Isn’t “cryptocurrency” a quite cryptic concept? Do most people have trouble understanding how it works as an investment, let alone how it powers itself? Yet, Bitcoin has skyrocketed in worth beyond many investors’ expectations over the past decade. This article attempts to shed light on this phenomenon.
If you think bitcoin and blockchain could be good investments for you, this article will show you how to get started.
What Is Cryptocurrency?
Cryptocurrency (or crypto) is a digital asset that circulates without a central authority such as a central bank or government. Instead, cryptocurrencies are created with cryptographic methods that enable people to buy, sell, and trade them anonymously.
When putting money into cryptocurrency, what do you need?
Beginner investors need only meet a few minimal requirements to start investing in cryptocurrency. You will need the following if you are interested in becoming a cryptocurrency investor:
• Personal identification documents
• Bank account information
• Secure internet connection
There is also the option of buying cryptocurrency through a stockbroker. In this case, your financial and personal information will already be on file. So, now that you have all the information you need let’s begin investing.
5 Cryptocurrency Investing Steps
First, if you want to invest in crypto, you must make sure all your money is in order. This means having an emergency fund, a manageable amount of debt, and, ideally, a portfolio of investments with various assets. Then, your crypto investments can become another part of your portfolio. This will help you get a better return on your total investments.
As you start to invest in cryptocurrencies, you should also pay attention to these five other things.
1. Know what you're putting your money into
As with any investment, you should know what you’re putting your money into. When buying stocks, you should read the annual report and other SEC filings to learn as much as possible about the companies. I plan to do the same with all cryptocurrencies since thousands work differently, and new ones are made daily. For each trade, you need to know the investment case.
Many cryptocurrencies are backed by neither hard assets nor cash flow. For example, this is the case with Bitcoin, where investors can only make money if someone buys the support for more than they paid. In other words, unlike stocks,
where a company can make more money and increase your returns, many crypto assets require the market to become more optimistic and bullish for you to make money.
Ethereum, Dogecoin, Cardano, and XRP are some of the most well-known coins. So, before investing, you should know the possible pros and cons. For example, it could be only very worthy if you have an asset or cash flow to back up your investment.
2. Don't forget that the past is over
Many new investors need to look at the past and assume it will be the same. Yes, Bitcoin used to be worth pennies, but now it’s worth a lot more. So the critical question is, “Will this growth continue in the future, even if it’s not quite at this meteoric rate?”
Investors look at what an asset will do in the future, different from what it did in the past. What will cause returns in the future? For example, traders who buy a cryptocurrency today are looking for gains for tomorrow, not yesterday.
3. Keep an eye on that change
The prices of cryptocurrencies are about as unstable as an asset can be. They could fall quickly in a matter of seconds based on nothing but a rumor that turns out to be false. That can be good for experienced investors who can make trades quickly or who have a good understanding of the basics of the market, how it works, and where it might go. Unfortunately, it’s a minefield for new investors who need these skills or the high-powered algorithms that guide these trades.
Wall Street traders with lots of money play a game called “volatility,” in which they try to beat other wealthy investors. Unfortunately, volatility can make it easy for a new investor to lose everything.
This is because volatility scares away traders, especially those who are just starting. In the meantime, other traders may come along and buy cheaply. So while volatility might benefit “buy low, sell high” traders, it can lead naive investors to “buy high, sell low.”
4. Take care of the risks
It will help you manage your risk when you trade an asset for a short time. This is especially important with volatile assets like cryptocurrency, which can change significantly. So, if you’re a new trader, you’ll need to learn how to handle risks and find a way to limit your losses. And this process can be different for each person:
For a long-term investor, more is needed to sell, no matter the price. Investors can stay in the position because they are thinking about the long term.
On the other hand, a short-term trader might set strict rules about when to sell, like when an investment has dropped by 10%. The trader then sticks to the law to ensure that a slight drop doesn’t turn into a huge loss later.
Traders just starting should set aside a certain amount of money and only use a portion of it at first. Then, if a position goes against them, they will still have money to trade with later. The key idea is that sales are impossible without capital. So, putting some money aside means you’ll always have enough money to barter.
Risk management is essential, but it will cost you emotionally. Even though it hurts to sell a losing position, doing so can help you avoid more significant losses in the future.
5. Don't risk more than you can afford to lose.
Lastly, it’s important not to put the money you need into risky investments. If you can’t afford to lose it all, you can’t afford to put it in risky assets like cryptocurrency or other speculative assets.
The money you will need in the next few years should be kept in secure accounts to be there when you need it. This money might be used for anything from a down payment on a house to an emergency buy. And if you want a sure thing, the best thing you can do is pay off your debt. No matter how much interest you pay on your debt, you will earn (or save) the same amount. There’s no way to lose.
Lastly, consider how safe any exchange or broker you use is. Even if you legally own the assets, someone still has to keep them safe, and that safety has to be tight. For example, if they think their cryptocurrency needs to be more secure, some traders buy a crypto wallet to store their coins offline, where hackers and other people can’t get to them.
Investing in cryptocurrency is highly risky. Cryptocurrency prices, even the most established ones, are far more volatile than other assets such as stocks. In addition, future cryptocurrency prices may be influenced by regulatory changes, with the worst-case scenario being that cryptocurrency becomes illegal and thus worthless.
Despite this, many investors are drawn to cryptocurrency’s potential upside. If you decide to invest, you should thoroughly research any digital coin before purchasing it. When purchasing cryptocurrency, remember that transaction fees can vary significantly between currencies.
Because the cryptocurrency space is rapidly evolving, keeping an eye out for new developments that may impact your crypto holdings is critical. In addition, cryptocurrency investors must understand the tax implications of using cryptocurrency, especially if they intend to buy or sell their crypto investments.
Given the inherent risk of cryptocurrency as an asset class, it is critical to refrain from investing more money in cryptocurrency than you can afford to lose.