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Once considered a frontier asset class—many financial advisors and journalists have dubbed it the “wild, wild west” of investing—right now, cryptocurrency is looking more and more like a suburb. It’s not quite as populous as downtown in a major city, but lots of folks are moving there.  

How mainstream has crypto investing become? Recent surveys have revealed that about 16% of  Americans have, at some point, invested in or traded crypto. Crypto is the darling of young  investors, who have grown up in the digital age and, arguably, are simply more comfortable with  virtual things. About 94% of cryptocurrency owners and traders are millennials and members of  Gen Z. On the flip side, men outpace women when it comes to crypto investing: about twice as many men own crypto as do women. Cryptocurrency has a gender gap problem.

We’ve all heard tales of bit role investors becoming millionaires by investing in cryptocurrency. People who invested in cryptocurrency at its inception—the first crypto trade was made in January of 2009—have made multiple fortunes due to their foresight, willingness to take a risk, and in some cases, blind luck. A single Bitcoin (BITCOMP), worth about a dollar in February of 2011, was valued at $65,000 when the currency reached its high in 2021. But not every Bitcoin investor had the wisdom to cash out when Bitcoin peaked. In early May of 2022, that same bitcoin was worth $31,736. Today’s crypto market is highly volatile. By that we mean it swings upward and downward at sharp angles. Volatility isn’t always a bad thing. But while timing isn’t quite everything when it comes to crypto investing, it plays an outsized role in investment success. For risk-averse investors and those for whom a rapid market decline could spell financial devastation, investing in crypto—especially for the short-term—may not be advisable.

Is crypto investing right for you? How do cryptocurrencies work? What can you actually do with crypto once you own some? Let’s run through some cryptocurrency basics. The answer may become clearer to you as you gain more knowledge about this increasingly popular asset class.

Cryptocurrency Isn’t Widely Understood

The concept of cryptocurrency can be tough to get your mind around. It’s no wonder that a recent survey of crypto investors found that a third of them have zero or next to zero understanding of what they’re buying. That’s pretty alarming on the surface. But bear in mind, people who play the stock market often invest blindly, too. They rely on human financial advisors, robo advisors, and investment apps to pick stocks for them and guide their investment strategies.  No matter where you invest, though, having a thorough understanding of your assets can only be an advantage.

A Definition of Cryptocurrency

Cryptocurrency is purely virtual. It has no physical properties: you can’t stash it in your purse or under your mattress. Cryptocurrency only exists because of technology—or, more specifically, blockchain technology. 

Blockchains are chains of data that are stored on a series of networks. Every time you make a crypto transaction—buying, selling, trading, or spending your cryptocurrency—it’s recorded in a blockchain across multiple digital networks. Redundancy is one reason why blockchain technology is considered very safe. Another reason is the immutability of data stored in a blockchain. Once you’ve made a crypto transaction and it has been recorded across hundreds of computers, it’s virtually impossible to change or erase it. It’s part of digital history. Finally, blockchain safeguards data through powerful encryption. We can’t exactly be sure, because it was invented by an anonymous genius, but that’s probably how cryptocurrency got its name.

Investors Have Cryptocurrency Choices

You’re probably familiar with the names of a handful of cryptocurrencies. Bitcoin (BITCOMP), Dogecoin (DOGE-X), and Ethereum (ETH-X), for example, have earned a lot of brand recognition. But just like there are Euros and yen and dollars, there are many kinds of cryptocurrency. How many? An astonishing 12,000 or more. Compare that to the relatively tiny number of fiat currencies: a mere 180. 

That fact alone can make investing in cryptocurrency overwhelming. But once you’ve decided to purchase cryptocurrency, you need a place to buy it. Cryptocurrency stores are called crypto exchanges. Most are akin to department stores because they offer dozens of brands of cryptocurrency for purchase. How can you tell the best cryptocurrency exchanges from the rest? They’re distinguished by two major qualities: the measures they take to protect your data and the fees they charge for transacting business.

Some of us may not have the patience or technical expertise to delve into the cybersecurity protocols crypt exchanges use to protect transaction data. And frankly, exchange fees aren’t the easiest to understand. They may be based on the value of your purchase, the volume of crypto business you do with a particular exchange, or even the time of day when you transact business. To make matters even more complicated, the crypto exchange industry is subject to fraud. Fake exchanges abound and investors have lost millions of dollars by falling victim to their scams.

Your best bet is to do plenty of research in the financial press before choosing a crypto exchange to work with. Choose an exchange that has a solid, long-standing reputation. Take note of the process you must go through to make a crypto purchase: the most reputable crypto exchanges don’t make it easy. Don’t fall for no-fee promises. That’s a sure sign you’re dealing with a disreputable resource. 

