Crypto Investing for Beginners
With the explosive rise of cryptocurrency in recent years, many people have taken an interest in investing in it. Unfortunately, many novice investors don't do the proper research before diving in, and their pocketbooks suffer for it. In this article, we'll discuss the nuanced world of cryptocurrency as well as the smartest ways to get in on the action.
What are Cryptocurrencies?
The most important step in any investment is getting a good understanding of the asset you intend to purchase, and cryptocurrencies, or cryptos, are no different.
A cryptocurrency is a digital token that stores value, much like the dollar does. Every transaction is recorded on a secure, immutable, and transparent ledger known as a blockchain. People can use it to make purchases just the same, since an ever-increasing number of businesses accept it as a form of payment.
The blockchain technology that underpins cryptocurrencies can be traced back to cryptographers in the early 1980s who were looking for innovative ways to prevent digital tampering. As time went on, people tested the limits of what this technology could be applied to. Several groups tried and failed to develop a functioning cryptocurrency before Satoshi Nakamoto finally found success with Bitcoin in 2008. He championed it as a peer-to-peer payment system which is completely autonomous, meaning that it doesn't rely on a third party such as a bank to process transactions.
Today, there are countless tokens besides Bitcoin. It's become easier and easier for the average person to access the technology, and so prices have gone through the roof. Lesser-known cryptos, called "alt-coins," have popped up everywhere to serve different purposes in their digital ecosystems. Some are used in financial transactions, while others simply serve a function within their ecosystem. For example, some tokens, known as governance coins, give their owners the authority to vote on important decisions in a network. When investing in alt-coins, it's important to ensure their function and legitimacy. Anyone can make a cryptocurrency, and not all of them are secure investments.
Investing in Cryptocurrency
Today, the world of cryptocurrency extends far beyond Bitcoin. There are countless coins in existence, and not all of them are suitable for investment. It's wise for new investors to stick to popular coins with proven track records, such as Bitcoin, Ethereum, and other tokens with high market caps like the Binance Coin and the XRP token. It's vital to do diligent research into the inner workings of any coin you're considering investing in.
Why invest in crypto?
In recent years, cryptocurrencies have experienced exponential growth due to rapid adoption. It also appeals to those seeking freedom from centralized finance. Bitcoin is often referred to as digital gold, and as such, it may hedge against inflation by rising in price when the currency devalues. It's important to remember that, no matter how much potential upside crypto has, there is just as much risk involved. Past price action does not guarantee the future, so making savvy decisions is key.
Strategic Investment
Cryptocurrencies have tickers, just like stocks do. Bitcoin, for example, is abbreviated as BTC. It's important to understand the way the crypto market works, since the various factors will affect potential profits. Historically, Bitcoin has gone into a bull run every four years when the amount of Bitcoin being minted each year is cut in half. Therefore, a savvy investor may purchase the coin sometime after the bull run has ended and wait until the next halving. Other market factors include mass adoption, regulation, technological upgrades, and macroeconomic factors often affect prices. For this reason, it's important to stay up to date with the inner workings of the crypto space.
Develop an investment strategy that suits you as an investor. Map out how much you plan to invest, how frequently, and under which conditions. Under what circumstances will you sell? What percentage of profits are you looking for? Decide whether you're looking to capitalize on short-term price movements or longer-term ones. Answering all of these questions and more will help you develop a systematic investment plan that emotions can't influence.
It's also important to properly manage risk to prevent significant losses. A factor that cannot be overstated is emotional management. Not every social media hype is a reason to buy, and not every dip in price is a reason to sell. Emotional investors almost always make poor decisions. It's vital to be diligent in researching crypto projects that you're considering for investment. Make plans for dealing with market volatility, such as gradually buying your position over time. As the old adage goes, "don't put all your eggs in one basket." Most people diversify across multiple cryptocurrencies, and crypto should not be the only investment in your portfolio.
Investing by Proxy
Instead of going through the work of investing in crypto by directly purchasing the coins, people can also purchase funds and derivatives of popular projects. Some believe in simply buying stock in crypto-based companies such as exchanges, which follow crypto's price movements. No matter how an investor approaches adding crypto to their portfolio, the fundamentals always remain the same.
