But before considering investing in cryptocurrencyIt’s important to understand the difference between meme coins, altcoins and bitcoin.

Bitcoin is the original cryptocurrency and the largest in market capitalization, with more than US$ 1.3 trillion, according to CoinMarketCap. It was created by Satoshi Nakamoto, a person or group of people whose identity remains a mystery. Nakamoto envisioned bitcoin as an alternative version of virtual money that would not rely on a government or financial institution, such as a bank, to function and facilitate payments.

Like many cryptocurrencies, bitcoin is powered by blockchain technologywhich functions as a decentralized digital ledger that tracks transactions made on the network.

Bitcoin also has a built-in feature limited offer of 21 million coins. This means that no new bitcoins will be issued after 21 million coins have been mined. The scarcity is on purpose; The supply limit ensures that bitcoin remains a scarce good, so theoretically, as demand increases and supply remains the same, the value of bitcoin also increases.

Altcoins, also known as alternative currencies, refer to any cryptocurrency other than bitcoin. While some of these digital tokens may operate similarly to bitcoin, they are built on different blockchain networks.

There are thousands of altcoins, which are typically created with a specific purpose in mind. To take stable coins, for example. A stablecoin is a type of altcoin that pegs its value to another asset, such as gold or the US dollar, with the aim of stabilizing its price.

Outside of stablecoins, many altcoins derive their value from market demand and traders’ preferences. However, this can make them particularly vulnerable to rapid and unexpected price changes, says James Royal, chief investment and wealth management analyst at Bankrate.

“If demand dries up, you’re just left with useless digital assets and a good story,” he told CNBC Make It.

Furthermore, with so many altcoins available, it is important to be aware of possible scams. One of the most common types of crypto investment scams encourages you to purchase a large amount of a certain coin and then transfer it to the scammer’s wallet.

“Before investing in crypto, search online for the name of the company or person and the name of the cryptocurrency, as well as words like ‘review,’ ‘scam,’ or ‘complaint,’” the Federal Trade Commission it says on its website.

Under the umbrella of altcoins are meme coins. These virtual tokens are often created for fun and are named after Internet memes or pop culture references. And while every meme coin is an altcoin, every altcoin is not necessarily a meme coin.

While all cryptocurrencies pose risks, meme coins can be especially treacherous for traders, says Royal.

“Meme coins are among the riskiest cryptocurrencies because they seem to appear out of nowhere and information about them can be scarce,” he says. “They are expected to rise and fall as public sentiment shifts from one side to the other. Meme coins can attract public attention today and disappear tomorrow.”

Aside from stablecoins, most cryptocurrencies are not backed by an underlying asset such as gold, other commodities, or fiat currencies. Many cryptocurrencies are only worth what the next trader is willing to pay for them, which is why they are considered highly volatile and subject to unpredictable price swings.

“While well-established cryptocurrencies like bitcoin and ethereum may have trader sentiment in their favor now, they are still ultimately driven solely by sentiment,” says Royal. “If traders decide these coins are no longer worth it, there will be no fundamental business to support the price of the coins like there is with stocks.”

Ultimately, Royal says to “avoid cryptocurrency entirely.” But if you are interested in “trying your luck” in the crypto market, try a bitcoin exchange traded fundhe says.

An ETF is a type of investment fund that aims to imitate and track the price movement of an asset or basket of assets. You would purchase a bitcoin ETF through your brokerage account, rather than purchasing and storing bitcoin on a cryptocurrency exchange or the bitcoin blockchain network.

“The annual fees are reasonable, cheaper in most cases than buying the crypto yourself, and you are buying a coin that has interest from institutional investors, so demand can remain robust,” says Royal. “You will also avoid the security, fraud and theft issues that have plagued cryptocurrency exchanges in recent years, while paying lower fees.”

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