The Basics of Investing in cryptocurrency
16 May, 2022
The Basics of Investing in cryptocurrency
As the price of Bitcoin and other cryptocurrencies has risen, more people have been investing in cryptocurrency without knowing how it works or where to start.
In this guide, we’ll help you learn how to invest in cryptocurrency, manage risk, explain the best crypto to invest in, and legal issues you may face.
What Is Cryptocurrency?
Simply put, cryptocurrency is digital money. It allows people to send currency from one person or location to another via an encrypted computer network. In some ways, it operates similarly to an exchange like eBay—but with digital currencies instead of physical goods.
Essentially then, investing in cryptocurrency is just like trading in foreign currencies or stocks—but with less regulation.
Cryptocurrency is decentralized, meaning it is not controlled by any authority. This is one of the major reasons why it is being adopted so widely.
How to Safely Invest in Cryptocurrency
To ensure the safety of your cryptocurrency when buying it, it is important to choose an exchange that is operating legally and takes steps to ensure that transactions are encrypted and secure.
Additionally, as soon as you get your hands on cryptocurrency, transfer it to a paper wallet. Paper wallets are an easy way to store your coins offline—the keys aren’t stored digitally anywhere and can’t be hacked remotely.
All you need is a clean computer (which hasn’t been previously connected online) with a printer and some bitcoins. Once you create a paper wallet, print out your public and private keys on separate pieces of paper.
The public key will be used to deposit funds into your account; keep that one safe! The private key should never leave its secure location. If someone gets their hands on that piece of paper, they could steal your money from any account linked to that address.
Decide Where to Buy It
You can buy cryptocurrencies with fiat money on exchanges, such as Coinbase or GDAX. Look for cryptocurrency exchange with the following features:
● Simple and easy to navigate
● Low exchange fees
● Good UI/UX
● Has a mobile app
● Keeps your data secure (e.g., two-factor authentication, automated logouts, etc.)
● Offers a wide variety of payment methods
● Shows current market trends
● Has additional features (e.g., automatic withdrawals, buy and sell orders, etc.)
● Registered with state authorities and operating legally
If you’re looking for other options, check out LocalBitcoins (for P2P transactions) or Bitstamp (one of the first crypto exchanges). It’s important to ensure that the exchange you choose is available in your area, as many states have regulated the use of crypto.
Choose How You'll Pay
The number of cryptocurrencies out there is growing, which means more options when it’s time to pay. The key is knowing what payment methods are available, where you can use them and how they impact your investment.
Choose an exchange that supports secure and widely used payment methods in your country, including (but not limited to):
● Apple Pay
● Google Pay
● Paysafe card
In most exchanges, you’ll need verified payment methods to first purchase USDT and then buy cryptocurrency coins.
Add Value to Your Account
Adding value to your account allows you to make smart investment decisions. First, you must learn how each cryptocurrency works and what problems it’s designed to solve.
The better informed you are, the more likely you are to invest wisely and remain safe from potential scams. Second, consider diversifying your holdings: once you buy a currency, don’t put all of your eggs in one basket.
Select a Cryptocurrency
New cryptocurrencies are emerging all over, and it can be hard to know which one will last. If you’re looking for new crypto to invest in, these key factors can help you make a decision:
● Market Cap (The total value of a currency)
● White Paper (A document issued by developers that explain the technology and purpose of the project)
● Use Cases (Major factors that drive investment)
● Total coins (to be mined and in current supply)
Keeping Crypto Safe
Once you’ve bought cryptocurrency, it’s important to keep it safe. Here are several ways you can ensure the safety of your holdings:
● Cold Wallets: cold wallets, also known as hardware wallets, are not connected to the internet and hence are not vulnerable to cyberattacks. Keeping your private keys in a cold wallet is the safest choice because these wallets are encrypted.
● Secure Internet Connections: use only a known internet connection and avoid public Wi-Fi networks when trading or conducting crypto transactions. Use a VPN even when connecting to your home network for added security. Your IP address and location are changed using a VPN, which keeps your internet behavior secure and confidential from potential threats.
● Multiple Wallets: you can diversify your crypto investments by using numerous wallets because there are no restrictions on wallet creation. Use one wallet for daily transactions and another for everything else. This will safeguard your cryptocurrency assets and reduce the risk of a security compromise.
● Secure Device: to protect against newly identified vulnerabilities, make sure your device (laptop, phone, etc.) is up to date with the newest anti-virus software. To prevent hackers from exploiting any flaws by building programs to target the vulnerability, use a robust antivirus and firewall to increase your device's security.
● Password Protection: unfortunately, many people are prone to hacking because they use easy-to-guess passwords or similar passwords across various accounts. Make sure you have a strong, complicated, and difficult to guess password that you change regularly. If you have many wallets, use different passwords for each. For added protection, use two-factor authentication (2FA) or multi-factor authentication (MFA).
