Investing in cryptocurrency can seem complicated. But if you’re reading this, it’s likely that you’re contemplating giving it a go, and you want to understand the crypto market better before taking the plunge or maybe you’re just not sure how to start investing.
The difference between traditional and digital assets
To understand why more people are investing in cryptocurrency, let’s dive into the difference between traditional and digital assets.
There are lots of types of traditional investment assets. Two popular options are stocks and equities. With these investments, you’re investing in a specific company that you believe will thrive. If the company grows or is successful, your investment will be as well.
Another type of traditional investment is a bond. Buying a bond means you loan money to a municipality or corporation for a period of time. In return, the borrower pays interest. The period is usually quite long — 20 years or more — and the contract is called a bond.
Funds are another way to invest your money. A mutual fund allows you to trade over time with a combination of different stocks. With actively managed funds, someone on the fund’s staff will make trades on your behalf, while exchange-traded funds allow you to trade these funds on an exchange yourself.
Cryptocurrency is a type of digital asset that has been designed to work as a way to exchange and store value. You can use crypto to purchase goods and services, earn returns on short-term trades, or invest for the long term. As of September 2021, there were more than 6,500 cryptocurrencies available on the market.
The first cryptocurrency was Bitcoin (BTC), created by the anonymous Satoshi Nakamoto with the Genesis block. Not only is Bitcoin the most prominent cryptocurrency, but it is also a decentralized cryptocurrency, which means that it is verified through consensus. Think of consensus verification as a wedding that is never recorded on paper. Even if there’s no marriage certificate, all of the dozens of people invited to the event can testify that two people were joined in matrimony, and they can even give details of how the wedding went. That’s the idea behind decentralized data management technology, or blockchain: verification through the collective confirmation of asset holders.
Altcoins are any cryptocurrency that isn’t Bitcoin. Most are based on the original protocol but have made technical modifications to improve speed, increase anonymity, or incentivize network activity. Popular altcoins include Litecoin, Ethereum, Dash, Monero, Zcash, and Dogecoin. They all function like Bitcoin: they’re all decentralized currencies distributed through consensus-based verification. Though altcoins may be volatile, they have generally been rising in value as more people adopt them.
You may have also heard of stablecoins. Stablecoins are a type of altcoin. These are pegged to the value of some national currencies to make the coins’ value less volatile. For example, there’s Tether, a ‘fiat-collateralized’ stablecoin that is ‘pegged’ to the U.S. dollar, which means that the U.S. dollar backs every tether coin in circulation.
Why more people are considering cryptocurrency investments
Diversification is a way for investors to mitigate risks in their investment portfolio. Diversifying to include a range of assets can reduce the effect of volatility on a single asset at any point in time. So, if one asset fails, there is still the opportunity to earn from another. With a good diversification strategy, you can balance out potential losses with profits. Investors also diversify within their cryptocurrency portfolio, so they’re not invested in just one coin.
The opportunity for high returns
You probably already know cryptocurrency is volatile — one minute it’s up, the next it’s down. For example, Bitcoin’s price surged from around $30,000 in January to a peak of over $63,000 in April. Then in June, it dipped below $30,000. But with this volatility creates an excellent opportunity for high returns. Many investors look to buy in the dip to ride the upswing of the assets and yield high returns on their investment.
Investing in the different types of cryptocurrencies, coins, or tokens is also appealing because it’s more easily accessible for many. As mentioned, unlike national financial systems where transactions require verification, minimum account balances, fees, and more, many digital currencies can be freely traded at the push of a button. This is even more important now, as some national banking systems scale back services for traditional small depositors because managing their money doesn’t even bring in enough for the banks to make it worth their time.
How to invest in cryptocurrency
Now that we’ve covered what cryptocurrency is, how it works and why investors are interested in it, let’s talk about how to start investing in digital assets.
1. Devise a digital asset investment strategy
Many experts suggest that a diversified approach is essential in constructing your first cryptocurrency or digital asset strategy. Some hedge fund managers have recommended 5% to 10% of your total investments go to cryptocurrency investments — as a general earmark. Also, experts advise only investing as much as you’re prepared to potentially lose.
