Cryptocurrencies can offer investors and traders very attractive returns that can give returns on investment higher than 10x – a common target for cryptocurrency investment gems. Of course, this also means that there is an increased risk that investors will lose their investments too. Nonetheless, this article will take a look at how to invest in cryptocurrencies.
What Is Cryptocurrency?
Cryptocurrency is a type of digital currency that doesn’t rely on a central authority to verify transactions or create new units. Instead, it relies on cryptography to prevent counterfeiting.
Blockchain technology supports cryptocurrency.
A blockchain consists of individual blocks of data that can contain information about anything, such as transactions made in a specific cryptocurrency. Each block of data makes a reference to the previous block, creating a chain of blocks. The reference uses cryptography to ensure the chain remains immutable so hackers are unable to change data.
There are thousands of cryptocurrencies in existence right now. That’s largely due to the ease of creating a new currency by using smart contracts. New coins can simply piggyback on an existing blockchain that already has a well-established network of computers verifying blocks.
What Is a Cryptocurrency Exchange?
A cryptocurrency exchange is a platform where buyers and sellers meet to trade cryptocurrencies. Exchanges often have relatively low fees, but they tend to have more complex interfaces with multiple trade types and advanced performance charts, all of which can make them intimidating for new crypto investors.
Some of the most well-known cryptocurrency exchanges are Coinbase, Gemini and Finance.US. While these companies’ standard trading interfaces may overwhelm beginners, particularly those without a background trading stocks, they also offer user-friendly easy purchase options.
The convenience comes at a cost, however, as the beginner-friendly options charge substantially more than it would cost to buy the same crypto via each platform’s standard trading interface. To save on costs, you might aim to learn enough to utilize the standard trading platforms before you make your fist crypto purchase—or not long after.
An important note: As someone new to crypto, you’ll want to make sure your exchange or brokerage of choice allows fiat currency transfers and purchases made with U.S. dollars. Some exchanges only allow you to buy crypto using another crypto, meaning you’d have to find another exchange to buy the tokens your preferred exchange accepts before you could begin trading crypto on that platform.
How to Pick a Cryptocurrency to Invest In
Before you go ahead and buy some coins or tokens just because somebody says it’s a good investment, it will pay to do some research.
First of all, it’s important to understand that picking a good cryptocurrency is not like picking a good stock. A stock represents ownership in a company that creates profits for its shareholders, or at least has the potential to do so.
Owning a cryptocurrency represents ownership in a digital asset with zero intrinsic value.
What makes a cryptocurrency increase or decrease in price is simple supply and demand. If there’s increased demand and a limited supply increase, the price goes up. If supply becomes constrained, price goes up, and vice versa.
So, when evaluating a cryptocurrency, the most important questions to answer are how the supply increases, and what will drive demand for the coin higher.
You can answer those questions by reading the white paper that a cryptocurrency team publishes to attract interest in their project. Look at the roadmap for a project and see if anything could spark an increase in demand.
Research the team behind a project and see if they have the skills to execute their vision. Try to find a community of people already investing in the cryptocurrency and gauge their sentiment.
It’s also important to consider how much money has already flowed into a cryptocurrency. If the market cap is already very high, there may not be much potential growth left. A high price will curb demand and increase supply as early investors look to take money off the table.
How to Invest in Cryptocurrencies
Once you’ve found a cryptocurrency you think will make a good investment, it’s time to start buying.
The first step is to open an account with a cryptocurrency exchange. Most stock brokers don’t support trading in cryptocurrency. Coinbase is one of the most popular and beginner-friendly exchanges in the U.S. Other options include Gemini, and newer brokers such as Robinhood and SoFi support crypto.
Just be sure the exchange you want to use also supports the cryptocurrency you want to buy.
Once you’ve funded your account with fiat currency, you can make an order to buy your cryptocurrency. Orders on an exchange work the same way as orders in the stock market. The exchange will match your buy order with someone making a sell order at the same price and make the trade.
Once your trade is complete, the exchange will hold your cryptocurrency for you in a custodial wallet.