● Avoiding Scams: do not open suspicious emails, pop-ups, or advertisements on the internet. These could hack into your device and steal sensitive information. It’s best to keep a firewall always enabled so that your device will automatically block or warn you about malicious content. Moreover, using a reputable crypto exchange will also lower the likelihood of scams.
Advantages to Investing in Cryptocurrency
Crypto is gaining increasing popularity for many reasons. If you’re still hesitant about investing, check out these benefits that it has to offer:
- Diversification: diversifying your portfolio allows you to spread your risk, which could help you sleep better at night if one asset’s performance goes sour.
In 2017, many thought Bitcoin was on track to reach $50,000 or more, and some predicted it would go even higher. While that didn’t happen, there are indications that investors who spread their money across multiple cryptocurrencies have fared well so far.
- Return Potential: in general, cryptocurrencies are considered a great investment for their high rates of return. Ethereum has returned over 8,000% since its initial coin offering (ICO). With an average expected ROI of 1,153%, it’s no wonder people are clamoring to get into crypto.
When compared with traditional investment vehicles such as blue-chip stocks or government bonds, cryptocurrencies have historically delivered much better returns. But they also come with higher risk than safe investments like CDs and money market accounts.
- Additional Utility: some cryptocurrencies, like XRP and Dash, can provide additional utility for their holders. Because of their unique structure, these cryptocurrencies’ tokens have real-world use cases outside of being a method of payment.
One could even argue that cryptocurrency is less speculative than most early-stage startups, given that cryptocurrencies’ use cases are not only novel but have an established record of success.
How to Choose a Cryptocurrency to Invest in
We see a new cryptocurrency in circulation every other day. This can make it confusing for beginners to choose which one to invest in. While newer coins are cheaper and have the potential to grow, it’s safer for newbies to invest in trusted coins that pose less risk. These include:
Bitcoin is one of the biggest cryptocurrencies out there, and it boasts a market cap of over $758 billion. It is a decentralized digital currency that keeps track of transactions in a distributed ledger known as a blockchain.
Bitcoin miners use high-powered computers to solve difficult riddles to confirm blocks of transactions. These blocks are added to the blockchain record if they are successful, and the miners are paid with a number of bitcoins.
As Bitcoin is being adopted in many industries, you can use it to buy things online or even make purchases at certain stores.
Ethereum is not just a cryptocurrency but an entire blockchain-based platform. Its network is secure because it is decentralized, a major reason why it is so valuable today (its market cap ranks second, just after Bitcoin).
Ethereum has a stable infrastructure of applications that are built on top of it, which makes it one of the safest crypto to invest in on a long-term basis. The best part about investing in Ethereum is that you can also use it as a payment method when shopping online or booking flights.
Moreover, with so many companies adopting ETH as their preferred payment system, there are high chances of your investment growing exponentially over time.
As compared to Bitcoin, which is priced at approximately $40000 for 1 BTC, the price of ETH ranges from $2,500-$3,500 depending on market fluctuations.
Managing Cryptocurrency Risk
This section will help you calculate how much to invest in cryptocurrency and how to invest in cryptocurrency with only a little money. A lot of beginners invest because they see the market growing at a fast pace and don’t want to miss out when they see others trading.
However, it is important to remember that the crypto market is extremely susceptible to volatility. Thus, here are some important rules you should follow to minimize risk and improve the chance of profits:
- Calculate the trade's size: always follow the six-percent and two-percent rules. According to the latter, you should open a position with a maximum of 2% of your total investment. Some experts advise investing no more than 1% of the amount.
You will never lose your full deposit if you use this strategy. The six percent rule states that if you keep losing money in crypto trading and can't seem to stop, you should quit trading if you lose more than 6% of your initial investment.
In this instance, it is recommended that you take a 1.5–2-week sabbatical from trading so that you can mentally heal and avoid making rash decisions.
- Calculate the transaction's profitability: the profit/loss ratio is the most important factor to consider. It should ideally be 3 to 1 or at least 2 to 1. Keep in mind that not every trade will be profitable. Even the most experienced traders lose money. Losing is unavoidable in trading; you must simply accept it.
In addition to these, as we have emphasized above, make sure to always diversify your portfolio as the number 1 rule to minimize risk. These strategies will teach you how to know when to invest in cryptocurrency.
Cryptocurrency Legal and Tax Issues
Since crypto is still new, it comes with a lot of legalities and taxation issues, including:
● Transacting parties' anonymity (you don’t know who you are dealing with)
● Lack of proper authority (in case you encounter an issue or fall victim to scams)
● Laws that aren't adequately specified
● Many users invest in crypto for tax evasion and money laundering
● Users are subjected to frequent phishing attempts
● Data loss, illegal trading, and purchasing systems
Currently, you are liable to pay tax when using mainstream cryptocurrencies such as Bitcoin and Ethereum.
The good news is that there are a lot of factors you can control when investing in cryptocurrency. Always remember to buy low and sell high.
While there’s no guarantee you won’t lose money, your strategy for how to invest in cryptocurrency can improve your odds of making smart investment decisions and making money, too.