You’ll Need a Place to Store Your Crypto

While cryptocurrency exchanges will store your crypto for you—usually for free—that’s generally not the safest or most convenient option. Most crypto investors quickly move their crypto assets to a crypto wallet. Crypto wallets hold the encrypted private and public keys you need to transact crypto business. Keys are like passwords. You shouldn’t share them with anyone. Experts differ on the matter, but the best crypto wallet for your needs depends mostly on how and how often you intend to move your crypto around and the specific currencies you want to purchase. Not all wallets support all cryptocurrencies. If you’re trading many different currencies, you may need more than one wallet to cover them all.

There are two general kinds of wallets to choose from: hard (also known as cold) wallets and soft (also known as hot) wallets. Hard wallets are so named because they are actual pieces of hardware. You can buy a hard wallet for around $100. They range in size, but all of them will fit in the pocket of your jeans. Here’s the lowdown on hard wallets. They’re considered very safe—less vulnerable to hacking and safer than soft wallets. But if you want to use one, you must have it on your person. Frankly, a soft wallet isn’t something you want to carry with you all the time. Just like a traditional wallet, that would make it more vulnerable to being lost or stolen. So hard wallets are best for crypto owners who don’t expect to buy, sell, trade or spend their currency often. 

The name “soft wallet” also reflects the way it functions. They’re built on software. You can’t hold a soft wallet in your hand, but you can access it any time, from anywhere you have internet access. That means they’re more flexible than hard wallets. You can transact crypto business whenever the spirit moves you. Why would that appeal to you? Crypto markets are open 24/7. If you’re an active trader and want to time your buying and selling precisely, a soft wallet makes that easy. It also offers benefits to the less active investor. A soft wallet lets you take advantage of the lower transaction fees offered at certain times of the day. And if you want to use your crypto wallet like an ATM card to buy, say, a new sweater from Amazon or an espresso at Starbucks, soft wallets give you that freedom. The number of businesses that accept crypto directly for purchases is growing. By some estimates, you can use crypto just as you would cash or a credit card to do business with a third of small-to-medium size businesses in the US. You can add many large businesses to the list, too, from Walmart (WMT) to Pizza Hut (YUM) to Overstock.com (OSTK). If you intend to spend your crypto frequently, a soft wallet is probably the right choice for you.

All that sounds pretty terrific, right? So what’s the downside to soft wallets? The thing that makes them tick—the internet—is the thing that makes them less secure than hard wallets. The web, as we know, is vulnerable to security breaches and hackers get more creative every day. That’s especially true when you use a public WiFi network to access it. So needless to say, don’t connect with your crypto wallet via free WiFi at the airport or while you’re wolfing down a sandwich at Subway. When you’re on the go, soft wallets are best used in conjunction with a secure VPN connection. So you may want to equip your mobile devices with one of those. You can sign up for a VPN for free or next to nothing. Incidentally, unlike hard wallets, many soft wallets are available for free, too.

Are You a Crypto Candidate?

Like many financial questions, the answer to that is it depends. Investing a small amount of money in cryptocurrency—that is, as much as you can afford to lose—can’t hurt much. If you’re interested in becoming a crypto owner, starting small is the way to go. Most financial advisors recommend that you never invest more than 5% of your net worth in cryptocurrency. That’s probably sound advice for any high-risk asset you’re buying, too. How much you invest should also be determined by your life stage. Young investors, who have a lot of time to earn and save money ahead of them, can take bigger risks. They have years to recover from a loss, should one of their crypto assets go south or should the crypto market crash completely. (There’s quite a large cadre of financial gurus who expect that to happen, by the way.)

Once you’re nearing retirement age and you have less time to amass a nest egg, conventional wisdom says you should take steps to limit your investment risk. Moving your money from speculative and high-risk stocks to mutual funds and government bonds is considered the safest strategy as you move towards the end of your career.  

Finally, ask yourself, do you like roller coasters? You’ll need a strong stomach to comfortably navigate the ups and downs of the cryptocurrency market. Like stock market investing, investing in crypto is probably best undertaken as a long-term strategy. The crypto market’s sometimes daily, high-velocity swings aren’t for the squeamish. So take the time to educate yourself on the machinations of the market and the best-performing cryptocurrencies out there before making a conservative crypto investment. You can always ramp up once you’ve built a firm financial foundation and can put a little more money on the line.

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Author Bio: Susan Doktor is a journalist and business strategist with quite a few grey hairs on her head. She covers a wide range of personal finance topics, including investing and financial technology. Her contribution comes to us courtesy of Money.com.