With Bitcoin crossing $4,000 USD last week, and everybody seeming to be talking about cryptocurrencies – there are a lot of “other” currencies getting into the game. As such, there has been a huge rise in Initial Coin Offerings (ICOs), which mirrors what you’d find with an Initial Public Offering (IPO) of a stock.
It’s important to remember that investing in any currency (even USD or EUR) is simply speculation. There is no asset, no “money making” ability, simply the value of what one person will pay for it and what you’re willing to sell it for. It’s very akin to investing in gold or platinum. The value is there because another person says so.
That doesn’t mean they can’t be good investments – people are making millions investing in bitcoin.
What Is Cryptocurrency And Why Should You Care?
Cryptocurrency is a virtual currency. People refer to it as “crypto” because most of these currencies use very powerful math algorithms as the basis for their currency. Since this is very akin to cryptography, and it sounds cool, the name stuck.
There are a lot of potential benefits of investing in cryptocurrencie. Most of the main currencies out there rely on a technology called blockchain, which is a public ledger of all transactions. As such, many proponents of investing in crypto say that there is more transparency in the system versus other currencies. Also, since the system is distributed, there isn’t one government agency that could potentially manipulate the currency value.
Furthermore, many companies (especially online) are starting to accept cryptocurrencies such as Bitcoin as a form of payment, making it easy to use for transaction.
The Main Cryptocurrency Options And How To Invest
There are close to 100 different types of cryptocurrencies, and more are springing up all the time (hence the rise of initial coin offerings). The largest and “most safe” cryptocurrencies are:
- Bitcoin (Learn how to invest in Bitcoin)
- Ethereum (Learn how to invest in Ethereum)
- Litecoin (Learn how to invest in Litecoin)
- Ripple (Learn how to invest in Ripple)
For a full list of the main cryptocurrencies, check out this directory.
Investing in these currencies requires the use of a digital wallet. The easiest wallet we’ve found to use is Coinbase. Coinbase currently serves Bitcoin, Ethereum, and Litecoin, but there are more on the way. We like them because if you use this link, deposit $100, you get a $10 bonus!
Warning Signs Of Fraud And Potential Problems
Given the rise of initial coin offerings (ICOs), the SEC has created a warning for consumers considering investing. Given the fact that these currencies are only worth what others will pay for it, investing in a “lesser known” currency or ICO could pose a lot of risk.
With any investment, you should understand how it works and why there is potential value. You should also understand the creator’s underlying business plan to make the currency more popular that the top competitors. Why would someone switch from Bitcoin to this new ICO coin? The only way it’s going to gain value is if there is a reason to switch.
Furthermore, there are a lot of red flags to potentially look for:
- “Guaranteed” High Investment Returns: Remember, nothing is guaranteed, especially with an initial coin offering. If someone is guaranteeing you returns, it’s a big red flag.
- Unsolicited Offers: How did you find out about this potential new currency? Did you seek it out or did they seek you out?
- Sounds Too Good To Be True: Remember, if anything sounds too good to be true, it usually is!
The bottom line is that you need to be very careful investing in any initial coin offering.
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.