Understanding cryptocurrency investments  eye-popping returns for investors, but the volatile asset comes with risks. It’s important to understand these before deciding to invest.

Bitcoin has delivered an average return of 1,416% over the past five years, beating the S&P 500’s 67% return. However, it’s not a risk-free investment, and any potential future returns will depend on market fluctuations, transaction costs, taxes and other factors.

One of the biggest differences between cryptocurrencies and traditional currencies is that they’re not backed by governments or central banks. Instead, they’re based on a technology called blockchain that allows thousands of machines around the world to process and store transactions in a shared record. This makes it extremely hard for anyone to change or tamper with historical transactions and protects against hackers.

Understanding Cryptocurrency Investments: Risks and Rewards

But blockchain isn’t perfect – its security depends on users’ willingness to purchase and hold cryptocurrency. It also requires substantial energy to process, and critics point to price volatility and the fact that a crypto’s value can fluctuate so dramatically over short periods of time.

As with any investment, it’s a good idea to diversify your portfolio by investing in a variety of different assets like stocks, bonds and real estate. For those interested in adding crypto assets to their portfolio, starting small and learning the ropes can help minimize risk. This is particularly true if you set aside only a percentage of your investable funds and only invest what you can afford to lose.