Cryptocurrencies are a lucrative area of investment. They have attracted great attention because of the flexibility and seamlessness digital currencies propose to provide to the financial system.
People have been investing in cryptocurrencies for two reasons. First, to understand the technology better and second, to benefit from the rise in crypto valuation. Given the surge in bitcoin price in 2017 and its increasing user base, cryptocurrencies have set forth discussions on the future of money.
Several alternatives to bitcoin also made their way into the market to provide people with a range of cryptocurrencies to choose from and invest in. These alternative cryptocurrencies are also known as Altcoins. Examples of altcoins are Ethereum (ETH), Litecoin (LTC), and Dogecoin.
Since the market and demand for digital currencies have considerably grown in the past few years, investors see great potential in some upcoming cryptocurrencies, such as Decentraland’s MANA, Ethereum (ETH), and Solana (SOL) are a few from the list of other cryptocurrencies.
In the following sections of the article, we’ve covered the essential things one should know before investing in cryptocurrencies. This article will cover it all, from a general brief about the meaning of crypto and how it works to digging deeper into some of the characteristics of cryptocurrency that affect investment choice. Read till the end to learn more!
First of all, before investing in cryptocurrency, a basic understanding of the term, the nature of digital money and its way of working are necessary to make sound investment choices.
Cryptocurrency is a digital medium of exchange that is powered by blockchain technology. Unlike traditional currencies, cryptocurrencies aren’t issued by a central authority; they are decentralized and encrypted, ensuring secure transactions without third-party interference.
Investments in cryptocurrency are made either directly through purchasing crypto coins from cryptocurrency exchange platforms or indirectly through investment in the shares/stocks of companies actively involved in the digital currency market.
Questions To Ask Before Investing In Cryptocurrency
Before responding to the cryptocurrency market trends and venturing into dealing with the digital currency, financial experts suggest that an investor must ask themself some questions before entering into the space of crypto investments.
Given the dynamic nature of the crypto market, if an investor is aware of where their decisions are coming from, they’ll be able to sustain the varying market conditions and make better decisions.
Given below are the questions they might use for cogitations regarding investing in cryptocurrencies:
1. What Is Your Purpose For Buying Crypto?
It is important to question the intent of your purchase as an investor because that will give you a better understanding of how to manage your experimentation with cryptocurrencies.
People mostly invest in top cryptocurrencies either to use them as a traditional ‘currency’ for transactional purposes or to hold them till they reach a relatively high valuation to sell them off at the right time and reap gains from investment.
Kiana Danial, leading investor, entrepreneur and author of “Cryptocurrency Investing for Dummies,” said in an interview that, unlike the stock market, where people have been the witness to a long record of increase in value over time, cryptocurrencies are relatively riskier in the present times because of their uncertain nature.
Financial experts believe investing in cryptocurrency with the viewpoint that making quick and easy money would be a risky approach; instead, one should have a long-term vision to reap genuine benefits from the technology.
On the other hand, the adoption of crypto as a currency for transactional purposes will depend on the level of acceptance it receives as an alternative to fiat money.
2. How Much Risk Can You Take?
The next essential question that a crypto investor should consider is their risk appetite for investing in cryptocurrency. Given the volatile and highly dynamic nature of the cryptocurrency market, people planning to allocate a share of their portfolio to cryptocurrencies must assess their ability to take the risk of loss in value.
The crypto market is relatively young, and therefore most people are unaware or struggle with understanding its market mechanism. Moreover, there are high fluctuations in the value of cryptocurrencies, even by the hour. Therefore, there is a possibility that the market may collapse, and the digital asset might stand worthless overnight.
Given this harsh likelihood, before investing, one must ask themself if they’re willing to go for such a risk and accordingly determine the amount of money they’d like to invest in the crypto market.
A key takeaway that financial experts and investors suggest would be to acknowledge the speculative character of these digital currencies.
3. What Are Your Trusted Sources For Guidance in Investing?
Since the cryptocurrencies are fairly nascent, quite baffling and complex, investing in them would require understanding the basics of cryptocurrency, its various trends and other related information to make a correct choice of cryptocurrency.