Investing a small amount is an easy way to mitigate risk while still gaining access to the potential for incredible growth attributed to this asset class. Think about it like learning to swim. The first day in the water is not also the first day you dive into the deep end. Start small and get your feet wet!
“The question investors need to answer isn’t what strategy worked yesterday but what strategy will work tomorrow. When you’re trying to reduce risk in your portfolio, you want diversified assets that aren’t closely correlated.” — Glen Broomfield, General Manager of Fabriik Weave
2. Decide what coins to invest in
When it comes to choosing which cryptocurrencies to invest in, the options are almost endless. Before you start investing in different coins, it’s essential to research what exactly your coin of choice is used for. Although some cryptocurrencies were created for fun, others have been made with particular use cases in mind.
Here are a few factors to consider: how the coin works, how its market is performing, exchange access, on-ramps, etc.
Remember! Cryptocurrencies are intangible assets. You won’t get any physical coins when you buy them; they only exist digitally.
3. Choose an Exchange
The most reliable and reputable cryptocurrency exchanges offer users many different ways to watch and invest in the most profitable cryptocurrencies. Look for exchanges providing a range of fiat and cryptocurrency pairs — and most importantly, choose a regulated platform.
Once you’ve chosen what exchange to use, it’s time to open an account. As a part of that process, the exchange you select needs to verify your identity. This is a process called “Know Your Customer,” or KYC for short. Established by the Financial Crimes Enforcement Network (FinCEN) as a part of broader federal Anti-Money Laundering (AML) regulations, KYC is mandatory for all financial institutions.
4. Place an Order
Once your account has been verified and you know what you want to invest in, you’re ready to place your first order! You will need to decide what order type to place. There are four standard orders for trading: market order, limit order, stop order, and stop-limit order.
- A market order is an instruction to be executed immediately at the current market price, i.e., without considering the execution price. A trader using a market order can expect their trade to be filled but does not know what price they will get.
- A limit order lets you set a maximum or minimum amount that you are willing to pay. When you place a limit order, the order will only execute if your trading conditions are met. Keep in mind that even though you set a limit order, it might not be executed at all if the market doesn’t hit that price.
- A stop order is a particular type of market order. Once the price of the asset reaches a predetermined price (called the “stop price”), an event occurs: either a market order is automatically placed, or the trade is left “pending” until manually canceled or executed at the stop price.
- A stop-limit order lets you execute a trade when the market reaches a specific price — but it’s not a regular limit order. Once the stop price is reached, the order triggers and becomes a limit order. The stop-limit order works like a limit order, once trading at or above your stop price, but only if the trading price reaches the specified trigger price.
5. Store Your Assets
As digital currencies are intangible assets made of code, not physical money that you can stick in your wallet, the coins you invest in also need to be stored digitally. This is usually called a “digital wallet.”
One storage method uses a desktop wallet, where your desktop device’s hardware holds your keys and related data. Mobile wallets can be built into a smartphone device. Other wallets can be ported into a flash drive or can live online.
There is one thing to keep in mind as you navigate the digital currency universe—although you have to have your assets online to trade and do transactions, many experts recommend immediately taking assets off-line to a hardware wallet as soon as you’re done. That means your digital wallet will be disconnected from the internet, any remote cloud, or other networks.
Another essential tip is always to keep the hardware secure to avoid losing it because once the digital asset is lost, there is no getting it back. It’s imperative to remember your private key and secure your digital assets, even though they’re not in physical form.
“If you invest in cryptocurrencies, you should always protect your cryptocurrency passphrases and wallet with the most reliable security measures. This includes storing your digital assets on a dedicated hardware wallet, enabling two-factor authentication, and keeping your system up-to-date with software patches. If you don’t take these precautions, you run the risk of losing all of your cryptocurrencies.”
Clay Epstein, Chief Information Security Officer, Fabriik.
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