How to Invest in Cryptocurrency: The Basics
Even if you’re not into these things, there’s no escaping the talk about cryptocurrency. They’re everywhere, even mainstream media covers news about the major cryptocurrencies. They even wiggled their way into pop culture. This is not surprising. The prospect of investing in decentralized virtual currency is quite enticing especially if you hear how high crypto to fiat exchange is or how a teenager got stinking rich from cryptocurrency. And let’s not forget how real things – houses were sold using cryptocurrency. The question still stands though: Is investing in cryptocurrency safe? Is investing in cryptocurrency right for you?
We’ll take a closer look at the phenomenon that is cryptocurrency. This guide can hopefully help you decide whether to take that plunge or just keep your distance from cryptocurrency.
Cryptocurrencies: An Overview
Bitcoin is the first decentralized cryptocurrency that powered by Blockchain technology. It also continues to dominate the cryptocurrency scene. The prediction is that Bitcoin’s value would reach beyond the five-digit threshold. There is also Ethereum, the second largest cryptocurrency in the market. Ethereum is also the largest open-ended decentralized platform and programming language powered by Blockchain.
There are also several high-performing Bitcoin alternatives (altcoins) and tokens. Altcoins are a variant or “fork” of Bitcoin using the same protocol as the latter but with changes in the code. A lot of these tokens run on Ethereum’s ERC20 token standard protocol. They basically run on top of Ethereum’s blockchain. Several of these coins and tokens don’t technically function as currency.
In 2017 alone, about 700 tokens came into existence. These usual uses for these tokens are to raise funds for startup companies and then monetize a digital platform through Initial Coin Offerings (ICOs).
Early investors had been reaping the profits in the past several years as Bitcoin’s value continue to rise. Bitcoin’s value increased at least 25,000 percent since 2011 and Ethereum’s value surged by 10,000 percent since the last quarter of 2015. ERC20 tokens are also on the rise, with EOS being the most valuable cryptocurrency (ranked 13th as of January 2018).
The Risks of Investing in Cryptocurrency
ICOs present the most number of risks for investors. From bogus ICO projects and coin sells that don’t pan out to ICOs that lack scalability, there’s a lot of things that can go wrong with your investment. But in general, security risks are very minimal in cryptocurrencies. Most of these risks revolve around how the coins/tokens are stored and security weaknesses in the part of coin holders. Then there are cryptophising schemes.
Scammers seem to have easily adapted and evolved to prey on cryptocurrency buyers and investors alike. Schemes include a messaging spam (email, notifications, and SMS), fake Google Ads search results, social media impersonation (mostly of crypto exchanges), fake promos, and chat platform phishing.
But overall, the risk in cryptocurrency is not greater or lesser than any given digital platform. There are several tools that can be used to protect yourself from vulnerabilities in your computer system.
This doesn’t account for the inherent risks of investing money in a volatile ecosystem, though. Just like in trading stocks, one must learn the inner workings of the system before placing stakes in cryptocurrency.
How to Invest in Cryptocurrency: Selecting a Cryptocurrency to Invest In
There are more than a thousand cryptocurrencies to invest from. The top cryptocurrencies are easy pickings – or so a lot of people think. If you invest in top-performing cryptocurrencies, the chances of you making a lot of profit from are quite slim. You can even lose some money from it.
The most common strategy is to invest in cryptocurrency while the coins are still cheap (During the ICO stage). As the cryptocurrency grows, so will your investment (HODL). This is how people who bought Bitcoin for a couple of dollars several years ago are now reaping the benefits. But it’s also true that not all promising cryptocurrencies turned out to be the next Bitcoin. Some just fizzled out, leaving their investors hanging. There is only a handful that already stood the test of time and may have already missed the window of opportunity to make a huge profit from these cryptocurrencies.
To minimize the risks, you to be proactive in your cryptocurrency investment. You need to perform some research and understand the inner workings of the industry in order to assess the real potential of the cryptocurrency. You also need to consider your approach to investment, do you want to invest in cryptocurrency for the coin’s intrinsic currency value or for its platform’s practical application? Don’t just stick to one cryptocurrency, build a cryptocurrency portfolio. Diversifying your cryptocurrency holdings according to market caps can help further minimize the downside risk.
No matter which of these reasons you have, there are common criteria you use to decide on what cryptocurrency to invest in.
Things to Consider When Selecting a Cryptocurrency to Invest In
Bitcoin and Ethereum are the two biggest cryptocurrencies on the market. But in the past years, Bitcoin’s market share decreased from 90 to 40 percent. Bitcoin’s value is still high and Ethereum’s value continues to rise but it is also important to have a well-balanced portfolio.
Here are the things you should take note:
- The legitimacy of the cryptocurrency. Cryptocurrency regulation is still in its early stages. Though it is now easier to spot fake ICO projects, it is still difficult to spot an ICO that’s likely to fail – and 46 percent of these ICOs do fail. Make sure that there aren’t any red flags on the ICO project’s legitimacy before you invest. The ICO should have a well-designed website; a detailed whitepaper disclosing the location, details about the coin/token especially the use case, delivery goals/roadmap, and supporting infrastructure.
- The relevance of the cryptocurrency. You need to judge a cryptocurrency’s relevance in the context of its uses rather than its value. This is especially true for cryptocurrencies that are used to power unique blockchain implementations.
- The growth potential of the cryptocurrency. A lot of ICOs are relatively young but some are already faltering on their delivery goals. Some ICOs even falter right at the coin sell phase or stall after a few months.
- The price of the cryptocurrency. The price range should realistically reflect the cryptocurrency’s growth potential.