Buying cryptocurrency is the easy part. As a crypto investor, you have to be prepared for volatility. Crypto, in general, is more volatile than traditional asset classes such as stocks. Price swings of 10% or more in just a few hours are very common.
Additionally, you should consider how much of your portfolio you ultimately want to allocate to a specific cryptocurrency and to the asset class in general. With the volatility of crypto, be sure to give yourself wide bands of acceptable allocations. If your investments fall out of those bands, be sure to rebalance.
Advantages of Investing in Crypto
Potential of Attractive Gains
Several people have become millionaires, or at least have made a lot of money, with crypto in a relatively short time. This is because cryptos are notorious for their large price fluctuations.
If you buy into a cryptocurrency at the right time, then there is potential for outstanding gains. Just keep in mind that this is not true for all cryptos in the market. So, some research may be required.
Fractional Investment
Unlike traditional investments such as farms and property, cryptocurrency gives investors a fractional investment alternative. This means that a person does not need to purchase an entire coin of a crypto, or adhere to a minimum investment amount, as is the case for property investments.
The ability to purchase micro amounts of cryptocurrency make it a popular choice for investors that do not have a large pool of funds to play with – giving them the chance to grow their portfolio one micro investment at a time.
Simplified Offshore Investment
With traditional investments, investing offshore is a tricky and complicated process. With cryptocurrencies, you are able to invest in American projects such as Ripple (XRP), or in Asian blockchain projects such as NEO or Binance Coin.
Disadvantages of Investing in Crypto
Creeping Regulation
Although the cryptocurrency markets are highly unregulated at the moment, this may not be the case for much longer as regulators across the globe have prioritized coming up with a regulatory framework for the crypto sector. This means that there will soon be crypto taxes imposed on crypto trading.
High Levels of Risk
The crypto market may provide the opportunity for quick and substantial gains, but it also poses significantly high levels of risk. Some cryptos may not pick up the desired traction in the market and will result in early-stage investors losing some or, in some cases, all of their invested capital.
A Lot of Scams
Due to the highly unregulated nature of the crypto markets, scammers run rampant and prey on unsuspecting newcomers. These scams all try to get access to your crypto wallets’ private keys – allowing the scammers to steal your funds.
This is perhaps one of the main disadvantages of investing in the cryptocurrency market, since the number of scammers in the market continues to rise. Fortunately, there are measures that can be put in place to protect yourself from being scammed.
Airdrops
Cryptocurrency airdrops is not necessarily a crypto investment method in the traditional sense, but it is a way for you to get into cryptocurrency without having to invest initial capital, since you can participate in some airdrops just by completing certain tasks. These tasks can include sharing a post on social media, joining a Telegram group, etc.
Airdrops are a popular marketing tactic employed by young cryptocurrency projects to attract new investors, and can either include handing out free non-fungible tokens (NFT) or free crypto coins. However, the latter option is the less popular of the two. Once you receive the airdrop, you can cash it out for the crypto that you want to get into.
Forks
Another way to accumulate some free crypto that is not considered an investing method is through fork events. These are events where an existing blockchain network or cryptocurrency token is replicated and a spin off is made from the original architecture and network design.
Not all forks are of the same degree of significance, and the reasons for the spin offs can vary. The main reason is a division in the community of a project, which results in part of the community branching out and creating their own version of an existing project. Some examples include Ethereum and Ethereum Classic, as well as Bitcoin and Bitcoin Cash.
When the spinoffs are created, anybody holding tokens belonging to the original network will receive the same amount of the cryptocurrency they hold in the token that belongs to the spinoff.
These fork events are relatively rare and not a common occasion in the market. So, just keep an eye out on news channels and social media.
Considerations to Keep in Mind
Choose the Correct Mix of Storage
When investing in cryptocurrencies, it is important to put some thought into how you will store your cryptocurrency investments. If you are investing for the long term, then you may want to store your cryptocurrency in a wallet not hosted on an exchange platform, such as a hardware wallet or cold wallet.
