Cryptocurrency may be highly volatile, but it's currently a trendy investment opportunity.
Many of the most widely used digital currencies, including Bitcoin and Ethereum, are experiencing similar cycles of low value followed by rapid appreciation.
Many seasoned investors have been betting on cryptocurrency for years, but how can someone new to the industry participate?
Here is a guide to getting started with cryptocurrency investments as well as some warning signs to look out for.
Table of Contents
What is Cryptocurrency? How Does it Work?
Cryptocurrency, or “crypto,” refers to a digital asset that can be traded freely without the intervention of a governing body or bank. Instead, cryptographic techniques are used to produce cryptocurrencies that may be bought, sold, and traded safely online.
Blockchain is a technology that underpins Bitcoin and many other cryptocurrencies by providing an irreversible record of transactions and establishing a system of ownership. The development of blockchains solved a difficulty encountered by earlier attempts to build solely digital currencies: the prevention of duplication of assets and double-spending.
Depending on their function, cryptocurrency units may be called coins or tokens. Tokens can serve as a medium of exchange for goods and services, as a means to hold value, and as a means to access specialized applications like video games or financial services.
Bitcoin utilizes a method called “mining” that is used to create new units of the cryptocurrency. Computers must solve complex algorithms in order to mine, which may be an energy-intensive operation that ensures the legitimacy of all network transactions.
The owners of these PCs can earn newly minted cryptocurrency in exchange for their efforts. Many alternative cryptocurrencies use less resource-intensive processes to produce and distribute their tokens.
How To Choose A Cryptocurrency To Invest In?
It is in your best interest to do some study before blindly purchasing coins or tokens simply because someone has told you that they are a good investment.
To begin, remember that selecting a profitable cryptocurrency is not the same as selecting a profitable stock. A stock is a piece of a company's ownership that symbolizes the company's promise to generate profits for investors. Owning a cryptocurrency is like having ownership of a piece of paper with no value.
The supply and demand for a cryptocurrency determine its price. When there's a high demand for a product but a small supply, the price tends to rise. When demand rises above supply, prices rise, and vice versa. That's why, while weighing a cryptocurrency, it's crucial to know how its supply grows and what factors may boost demand.
You may find the answers to these questions in the white paper that a cryptocurrency startup releases to gain support for their venture. Check the project's road plan to determine if there is anything that could lead to an increase in customer interest.
Check out the people working on a project to be sure they can bring their ideas to life. If you're looking to invest in cryptocurrencies, you should join a community to see how they feel about it.
It is also essential to take into account the total amount of money that has already been invested in a certain cryptocurrency.
Growth potential may be limited if the market capitalization is currently rather big. If the price is too high, early investors will pull their money out, reducing demand and increasing supply.
How To Invest In Cryptocurrencies
The next step is to begin purchasing the cryptocurrency you have determined to be a solid investment.
The initial action is to register for a cryptocurrency trading account. Unfortunately, cryptocurrency trading is not supported by the majority of stock exchanges. Make sure the exchange you're considering accepts the cryptocurrency you wish to buy before you make any deposits.
You can place an order to purchase cryptocurrencies after you have loaded your account with fiat currency.
A trader's order on an exchange functions similarly to a stock trader's order on the stock market. The exchange will complete the trade once it has matched your buy order with a sell order at the same price.
When your trade is finalized, the bitcoin you traded will be stored in the exchange's “custodial wallet.”
It's simple to get cryptocurrency. You, as a cryptocurrency investor, need to be ready for volatility. Overall, cryptocurrency is more volatile than stocks and other more established asset types. Large fluctuations in price, sometimes as much as 10% in a matter of hours, are usual.
You should also think about how much of your overall portfolio you want to invest in cryptocurrencies before deciding on a specific cryptocurrency.
Since cryptocurrency prices can fluctuate wildly, it's important to offer oneself generous tolerance boundaries when deciding how much to invest. You should rebalance if any of your investments fall outside of the target ranges you set.
The Pros And Cons Of Investing In Cryptocurrency
Investors from a variety of backgrounds have strong opinions on cryptocurrency. The following are a few of the reasons why some people think it to be a revolutionary technology, while others are concerned that it is only a passing trend:
Pros of Investing in Cryptocurrency
There are certain benefits to investing in cryptocurrencies:
It does not appear that the value of cryptocurrencies is associated with the price of other asset types, such as equities or bonds. Having said that, cryptocurrency has only been around for roughly a decade, thus there is a limited amount of data available in this regard.
However, when seen from a theoretical perspective, it makes perfect sense that the value of cryptocurrencies like Bitcoin and Ethereum is not linked to the value of traditional assets.
As its use becomes more widespread, cryptocurrency has generated exceptionally impressive profits. It is generally agreed upon that the potential return on investment for a profitable cryptocurrency investment is higher than that of investing in stocks.
In contrast to equities, several types of cryptocurrency can be used in practical applications. Bitcoin, for instance, can be used as a form of payment for many goods and services.
In some cases, tokens can be exchanged for early access to a project or discounted rates on the project's final product.
Cons of Investing in Cryptocurrency
However, there are also significant drawbacks for investors to consider:
Due to the lack of oversight in the cryptocurrency sector, investors do not enjoy the same level of security as they would in the more tightly regulated stock market. For example, if your account is compromised, you may lose all of your money and have no way to get it back.
There is little you can do if it turns out that the currency you invested in was a scam after it was launched. A further risk associated with investing in cryptocurrencies is that their demand may fall as a result of stricter regulation.
On a daily basis, the prices of cryptocurrencies are subject to drastically unpredictable fluctuations. Some investors find it difficult to maintain their composure in the face of such drastic price fluctuations.