- The market cap of the cryptocurrency. Make sure that the cryptocurrency’s market cap is not overly high or low. The higher the market cap, the higher is the investment needed for one to make a considerable profit. But cryptocurrencies with higher market caps are also less volatile. So, make sure to properly diversify your portfolio by including a mix of cryptocurrencies with high, medium, and low market caps.
Research is necessary. Read about cryptocurrency community news and cryptocurrency resources like coinmarketcap.com. Note that the cryptocurrency market is very volatile. Coin rankings fluctuate, so are the coins’ price. The coins you include in your portfolio also depends on the amount of risk you want to take. If want minimal losses on the uptake, create a portfolio with more than 95 percent high market cap coins. Also, have realistic expectations about small to medium-cap coins’ growth. Only a few of them would reach their full growth potential. What you need to do is predict which coins it would be.
Buying and Trading Cryptocurrencies
Depending on the cryptocurrency, you can buy coins/tokens using fiat money or other cryptocurrencies. You can purchase and trade these cryptocurrencies in different cryptocurrency exchange platforms.
I use Binance, which is the best cryptocurrency exchange in my opinion, it is by far the most secure one (others got hacked). Click the button below to create a binance account :
Here are some pointers in selecting the right cryptocurrency exchange platform:
- High level and multi-layered security system
- Beginner friendly (standard and intuitive user interface)
- A range of practical payment options
- Fixed, flexible, and transparent transaction fee system
- Accessible currency and transaction data
- Listing of a wide array of relevant currency pairs
- Efficient performance and fast loading times
- Accessible and accommodating customer service
- Number of supported countries
- The size of the exchange platform. Buying large amounts of coins is faster in larger exchange platforms. Liquidity can be an issue though. But if you only want to buy or exchange a small number of coins, small exchanges can offer better prices.
You can also buy cryptocurrencies, especially Bitcoin using low-risk investment vehicles like Coinbase.
Buying Cryptocurrencies in Exchange Platforms
The major disadvantage with investment vehicles or products is that you’ll need to pay high fees in order to directly buy Bitcoin. The best option is to buy Bitcoin and other cryptocurrencies from cryptocurrency exchange platforms. The process is straightforward. You just need to open an account and verify your identity. Next, you need to deposit funds on your account. Some exchanges only allow crypto-to-crypto exchanges. If the cryptocurrency you want to purchase is only listed in a crypto-to-crypto exchange, you’ll need to first purchase either Bitcoin or Eth in an exchange that accepts fiat currency like USD or Euro. There are also exchanges that don’t require initial funding. These exchanges allow users to directly trade with other users.
Best Times to Buy Cryptocurrency
There are also best times to buy cryptocurrency. Study the cryptocurrency and decide whether it is in a bubble or not. You also need to decide if the bubble is rising, falling, or at its peak. You need to basically master the art of trading by learning the perfect timing for investing in cryptocurrency.
When a cryptocurrency’s value increases by say 10 percent, it’s most probably the effect of daily volatility. A 100 percent increase can signal the start of the cryptocurrency’s “bubble mode.” Observe it for a while and see if it the increase is incremental or sudden. An increase of up to 1,000 percent is good but it’s difficult to predict when the bubble would peak or pop. Also, don’t buy or sell too early. Don’t buy the moment there is a dip in price or the moment the cryptocurrency enters a “bubble mode.” Always observe the movement of the cryptocurrency’s price and rank and observe the trends.
How to Safely Store Cryptocurrencies
You won’t want all your efforts to go to waste, don’t you? You already have in your hands a share of an ongoing monetary revolution. It doesn’t end there, though. You still need to decide where and how to store your coins and tokens. It boils down to two main options:
- Store them within the cryptocurrency exchange platform. If you selected the exchange platform that ticked all the boxes in the checklist above, then you probably trust them enough to safeguard your investment. Holding your coins in an exchange platform is also practical since you don’t need to invest your time, effort, and money in ensuring that the coin will remain safe in your computer.
- Store the coins on a personal wallet. There are several cryptocurrency wallets available in the market but they often do not store Bitcoin and Eth at the same time. There’s also an option for a software wallet, paper wallet, and hot wallet. I recommed a physical wallet : Ledger is again the best :
Things You Should Remember Before You Invest in Cryptocurrency
- Make sure to review the regulations in your country and the exchange’s country of origin. You’ll have better chances of getting a refund or file a complaint if your country or the exchange’s country of jurisdiction supports or have regulations regarding cryptocurrency transactions. Note that some countries aren’t cryptocurrency-friendly. One of these countries is China where some of the rising exchanges operate from. Though China seems to be changing its opinion about cryptocurrency, it still has some of the strictest regulations on cryptocurrency trading.
- There’s also the issue of taxes. Ask a local tax consultant for advice. Cryptocurrency – or rather the money you earn from investing in cryptocurrency can be taxable. This only applies to some countries. Countries like the USA and Germany considers cryptocurrency as a property, not a financial product. There are loopholes of course, but this may change as countries create more solid and comprehensive regulations.
- Do not put all your investments in cryptocurrency. If you can’t afford to lose your Bitcoin, you must certainly can’t afford to own it in the first place.
- Invest in safety. A single malware can erase the coins stored on your computer or smartphone. Also, if you the device you use to store your coins get damage, your coins would be lost forever.
As Erik Finman, a 19-year-old Bitcoin millionaire said, “Find what you’re good at, and find a way to make money doing it.” At the end of the day, one needs a genuine interest in cryptocurrency to be successful in trading it. There are many risks, but knowledge and vigilance are your best weapons in achieving success in the monetary revolution that is cryptocurrency.
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