Investors would need to set aside time to study everything about crypto to become an expert before investing, which can be pretty time-consuming, or they’ll require a reliable person who is an expert in the crypto industry for guidance.
4. Where and How Will You Purchase Crypto?
Cryptocurrencies can be purchased from crypto exchanges and stored in crypto wallets. However, one must note that since there is no third-party intervention in cryptocurrencies, the crypto exchanges are also mostly unregulated; they do not provide any oversight or protection as given by traditional banks and investment platforms.
Henceforth, the burden of choosing an appropriate and comparatively secure platform falls upon the investor. Platforms like Coinbase, Gemini, BitMart, and Kraken are some of the most reliable ones among many other crypto exchanges available; these have the list of top cryptocurrencies that are the most popular choice of crypto investors.
In addition, another key feature to consider is how to store the cryptocurrency. If the amount invested is small, one can rely on hot or virtual wallets to keep their crypto; however, in case of a huge investment, the provision for moving crypto onto a cold or offline digital wallet becomes essential.
5. What Factors Would Influence Your Choice Of Crypto Investment?
Many factors could affect your choices of cryptos, such as profitability, convenience, the volatility and limited supply of the cryptocurrency, the government regulations on the crypto, if any, and the competition in the crypto market because new tokens are launched every day. In addition, many platforms take a surcharge for every transaction done using cryptocurrency.
Depending on which factor one prioritizes, their choice of cryptocurrency for investment purposes may differ accordingly. If one purchases crypto for transactional purposes, investing in a widely accepted cryptocurrency would be appropriate.
What To Know Before Investing In Cryptocurrency?
Here is a list of seven things that you should consider knowing when investing in cryptocurrencies:
1. Absence Of Relevant Info In The Whitepaper Is A Red Flag
The whitepaper of any cryptocurrency is the best way to know the principles guiding a project, the purpose of the company setting it forth, and how the technology is used to execute it.
Financial experts advise that aspiring crypto investors must read the whitepaper of the cryptocurrencies they intend to invest in before entering head-first into the space. This is because reading the whitepaper on the crypto gives a clearer understanding of whether a particular cryptocurrency is worth investing in or not.
Top cryptocurrencies have their whitepapers on their websites which anyone can access and read. The ones with good, informative and detailed whitepapers covering essential data and project specifics can certainly be considered the best cryptocurrencies to invest in. Therefore, the absence of it should be deemed as a red flag.
2. Difference Between Crypto Coins And Tokens
Knowing the difference between several cryptocurrencies available in the market is significant when venturing into crypto. However, given the vast expanse of this subject, the market primarily categorizes them into two heads — crypto coins and crypto tokens.
Crypto coins are usually native to a blockchain and are monetary, essentially used to hold transactional value for the user or investor. On the other hand, crypto tokens tend to use another coin’s blockchain. They are linked to financial instruments similar to securities and other utilities such as shares, services, and preferential treatment.
To understand this better, consider Ethereum and Bitcoin. These blockchains have Ether (ETH) and Bitcoin (BTC) as their native cryptocurrencies, respectively. And Basic Attention Token (BAT), Bancor (BNT), and OmiseGo (OMG) are some of the tokens that run on the Ethereum blockchain.
3. A Cryptocurrency Must Be Chosen Based On Its Merit
Choosing a cryptocurrency from amongst several options can be difficult; however, this decision can be simplified by analyzing the top cryptocurrencies in the market and opting for the best cryptocurrencies to invest in based on their performance and merit.
The legitimacy of the cryptocurrency project should be a top priority for investment, followed by the eventual investment’s potential. Therefore, investors should always choose their crypto coin or crypto-token based on the merit visible through their performance rather than being influenced by marketing propaganda.
Crypto finance experts suggest that doing proper research and maintaining rationality while investing would protect aspiring investors from severe losses.
4. Knowing How To Exit The Market Is Equally Important
Investing in cryptocurrency calls for a rational assessment of how much one is willing to lose since the crypto market is undoubtedly highly speculative. For this reason, some experts have even called putting money into cryptocurrency gambling.
The outcome of investing in crypto is mostly unpredictable since the investment is often based on sentiments manipulated by perceived scarcity. Therefore, setting a breakeven mark for oneself and knowing when and how to exit from the crypto market are equally important.