Also, make sure to make multiple backups of the private keys for all of your cryptocurrency wallets. If you lose access to your wallets, these backups will allow you to re-access your crypto wallets on another device.
Prioritize Liquidity
Liquidity will play a noticeable part in your crypto investment journey, especially if you are planning on investing a large amount of capital. This is because low levels of liquidity make it easier for small capital amounts to move the markets.
Therefore, you may encounter a problem if you want to sell a large portion of crypto as doing so will have an impact on the price and your profits.
Harness Volatility
Since cryptocurrency is an emerging asset, there is still speculation and hype surrounding the asset class, which can often lead to heightened volatility. While large price movements are typically seen as a risk, daily volatility is normal and healthy for the crypto market and is actually an opportunity to make profits.
But to manage your volatility risk effectively, it’s best to understand what type of trader you are so you can manage the market’s price swings.
Invest What You Can Afford
Cryptocurrencies are speculative assets that could entail a high degree of loss. Just like with traditional investing, only invest in the crypto market what you can afford to lose. If you are not able to withstand the potential full loss of your crypto investment, that means you cannot afford the risk of investing the amount you are considering.
Determining risk tolerance in the crypto market comes down to how much you earn and your level of expertise.
Take Your Gains Often
Experts say crypto market participants should take gains frequently. The best practice is to store your gains in your hardware wallet. When it’s time to take profits, crypto investors are often faced with the challenge that a cryptocurrency’s price could sink or soar. Regular profit-taking smooths out this risk over time.
Diversify
Putting all your eggs in one basket is not a sound strategy in the world of crypto. A better strategy to minimize risk in crypto investing is to have your crypto portfolio invested in a variety of coins and crypto projects. There are many investments available on the market associated with cryptocurrency and blockchain, including the “internet of things,” non-fungible tokens, DeFi projects and the wide variety of coin types.
What is a Crypto Market Cycle?
A crypto market cycle is simply the period between the peak and low of a market and its stages. Market cycles happen in all financial markets. It is a natural procession of cycles that are bound to appear and reappear as time progresses. However, compared to the stock market, cycles in crypto can be significantly shorter due to the rapid price movements.
Market Cycle Timing
A cycle can last anywhere from a few weeks to a number of years, depending on the market in question and the time horizon at which you look. A day trader using five-minute bars may see four or more complete cycles per day while, for a real estate investor, a cycle may last 18 to 20 years.
Different Types of Crypto Investing
Investing in Cryptos Directly
This is the most common form of investing in cryptocurrencies, and is the process of investing in cryptos directly by buying into them on a crypto exchange platform. For instance, buying BTC on Binance and then storing the crypto in a hardware or cold wallet.
Crypto Funds
Many asset managers are creating crypto funds that investors can invest capital into. These funds are indexes of ETFs that track the performance of crypto. However, some investors opt for investing in crypto directly over investing in a fund that tracks the performance of cryptos.
Invest in Cryptocurrency Companies
This form of crypto investing involves buying shares in a company in the cryptocurrency space. An example is purchasing shares in Kraken or another centralized platform. However, most investors choose to just purchase the company’s native token, such as purchasing Binance Coin (BNB).
To Recap
Cryptocurrency is a type of digital currency that doesn’t rely on a central authority to verify transactions or create new units. Instead, it relies on cryptography to prevent counterfeiting.
The first step to investing in crypto is to open an account with a cryptocurrency exchange. Next, you will need to fund your account and then you will be able to purchase or invest in cryptocurrencies. The cryptocurrencies that you will be able to invest in depends on what cryptos the platform offers.
Although cryptos have the potential to yield fast and high returns on investment, the market can easily turn on any investor – resulting in dramatic losses.
Before starting on your cryptocurrency journey, the best thing that you can do is to research as much as you can on projects that you are looking to invest in. Lastly, putting all your eggs in one basket is not a sound strategy in the world of crypto. A better strategy to minimize risk in crypto investing is to have your crypto portfolio invested in a variety of coins and crypto projects.
