Crypto Investing

Cryptocurrency investing has been the talk of the town for the past few years. As a newcomer to the crypto community, you're probably curious what the benefits of carving out a niche in the industry are. How do you know if this is the right field for you? Is it really worth it to invest in cryptocurrency?

Cryptocurrency

People use cryptocurrencies to buy products and services because they are virtual or digital properties. Cryptocurrencies can also be used as investments and mediums of exchange, allowing network users to conduct more private, quicker, and less expensive money transactions.

You must buy crypto assets in exchange for fiat currencies in order to trade with them. Bitcoin, the world's first and most famous cryptocurrency, was created by an anonymous developer named Satoshi Nakamoto at the start of 2009.

The cryptocurrency market has evolved since Bitcoin's emergence, and crypto assets (there are now over 4,000 of them) have become relevant for global businesses not just as mediums of exchange and stores of value, but also as decentralized finance tokens.

How cryptocurrency works

The ‘crypto' in ‘cryptocurrency' refers to cryptography, which entails converting plain text into encoded data in order to provide safe communication.

Every cryptocurrency has its own electronic payment network, which is based on the blockchain, a distributed ledger. The blockchain keeps track of all cryptocurrency transactions and stores them as encoded data in blocks. This is accomplished by a complicated mathematical mechanism that guarantees that no one can change the data or delete transactions from the ledger.

Participants in the network, known as "miners," control the network voluntarily by performing this complex algorithm and verifying incoming transactions. This means that cryptocurrencies are decentralized, which means that there is no central authority in charge (such as the government or central banks).

Why invest in cryptocurrency

Liquidity

Popular cryptocurrencies have high liquidity, which means they are very easy to purchase, sell, and turn into cash on the market. Liquid crypto assets have high exchange rates and are thus less susceptible to price fluctuations and market manipulation.

In contrast, because there is a lack of market activity and participants, so-called "whales" (individuals with a large amount of capital) can easily manipulate the price of illiquid assets. One large buy or sell order is all it takes to destabilize the price of these assets, increase their uncertainty, and put investors at risk of losing money.

Low entry threshold

If you want to start investing in stocks or real estate, you'll need a lot of money up front. Cryptocurrencies, on the other hand, have a low entry barrier. Many cryptocurrency exchanges allow you to make your first investment with as little as $100.

Security and transparency

Since cryptocurrency transactions are stored on the blockchain, they are more secure than traditional bank transactions. Any improvements to this impenetrable ledger and its underlying technologies will necessitate a massive amount of computing power. It's not shocking that so many people all over the world are investing in cryptocurrency or opening crypto IRA accounts.

Portfolio diversification

Finally, investing in cryptocurrencies is a fantastic way to diversify your portfolio while also improving your risk management skills. The most popular investment advice is to avoid putting all of your eggs in one basket. This means that if you diversify your investments through asset groups, you will risk less in the event of a market downturn. Otherwise, if you put all of your assets into one asset and the price of that asset drops dramatically, you will lose a lot of money.

The risk in investing on crypto

Regulation

Because of the lack of control in the crypto market, some investors are reluctant to invest. On the one side, the whole idea of cryptocurrency is that it operates across decentralized payment networks, which are outside the control of regulators. However, since there are no universal regulatory mechanisms in place, crypto platforms used by crypto investors are more vulnerable to hacking and fraud and are unable to provide adequate consumer and fund security. As a result, crypto investors and their funds are at risk.

Volatility

You may be concerned about cryptocurrency uncertainty as a potential crypto investor. Volatility in the crypto market refers to significant price swings, which are typical in the early stages of any market.

However, if you're cautious and use the right trading approach, you can profit from crypto volatility. For example, HODL (Hold On for Dear Life) is a common cryptocurrency strategy in which investors buy cryptocurrencies and keep them for a longer period of time in order to benefit in the future. Rather than responding to short-term market fluctuations, they seek to maximize profits while minimizing risks.

Scams are unfortunately popular in the cryptocurrency industry, and you might find yourself on the receiving end of a fake email. Their main goal is to deceive people into sending money by making false claims and offering fake business opportunities. If you get one of these emails, simply block the sender, ignore it, and don't click on the email links.

Other investors' traps and schemes, such as the famous "pump and dump" scheme, should also be avoided. This happens when seasoned traders build a fake buzz about a new token and promote it on online forums in order to draw new investors. The whales already own a significant amount of this token, so when newcomers buy it and drive up the price, the whales sell their shares and dump the market.

How to Spot a Legitimate Cryptocurrency

With so many digital assets circulating in the crypto market, it's becoming more difficult to identify reliable and promising altcoins. If you're especially interested in a digital currency, the first step is to find the asset's whitepaper on the company's website to learn more about it.

The asset might, for example, be configured as a decentralized finance token or feature technology that allows users to submit anonymous transactions or make micropayments. It may be a token for social media or a token for advertising. If the altcoin isn't innovative, it will be outperformed by its competitors and will not be a good investment.

If you can't find a whitepaper, go to the official cryptocurrency website's 'About Us/Our Mission' section to learn who is behind the project and what their goals are. The names of the executive team members, as well as some detail about their past experience in the industry, are usually shown. The project's mission, goals, and principles, as well as future plans, should all be included on the website.

If you can't find it on the website, try looking on LinkedIn for the founders or developers. If that fails to produce results, consider this lack of accountability a red flag. Since they have nothing to hide, reputable teams are eager to establish a strong media presence and be outspoken about their project's current and potential goals.

Investing in crypto: cryptocurrency exchange

Cryptocurrency exchanges are the most commonly used cryptocurrency marketplaces. You can purchase, sell, exchange, and pass cryptocurrency investments using these platforms. Some exchanges are solely for crypto-to-crypto trading, while others allow you to deposit and swap fiat currencies such as EUR, GBP, CHF, and others in exchange for your preferred cryptocurrency.

Selling crypto

One of the most important aspects of investing in cryptocurrency is the ability to sell your holdings whenever you like (ideally for a profit!). Fortunately, you can sell cryptocurrencies on the same trading sites as you used to purchase them.

Storing your crypto

You're probably thinking about where you'll put your crypto investments once you've bought them. Digital currencies are held in digital wallets that use cryptographic encryption to keep your money secure. You have the choice of using one of the many online wallets (cloud-based or software-based) or purchasing a hardware wallet.

Most digital wallets, however, have the same flaw: they all depend on a private key. Investors use a private key, which is an encrypted address, to sign transactions and access their wallet balance. While private keys appear to be functional and safe at first glance, they can easily be mistaken for public keys, allowing anyone to gain access to the investor's funds. Alternatively, an investor can misplace or forget their key. It cannot be restored if this occurs.

Final thoughts

Cryptocurrencies are a profitable investment class and a perfect way for investors to diversify their portfolios because of their high liquidity, low entry threshold, and the reliability of the underlying blockchain technology.

To reduce potential risks, do your homework and figure out what the aim of the currency you're interested in is. Make no hasty decisions based on the hype and noise. Calculate how much you can afford to invest and stick to it. Finally, find a trustworthy crypto exchange that suits your investment strategy.