Most people usually buy the top 5 cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), Tether (USDT), Binance Coin (BNB), and USD Coin (USDC), among others, at a lower valuation and then sell them off when they spike. Doing so allows them to benefit from the increase in the nominal value of the crypto.
After the appreciation in the price of crypto, investors may sell them on the crypto exchange platform either in exchange for stable coins that track fiat currency or directly for fiat currency and transfer the amount to their linked bank account.
5. Defining Investment Success Beforehand Helps To Set Right Goals
As mentioned before, setting an intention for oneself as an investor will determine the level of involvement one would have to give when investing in crypto.
Someone planning to actively participate in a crypto project must account for the time and know-how they’ll be investing in the space besides money. For example, purchasing a significant stake in the initial coin offering or ICO of some new crypto would enable the investor to contribute to the metaverse economy by promoting DeFi or decentralized finance.
Alternatively, some people prefer to invest a certain amount of money with a passive involvement in the space, allowing the market forces to drive the value of crypto and timely reap the benefits.
Hence, these two routes have different trajectories available for anyone to choose from. Therefore, defining when they’ll consider their investments a success early on will help set reasonable boundaries and investment goals.
6. Choosing A Good Crypto Exchange Is Quintessential
The crypto exchange an investor picks to mediate their dealings in cryptocurrency, and the platform’s features determine the level of ease and smoothness they’ll get to experience throughout the process.
Four key features to look out for when choosing a crypto exchange are –
- Strong Liquidity Levels imply that cryptocurrency can be brought and sold without impacting the overall market price.
- Variety of Crypto Assets implies that the platform should have an array of cryptocurrencies, including crypto coins and crypto tokens, for the investors to choose from, instead of a limited set of options for crypto investment.
- Resilient Security Measures are necessary to keep the cryptocurrency one has invested in safe. It could include different methods like two-factor authentication, linking the account to a specific IP address, message notifications for withdrawal or transfer of funds, and fund withdrawal termination after account data changes.
- Trustability of a crypto exchange platform can be assessed based on the security measures it provides, the extent of its user base, and the reviews it has received from financial institutions and experts on investments in cryptocurrencies.
7. Learn Ways To Protect Your Crypto
Apart from the security features that a platform could provide an investor, they must learn other ways to keep their cryptocurrencies safe. For instance, adopting a hybrid approach to secure the digital wallets storing crypto. Furthermore, since online wallets have grown in popularity and might attract hackers’ attention, resorting to offline wallets should be kept as an alternative.
Terence Jackson, Chief Information Security Officer at Thycotic, a Washington D.C.- based provider of privileged access management solutions, suggests separating the private and public keys of crypto wallets. He further adds that the crypto investor should secure both keys with strong passwords and multifactor authentication.
Cryptocurrency is becoming more mainstream, and more traditional options will emerge gradually. However, in the meantime, a crypto investor is responsible for keeping their cryptocurrency safe to a great extent.
Things To Know About Cryptocurrency
Out of all the other basic understanding of cryptocurrency that an aspiring investor must have, there are a few things to know about cryptocurrency; these are primarily the key characteristics of this kind of digital asset.
- Decentralized. Cryptocurrencies are decentralized, which means that there is no central authority in charge of creating and supplying these digital assets. Instead, the transactions are processed and validated by a distributed open network free from governance or regulation of any kind.
- Irreversible and Ineradicable. Cryptocurrencies cannot be transferred or moved without the validation accessed through the owner’s private key. In addition, once a transaction is completed and validated, it is extremely complex for the transaction to be altered in any way because transaction records are made public and distributed over the network. Therefore, any change would affect the entire network of that cryptocurrency’s users.
- Anonymous. The absence of any central authority governing the network allows the users to maintain their anonymity as they are not required to identify themselves when transacting with crypto. Private and public keys are used to authenticate the transactions on the blockchain eliminating the requirement of revealing personal information.
- Trustless. A core concept that constitutes an essential element of blockchain technology, smart contracts, and crypto payments is ‘trustlessness.’ It simply implies the absence of a third party like an organization, institution or an individual to mediate the transactions. Instead, the investor deals with crypto transactions and holdings directly.
