The rising interest and investment in cryptocurrency has captured the interest of many investors. This beginner’s guide defines cryptocurrencies as an asset class and walks you through the fundamentals of investing in it. Learn what is crypto, what to consider before investing in cryptocurrency, and details to help you if you decide to be part of crypto world. Here’s how to start investing in cryptocurrency and the noteworthy risks you need to watch out for.
What is Cryptocurrency?
Before making any investments, you should first understand what cryptocurrency is. Essentially, cryptocurrencies are digital or virtual currencies that use cryptography for security and build on blockchain technology. Blockchain is a decentralized system used to handle and record transactions across multiple computers. In theory, anyone with an internet connection can access the blockchain. The system was developed with security, transparency, speed, and accuracy in mind. Traditionally, cryptoassets are thought to be decentralized, which means a network of users controls rather than a single point of authority.
Risks of Investing in Cryptocurrency
Before investing in cryptocurrency, you have to know risks of it. Investing usually involves taking a risk, and occasionally a big risk can result in a significant return. However, you could lose most or all of your money.
Cryptocurrency investing can be especially risky because it involves making investments in a brand-new sort of asset with volatile value. Between February 2021 and February 2022, the cost of a single Bitcoin varied from $26,826 to $68,991.
If you’re trading any asset on a short-term basis, you must limit your risk, and this is especially true for volatile assets. As a beginner, you’ll must understand how to effectively control risk and create a procedure to assist you limit losses. Individuals may experience this process differently. Newer traders should consider saving aside a fixed amount of trading money and just utilizing a portion of it, at least initially. If a position goes against them, they will still have money in reserve to trade with later. The ultimate point is that you can’t trade if you don’t have money. Keeping some cash in reserve ensures you always have a bankroll to finance your trade.
There are additional risks to investing in cryptocurrencies, such as the numerous cryptocurrency-related scams. These can be especially risky if you are unfamiliar with the cryptocurrency industry and feel compelled to move quickly because you are concerned about missing out on the next great chance. Additionally, people have been able to create hacks to take people’s cryptocurrency.
Although investing through a large, recognized platform can help to reduce your exposure to fraud and cybersecurity risk, it is impossible to completely eliminate it. For example, in 2022, we learned that FTX, a formerly reputable platform, was being managed by illegally actors who stole client assets. On November 2, 2023, its founder, Sam Bankman-Fried, was convicted of fraud and money laundering. On March 28, 2024, the court sentenced Bankman-Fried to 25 years in jail.
It is critical to manage risk. Selling a losing investment sucks, but it might help you avoid larger losses in the future.
How much should You Invest in Cryptocurrency?
It’s additionally vital to understand your investment limit. Some experts recommend investing between 1% and 5% of your net worth. When deciding how much of your portfolio to invest in cryptocurrency, it’s critical to limit your overall exposure to it. You should never invest more than you can afford to lose. While having a minor exposure to cryptocurrency may improve the risk-adjusted return profile of a diversified portfolio, the overall amount to invest in cryptocurrency should be determined by your overall investment portfolio and risk tolerance.
While the cryptocurrency market as a whole is unpredictable and volatile, larger, more widely traded cryptocurrencies may pose less risk than smaller-cap, more speculative cryptocurrencies. Even the biggest and most popular cryptocurrencies can experience significant price fluctuations. So, it’s a good idea to consider the number of cryptocurrencies in your portfolio, as well as the overall amount invested in them.
Choosing the Correct Crypto Value
You may choose to invest in one or more different cryptocurrencies. Checking cryptocurrencies can be more challenging because they have become a popular tool for fraud. These concerns may have you wondering how to invest in cryptocurrencies without becoming a victim to a fraud. Avoid smaller/newer cryptocurrency projects that are widely pushed on social media channels. It is vital to assess the investment risk of a specific cryptocurrency, and social media experts may not have your best interests at heart.
Understand what you’re investing in, just like you would with any other investment. If you’re buying cryptocurrencies, make sure to read the annual report and other SEC filings to thoroughly research the companies. Because there are literally thousands of them, each one functions differently, and new ones formes on a daily basis. You must understand the investing rationale for each deal.
Unlike stocks, where a firm may increase revenues and drive returns for you, many crypto assets must rely on the market becoming more optimistic and bullish in order to prosper. Before investing, consider the potential reward and drawbacks. If your financial investment is not backed by an asset or cash flow, it may become worthless.
One of the most important measures of a cryptocurrency’s potential is its market capitalization. Market capitalization is obtained by multiplying the cryptocurrency’s current price by the entire circulating supply. A bigger market capitalization usually suggests a more stable and generally accepted currency. However, it is not the single factor determining a cryptocurrency’s value.
Trading volume is another important factor. It indicates the total amount of cryptocurrency traded during a certain time period. High trade volumes suggest significant investor interest and liquidity, making it easier to purchase and sell cryptocurrency without significantly impacting its price.
Selecting a Cryptocurrency Exchange
When you’re ready to buy your first cryptocurrency, you must pick whether to use a centralized or decentralized exchange. Cryptocurrency must be bought via an exchange or investing platform, such as Coinbase, Gemini, or Kraken. When choosing an exchange, you may want to consider security, fees, trading volume, minimum investment requirements, and the varieties of cryptocurrency accessible for purchase on that platform.
In general, a centralized exchange is the most secure and convenient method to start. The company will keep the cryptocurrency for you and assist you in resetting your password if you forget it. They may also offer insurance or assurances to assist protect your money from hacks. However, using a centralized exchange means you do not have complete control over your cryptocurrency, which can be a disadvantage.
Using a wallet and a decentralized exchange, on the other hand, means you have complete control over the coin and do not have to share your identify with a private corporation. However, there are fewer protections in place. You could lose your wallet or password, preventing you from accessing the cryptocurrency, or you could end up purchasing a cryptocurrency that turns out to be a scam.
How to Keep Your Cryptocurrency Secure
Securing your cryptocurrency is critical in the digital age, where financial transactions are increasingly conducted online. Cryptocurrencies have transformed finance by enabling decentralized, secure, and efficient transactions. However, one of the specific risks associated with cryptocurrency investing is the need to take protects to keep your money secure. Some recommendations that may help:
- Use reliable cryptocurrency wallets, exchanges, brokerages, and mobile applications.
- Strong passwords, two-factor authentication, and secure internet connections can all help to secure access.
- Be wary of phishing scams that target cryptocurrency users.
- Do not share your password or key with anyone.
- Be wary of how your wallet is used in transactions.
- Avoid utilizing wallets hosted by providers.
- Use cold storage for long-term holdings.
Conclusion
Investing in any asset, such as stocks or bonds, involves evaluating the risk-reward. Cryptocurrency has a substantially higher risk-return profile than conventional asset types. This does not make it a poor investment, especially given the potential returns on cryptocurrency investments, but it does make comprehensive research more vital than ever.
If you can’t decide to choose which one is more suitable for you to start, you can also take a look at our other article about Hamster Kombat Coin. It may be an option to start investing.