Cryptocurrency has become widespread in recent years. In fact, at one point, the market value reached $2 trillion. As a new form of digital asset, it has disrupted how we perceive financial assets. That means it has the potential to reshape the global financial landscape.

Bitcoin, Ethereum, and Ripple are among the ones now with the most buzz. The first thought you might have is to strike the iron while it’s hot.

That said, you may still have some concerns if you should invest in them or not. Read on to explore the pros and cons of adding these types of currencies to your financial portfolio.

Understanding Cryptocurrencies and Finance

First things first are understanding what a financial asset is. Financial assets are something that you own.

It gives you the right to receive money or something else of value in the future. It’s like having a ticket you can exchange for something you may want later.

For example, you buy stock in a company. Buying that stock allows you to become a part-owner of that company. Thus, having a claim to a share of the company’s profits.

Having that claim gives you the right to receive money from the company in the form of dividends. Dividends are like a special kind of reward that some companies give to people who own their stock. It’s kind of like getting a bonus for being a good shareholder!

If a company makes a profit, it may decide to share some of that money with its shareholders. If a company pays a $1 dividend and you own its stock, you get $1 per share.

Of course, that’s not the only choice to make money. You can also earn money by selling your stock to someone else for more money than you paid for it.

Another example is a bond, which is like a loan that you give to a company or government. The bond represents the company’s promise to pay you back with interest at a later date.

All in all, you can use financial assets to your advantage. It can help you save money, grow your wealth, and achieve your financial goals.

Terms to Be Familiar With

When it comes to the finance world, some terms will throw you for a loop. And it seems like you can’t do anything but nod in confusion when listening to others. Here are some terms that’ll help you along the way.

Blockchain

A decentralized digital ledger that stores all cryptocurrency transactions across many computers. This ensures both transparency and security for each transaction.

Bitcoin

Bitcoin is the earliest and most popular digital currency. A person under the pseudonym of Satoshi Nakamoto created it in 2009.

Altcoin

Refers to any cryptocurrency other than Bitcoin, such as Ethereum, Ripple, or Litecoin. These coins often have different use cases, features, or technology compared to Bitcoin.

Cryptography

A method of using algorithms to secure and verify the validity of digital data. This authentication is the foundation of cryptocurrencies and blockchain technology.

Decentralization

Distribution of authority and control over a network, system, or organization. In cryptocurrencies, no central authority has control over the currency or its transactions.

Wallet

A wallet is a storage solution needed for using digital money. These codes help with managing, sending, and receiving money.

Private Key

A unique, secret alphanumeric code that grants the owner access to their holdings. It’s a must to keep the private key secure, as losing it can result in the loss of access to your digital assets.

Public Key

The public code comes from your private code. It’s an address for others to send you digital money.

Mining

Checks and adds new transactions to a blockchain by solving tough math problems. Miners receive rewards with a newly created cryptocurrency for their efforts.

Bitcoin Faucet

A Bitcoin Faucet is like a reward system. You can earn Bitcoin in small amounts for doing tasks.

Initial Coin Offering

Some new digital money projects raise money by selling tokens or coins. Early investors will buy these to support the project.

ICOs are like Initial Public Offerings (IPOs) in traditional finance. The difference is digital assets instead of stocks.

Advantages and Disadvantages

The purpose of cryptocurrency is to change how money works in a big way. But, like any big change, there are good and bad sides. Right now, the dream of a shared system using digital money is different from how it works in real life.

Advantages

• Eliminates centralized weak spots
• Simplifies fund transfers between individuals
• Eliminates intermediary involvement
• Potential for generating profits
• Streamlines money transfers

Advantages Explained

Cryptocurrency is a new way to use money without needing banks. People can trust each other and make deals without help from big money places. That way, if a big bank has a problem, like what happened in 2008, it won’t cause trouble all around the world.

Cryptocurrency helps send money between parties without needing a bank or credit company. These transfers are safe due to the codes put in place.

Without a bank’s help, sending digital money can be faster than usual transfers. Flash loans are a good example of this. They are fast loans without needing something to back them up, and they’re used for trading.

There is potential for cryptocurrency investment. In January 2023, Bitcoin reached a market value of $450 billion.

Cryptocurrencies are gaining traction in real-world applications like remittances and online purchases. They help with fundraising through methods like Initial Coin Offerings and token sales. As crypto technology grows, its uses and benefits might increase more.

Disadvantages

• Transactions using fake names
• Fake names can lead to illegal activities
• They’ve become mostly controlled by a few
• Costly to join the network and make money
• Security problems outside the main system
• Prices change a lot and quickly

Disadvantages Explained

Even though there is a claim of anonymous transactions, they still use false names. That means a digital trail still exists. Thus, opening up the possibility of authorities tracking financial transactions.

Criminals Often Use Cryptocurrencies

Criminals often use cryptocurrencies to hide money and buy illegal stuff. There is a famous person, Dread Pirate Roberts, who used it to sell drugs on the dark web. Hackers like it because they use it to make people pay for them when they lock up their computers.

People should spread cryptocurrencies out, sharing the money actively on a blockchain. But actually, only a few people own a lot of it. For example, only 100 addresses have about 12% of all the available bitcoin and its worth.

The idea floating around is that anyone can create them with a computer and the internet. But making popular cryptocurrencies needs a lot of power. The consumption can be as much as whole countries use.

Cryptocurrency storage places are often safe. But other places holding special keys can get broken into.

These places include trading and storage locations. Over time, hackers have attacked many of them. The result is the loss of millions of dollars worth.

Prices of cryptocurrencies in open markets change a lot. For instance, Bitcoin’s worth quickly went up and down. It was almost $65,000 in November 2021 but fell to a bit over $20,000 a year and a half later.

Because of this, many people think cryptocurrencies are a passing trend—either that or something people just guess on.

Stocks vs. Crypto

Knowing how stocks and crypto differ will help guide you on your investments. It’s worth taking the time to compare the two.

The unique characteristics and features of stocks include:

• Represent ownership in a company
• Regulated by government agencies
• Pay dividends to shareholders
• Value based on the company’s performance
• Traded on stock exchanges
• Long history and track record
• Less volatile in price
• Physical asset-backed
• Taxed according to capital gains
• It’s easier for beginners to understand

The unique characteristics and features of cryptocurrencies include:

• Digital or virtual currency
• Largely unregulated
• No dividends
• Value based on supply and demand
• Traded on crypto exchanges
• Relatively new, started in 2009
• More price fluctuations
• No physical backing
• Tax treatment varies by country
• It may be more complex for new users

Fortify Your Financial Assets

Diversifying financial assets is like planting seeds in various soils. The harvest may vary, but the combined yield ensures growth and prosperity.

Should you incorporate cryptocurrency into your portfolio? Of course, the answer is that it depends. It could be a strategic move for some investors.

That’s why you must know your personal risk tolerance and investment objectives. And thorough research is a must.

Do you still have questions? If so, contact us so we can guide you to a better financial future.