese government, have been dramatically affecting the cryptocurrency market. Michael Saylor, CEO of MicroStrategy, says that volatility is a good thing. In a recent interview, Saylor told Stansberry Research, “I would much rather have a volatile 300% return than a non-volatile 15% return.” People who invested early in Bitcoin and sold at its peak literally made millions of dollars in the digital currency.

Why you may not want to invest in cryptocurrency

But that volatility can work in the other direction, too! Cryptocurrencies can lose value as quickly as they can gain it. Bitcoin started at more than $47,000 per bitcoin in January of this year. It is now worth around $21,000.

Before you pour your life savings into Bitcoin, Ethereum, Dogecoin or any of the thousands of cryptocurrencies, consider these factors:

• Cryptocurrency is inherently unstable. Cryptocurrency has bought major returns for investors over the past year, but it has recently performed bearishly, showing only small pockets of growth over several weeks. 
• Cryptocurrency is still a big unknown. Though it recently passed its 12th birthday, the crypto market still holds many mysteries. No one even knows who founded Bitcoin!
• Cryptocurrency is often targeted by scams. The FTC warns that crypto’s decentralization means the U.S. government has no obligation to step in and help victims of crypto fraud.

Reasons to consider investing in cryptocurrency

With all the risks involved, you may still want to consider investing in Bitcoin, Ethereum, Dogecoin or another digital currency. Here are some reasons that may be driving your decision:

• Cryptocurrency provides investors’ portfolios with diversification. A small percentage of your total investments going toward cryptocurrency can be a good idea.
• Cryptocurrency has the potential for outstanding long-term performance. The cryptocurrency market has performed incredibly well over the past decade, which makes investors confident that similar gains will be enjoyed by those who put their money in Bitcoin and other digital currencies over the next decade as well.
• If you do decide to invest in cryptocurrencies, it’s best not to touch your 401(k) or other long-term saving funds. Invest with caution and only invest what you can afford to lose. It’s also a good idea to wait for one of the frequent dips in the market so you can buy your crypto when they’re at a relatively low price. You can invest through a brokerage platform that sells cryptocurrencies like Coinbase or Binance.

Investing in cryptocurrencies is trending, but that doesn’t mean it’s the right choice for everyone. Consider every factor outlined here carefully, and make an informed decision before putting your money into the digital market.

Learn more about cryptocurrency with our financial literacy partner, Banzai.