- Limited Supply and Scarcity. Cryptocurrencies are fixed and limited in supply. No individual or association can influence its collection without the approval of the majority. Most top cryptocurrencies have set token supply caps or offer infinite supply with pre-defined production parameters.
What To Know About Bitcoin Before Investing?
The key ideas to keep in mind before investing in cryptocurrency are generic and would be applicable to all cryptocurrencies alike. However, certain points to know about bitcoin before investing particularly in it are as follows:
- Bitcoin is not a traditional currency, it is a digital asset, and therefore, its foundational values are not measured conventionally as with fiat currency.
- Two parties or independent exchanges can directly trade Bitcoin. As cryptocurrencies become more mainstream and Bitcoin has gained greater popularity, brokerages facilitating trade for investors have increased.
- Bitcoin is a highly volatile digital currency. Therefore, the bitcoin investments are mostly entirely speculative, with frequent and vast swings in its price. For instance, there have been times when the value of the bitcoin rose by 20% over a week and then would fall altogether in a single day.
How To Invest In Cryptocurrency?
Investing in cryptocurrency is not a complex process. After gaining a sound foundational knowledge of crypto, considering essential guidelines and determining the amount of money one is willing to invest, the following procedure will be simple.
Here are the steps one can follow to invest in cryptocurrency:
- Choose An Exchange Platform. There are many platforms that one can choose from, some of which are Coinbase, Gemini, BitMart, Crypto.com, and WazirX.
- Create And Verify The Account. The verification process might require you to show or submit your documents like your driver’s license or passport to authenticate your account.
- Link The Bank Account With Adequate Fund Or Deposit The Cash. To buy cryptocurrency, you’ll need to link your bank account with the crypto exchange to pay for the crypto you intend to invest in. Other than that, a wire transfer can also be authorized for bing crypto, or you can make a payment with a debit or credit card.
- Place Order For The Cryptocurrency. Once the money is in the crypto account, you can place an order for the cryptocurrency you desire. There are an array of cryptocurrencies to choose from, including coins and tokens.
- Select A Storage Method. The final step requires choosing a storage method for your digital currency. For example, you can hold your digital assets in an offline wallet known as a cold wallet; they can be stored in online wallets, also called hot wallets, or you may opt to leave your crypto in the crypto wallets attached to your crypto exchange account.
FAQs – Investing in Cryptocurrencies
Q.1 How To Know Which Crypto To Invest In?
There are several ways to know which crypto to invest in. The best method would be to do a crypto market analysis, assessing the top 5 cryptocurrencies you’re interested in based on their monthly, quarterly and yearly performance.
You may also use different portals that provide information on the financial performance of cryptocurrencies to get a better understanding. In addition, YouTube channels and videos, Reddit and Twitter posts, and articles on cryptocurrency are also helpful to know the community’s stance on the same.
Q.2 What Are The Things To Remember For Cryptocurrency For Beginners?
For beginners, the things to remember while investing in cryptocurrency and the steps to initiate the process are the same. All that’s required for them to emphasize is their knowledge and awareness of the fundamentals of crypto, how cryptocurrencies work, and related investment guidelines.
The Bottom Line for Cryptocurrency Investments
Cryptocurrency has been gaining prominence for investment purposes. Investing in cryptocurrency seems a trendy and lucrative means to make money. Therefore, people have been interested in finding the best cryptocurrencies to invest in, eyeing the market to analyze the upcoming cryptos and shortlist the top cryptocurrencies. Simultaneously, following a guideline per individual investment preferences could help prevent severe losses. Therefore, as a crypto investor, one must know a few basic things before investing in crypto.
- Crypto Coins
- Crypto Exchange
- Crypto Investment
- Crypto Tokens
- Crypto Wallet
- Digital Assets
- Digital Currency
- Investing in Cryptocurrency
Nitisha Lal is a writer enthusiastic and curious to learn new things. Currently, she writes about the latest developments in technology, particularly around Web3 and the Metaverse. She enjoys nature walks, capturing the world around her on the phone, or reading books when away from work.