Investing in cryptocurrencies is not always Sunshine! If you are going to invest in this world then you have to know that it comes with potential risks and rewards. If you look at the bright side then these digital currencies offer great returns provided the decision is made correctly. The quick return is offered because cryptocurrencies operate on decentralized networks.

But on the darker side of the picture are the market’s unpredictability, and cyber threats, and the biggest drawback is it’s unclear sets of rules. Also, the blockchain Network, on which cryptocurrencies are operated, has its own sets of issues in which smart contracts hold the most importance. Therefore, it is advised to make yourself knowledgeable on the basics of this world which are mentioned below before starting investing.

What Is Cryptocurrency?

A Cryptocurrency is a digital currency that uses cryptography to secure its transaction. Most cryptocurrencies are built on blockchain technology which is a distributed ledger enforced by a network of computers called nodes.

Cryptocurrencies are not issued by any regulatory authority therefore they are not affected by any interference from the government. Since cryptocurrencies do not have any central issuing authority, therefore they make use of decentralized systems to record transactions.

Types of Cryptocurrency

When the crypto trend started it was only Bitcoin to research on. But now, there are so many options and types of Cryptocurrency that it’s become empirical to understand them all. But most investors make the common mistake of confusing them with different brands of Cryptocurrencies like Bitcoin, Ethereum, etc.

By types of Cryptocurrency, we mean what kinds of purposes it has. Make sure that you know the purpose of your coin before deciding to invest in it. Why? Because a Crypto coin with a purpose will be less risky than the one which has no purpose at all.

Below are the types of Cryptocurrency with their tokens’ example:

1. Transactional Cryptocurrencies

These crypto are designed to be used for peer-to-peer transactions or to put in easier words, they are designed to be operated as a medium of exchange. Bitcoin (BTC) and Litecoin (LTC) are the famous names of transactional cryptocurrencies.

2. Utility Cryptocurrencies

To provide access to a particular service on a blockchain network, utility tokens are created. For example, Ethereum (ETH) is used to create and deploy smart contracts and decentralized applications (DApps).

3.Governance Cryptocurrencies

Some blockchains allow stakeholders to give their opinion or vote in a decision-making process like protocol upgrades and other changes. Governance tokens are designed to give these voting rights to the participants.  Popular examples are Uniswap, and Tezos (XTZ).

4. Platform Cryptocurrencies

Platform cryptocurrencies provide developers with a platform to build blockchain-based applications like decentralized apps (DApps) and smart contracts. Popular examples are Ethereum (ETH), Solana (Sol), and Binance coin(BNB).

5. Security Tokens

Security token shows ownership of real-world assets on different platforms. Security tokens combine the benefits of traditional financial markets with blockchain technology. tZERO (TZROP) and Swarm (SWM) are examples of such tokens.

Risks and Rewards of Investing in Cryptocurrency

The main reason for the creation of Cryptocurrencies was to help secure the financial infrastructure but as things progressed, the risks of investing in Cryptocurrency increased. But it does not mean that the rewards are minimized. The main risks and rewards of investing in the Cryptocurrency are as follows:

The Rewards:

• Elimination Of Single Point Of Failure: Cryptocurrency operates on decentralized networks therefore no banks or other centralized or monetary institutions are required for the transactions. This freedom from interference from the centralized systems eliminates the risk of single-point failure.
• Incentive Systems and Easier Funds Transfer: Centralized systems require a third party and a trusted one to complete the transactions between two peers. But since crypto is a decentralized network therefore it lets the funds be transferred from one party to another without a third party. To complete the transactions securely, different incentive Systems like proof of work or proof of stake are utilized.
• Faster Transaction: Because of the absence of third-party intermediaries, Transactions in cryptocurrencies are done at much faster rates than traditional transactions which sometimes even take days. One such example of these faster transactions is flash loans which are completed in a few seconds to be easily used in trading.
• Lower fees: Since there are fewer intermediaries involved in cryptocurrency transactions therefore their processing fees are pretty low which makes them very feasible for lower-scale transactions.
• Generate Higher And Quicker Returns: With Cryptocurrency investment you can expect higher returns at a much quicker pace. The market value of just Bitcoin was more than $680 million in November 2023. Now the crypto market has reached over $2 trillion.
• Streamlining Fiat Currency Across Different Borders: Without third-party involvement, cryptocurrencies like Bitcoin can transfer money across borders. First, a fiat currency is converted into cryptocurrency and then transferred to the destination and converted to its fiat currency without any issue.
• Greater Financial Freedom: Cryptocurrency is a decentralized network that provides greater freedom financially and provides more privacy for the users.

The Risks:

• Pseudonymous Transactions: Transactions in cryptocurrencies are said to be anonymous but in reality, they leave a digital print that can be tracked by high-tech agencies like the Federal Bureau of Investigation (FBI).
• Pseudonymity And Criminal Uses: The use of digital address through Pseudonymity can provide privacy benefits but it also provides opportunities for criminal activities. Criminals may take advantage of the decentralized and pseudonymity of this digital currency platform and exploit it for activities like money laundering, illegal transactions, and ransom payments. One such criminal case was recorded in Dread Pirate Roberts, who was running a marketplace on the dark web for selling drugs.
• Highly Centralized: Cryptocurrencies are said to be decentralized but in practice, some cryptocurrencies have become highly centralized with just 100 addresses acquiring around 15% of circulating Bitcoin and total value.
• Have Become Increasingly Expensive To Mine: Cryptocurrencies are mined by using a computer that is connected to the internet. But if you want to mine famous currencies then they require a great amount of energy. Sometimes the amount is equivalent to what is required to run a country. As a result, the mining process has become increasingly expensive and thus only very few large-scale firms with revenue in billions can mine them.
• Security Issues: Crypto networks are blockchain networks that are highly secured but some security issues are off-chain. For example, key storage wallets or exchanges can be hacked. In fact, over the years, many wallets and exchanges have been hacked and millions of dollars have been theft.
• Volatility: Cryptocurrencies are highly volatile. It means if you want to invest in it then constant monitoring is required. For example, Bitcoin dropped from  $65,000 to $20,000 in a year and a half.
• Lack of liquidity: if we compare Cryptocurrency markets with traditional markets then they lack liquidity because they are smaller. Therefore buying or selling large amounts of Cryptocurrency may have a greater impact on the market.
• Lesser Adoption May Lead To Decline In Value: If we compare the investment between traditional markets and cryptocurrencies then it’s relatively low in the case of Cryptocurrencies and is largely affected by investor hype. If the adoption continues to be on a lower scale then cryptocurrencies might lose their value over time.

How Do You Buy Cryptocurrencies?

After making yourself informed about all the risks and rewards of investment in Cryptocurrencies, you can purchase cryptocurrencies from different platforms. Popular and trusted ones are crypto exchanges like Coinbase, Binance & Bybit. Other popular platforms are through brokers and apps like Cash App. You can also invest in cryptocurrencies through ETFs or other financial derivatives like CME’s Bitcoin futures.

The Wrap-Up!

Cryptocurrency might be a lucrative investment but it is still a digital currency that is continuously evolving. And with each evolution comes trade-offs. It is therefore advised to make yourself equipped with its complete knowledge and know all the risks and rewards that investment in Cryptocurrencies offers. Only then you can make an informed decision and when you start investing in cryptocurrencies don’t forget the golden rule ‘ ONLY INVEST WHAT YOU CAN AFFORD TO LOSE!’