Earning Interest on Crypto
There are a handful of ways to earn interest on cryptocurrency you already own, thereby growing your investment. The most notable of these is known as "staking." Similar to a certificate of deposit at the bank, crypto is locked up for a period of time, and interest is paid. This is a particularly sound investment strategy in the case of stable coins such as Tether (USDT), which are pegged to the value of the US dollar at a 1:1 ratio. They aren't subject to the same market volatility as other coins, and the interest rate on these staked coins is generally much higher than that of a traditional savings account or certificate of deposit.
Acquiring Cryptocurrency
Once you've built enough confidence in a coin to invest in it, the next step is acquiring it. Generally speaking, cryptocurrencies are traded through mainstream exchanges such as Coinbase. Once you get more advanced, however, your options begin to open up.
Exchanges
The most common way to acquire cryptocurrency is by simply purchasing it from an exchange. Consider an exchange to be the stockbroker of crypto. These will be your gateway into the world of crypto, since many common ones provide educational resources to customers. Some popular exchanges with proven track records include:
Coinbase
Binance
Kraken
Get Paid in Crypto
Did you know you can get paid in crypto just, like regular money? Many jobs and gigs, especially those within the crypto space, find it more convenient to pay their employees in cryptocurrency. You just need a place to store and convert it, and then you'll be able to invest in crypto using your labor!
Mining and Decentralized Finance
Outside of directly purchasing cryptocurrencies using cash, there are a couple of other ways to get your hands on cryptocurrency. One of these is mining, the process by which each transaction on the blockchain is validated. Countless computers all around the world work to solve a cryptographic problem designed to verify the accuracy of the blockchain ledger. The one that does this successfully receives a cryptocurrency reward. Other ways to get cryptocurrency include participating in decentralized finance (DeFi) events such as airdrops, where crypto is gifted to lucky participants. You'll learn more about these different avenues as you progress in your crypto journey.
Storing Cryptocurrency
Whether physical or digital, it's vital to choose a safe location to store valuable assets. Doing this properly will both preserve the assets into the future and help mitigate the risk associated with owning them.
Exchanges
The vast majority of people store their crypto with the exchange they purchase it from. This is usually a safe option, but it's best reserved for small amounts of crypto. Storing with your exchange means the asset is not technically in your possession, similar to how cash isn't in your possession when it's at the bank. Having it there makes it more convenient to move and trade. It may even save you money on transaction fees, but it's simply not the most secure option. Make sure the exchange you choose takes the proper precautions against cyber threats and insures their customers' funds.
Digital Wallets
The next option is to store your coins in a digital wallet. There are many popular wallets out there, such as Metamask and the Coinbase wallet. These wallets provide direct access to the cryptocurrency on the blockchain, giving the user more ownership and control. They are still, however, not the most secure option.
Cold Storage
The third and most secure way to store cryptocurrency is in a physical wallet, known as cold storage. This method is most suitable for large sums of crypto that are meant to be held for the long haul. Cold storage is a physical device that stores the keys used to access the assets. These are the most secure because they don't connect to the internet and therefore can't be hacked into.
Taxes and Regulation
Since cryptocurrencies are a relatively new class of asset, the legal regulations surrounding them are still developing. They are a $1.7 trillion industry that has exploded seemingly overnight, and the government is scrambling to keep up. This means the regulatory landscape is still evolving. Just like any investment, people are expected to pay capital gains tax or other similar taxes on their crypto profits. This applies whether you sell for fiat currency or simply trade into another currency. It's important to note that nothing mentioned in this article constitutes financial or legal advice. Do your own research, and consult with a professional if you feel unsure.
In Conclusion
All things considered, cryptocurrencies are an exciting asset class with loads of potential! By getting a firm grasp of the fundamentals mentioned in this article, investors are well on their way to navigating the markets like pros. Remember that research and risk management are key, since crypto is an ever-changing space with as much potential for profits as potential for losses. Keep a clear head and don't add emotions to the equation. That said, welcome to the world of decentralized finance!