How To Start Investing In Cryptocurrency?
Since its launch, cryptocurrencies have been incredibly unpredictable, but if you're looking to trade these digital assets, this volatility can present opportunities for profit. Cryptocurrencies like Bitcoin and Ethereum have increased dramatically since its launch, but they have now fallen off significantly, along with other well-known digital currencies. Years of cryptocurrency speculation by seasoned traders, but how do you get started if you're new to the crypto market?
Here are some tips on how to get started investing in cryptocurrencies as well as some major risks to be aware of.
5 steps for investing in cryptocurrency
First of all, if you want to invest in crypto, you need to make sure all your money is in order. This means having an emergency fund, a manageable amount of debt, and, ideally, a portfolio of investments with a variety of assets. Your crypto investments can become another part of your portfolio. Hopefully, this will help you get a better return on your total investments.
Step 1 - Understand what you’re investing in
As with any investment, you should know what you're putting your money into. When you buy stocks, you should read the annual report and other SEC filings to learn as much as you can about the companies. Plan to do the same with all cryptocurrencies, since there are thousands of them, they all work differently, and new ones are being made every day. For each trade, you need to know the investment case.
Many cryptocurrencies are backed by neither hard assets nor cash flow. This is the case with Bitcoin, where investors can only make money if someone buys the asset for more than they paid for it. In other words, unlike stocks, where a company can make more money and increase your returns by doing so, many crypto assets require the market to become more optimistic and bullish for you to make money.
Ethereum, Dogecoin, Cardano, and XRP are some of the most well-known coins. So, before you invest, you should know what the possible pros and cons are. If you don't have an asset or cash flow to back up your investment, it could end up being worthless.
Step 2 - Remember, the past is past
Many new investors make the mistake of looking at the past and assuming that it will be the same in the future. Yes, Bitcoin used to be worth pennies, but now it's worth a lot more. The important question is, "Will this growth continue in the future, even if it's not quite at this meteoric rate?"
Investors look at what an asset will do in the future, not what it did in the past. What will cause returns in the future? Traders who buy a cryptocurrency today are looking for gains for tomorrow, not for yesterday.
Step 3 - Watch that volatility
The prices of cryptocurrencies are about as unstable as it is possible for an asset to be. They could fall quickly in a matter of seconds based on nothing but a rumor that turns out to be false. That can be good for experienced investors who can make trades quickly or who have a good understanding of the basics of the market, how it works, and where it might go. It's a minefield for new investors who don't have these skills or the high-powered algorithms that guide these trades.
High-powered Wall Street traders play a game of outgunning other wealthy investors in the volatility market. The volatility can easily crush a new investor.
This is because volatility scares away traders, especially those who are just starting out. In the meantime, other traders may come along and buy cheaply. In short, volatility can help experienced traders "buy low and sell high," while inexperienced investors "buy high and sell low."
Step 4 – Manage your risk
When you trade an asset for a short amount of time, you need to manage your risk. This is especially important with volatile assets like cryptocurrency, which can change a lot. So, if you're a new trader, you'll need to learn how to handle risks and come up with a way to limit your losses. And this process can be different for each person:
Traders who are just starting out might want to set aside a certain amount of money and only use a portion of it at first. If a position goes against them, they will still have money to trade with later. The main point is that if you don't have money, you can't trade. So, putting some money aside means you'll always have enough money to trade.
Risk management is important, but it will cost you emotionally. Even though it hurts to sell a losing position, doing so can help you avoid bigger losses in the future.
Step 5 – Don’t invest more than you can afford to lose
Lastly, it's important not to put money you need into risky investments. If you can't afford to lose it all, you can't afford to put it in risky assets like cryptocurrency or other speculative assets.
Money that you will need in the next few years should be kept in safe accounts so that it will be there when you need it. This could be for a down payment on a house or an important purchase. And if you want a sure thing, the best thing you can do is pay off your debt. No matter how much interest you pay on your debt, you are sure to earn (or save) the same amount. There's no way to lose.
Lastly, don't forget to check how safe any exchange or broker you use is. Even if you legally own the assets, someone still needs to protect them, and that protection needs to be tight. If they don't think their cryptocurrency is safe enough, some traders choose to buy a crypto wallet to store their coins offline, where hackers and other people can't get to them.
Other ways to invest in cryptocurrency
Even though buying cryptocurrency directly may be the most common way to do so, traders can get into the crypto game in other ways, some of which are more direct than others. These things are:
Each of these ways is different in how risky it is and how much cryptocurrency it uses, so you'll need to know what you're buying and if it fits your needs.
FAQs about investing in cryptocurrency
How to mine cryptocurrency?
Mining cryptocurrency involves using computer hardware to solve complex mathematical problems in order to validate transactions on a blockchain network. This process is called "proof of work" and the first miner to solve the problem is rewarded with a certain amount of cryptocurrency. In order to mine, you will need a computer with a powerful graphics card (GPU), as well as specialized mining software.
One way to mine is to join a mining pool, which is a group of miners who combine their computing power in order to increase their chances of solving the problem and earning a reward. In exchange for joining a mining pool, you will typically need to pay a fee, and you will only receive a portion of the reward based on your contribution to the pool's overall computing power.
What are altcoins?
Altcoins, short for alternative coins, are digital currencies that are alternative to Bitcoin, the first and most well-known cryptocurrency. They operate on a decentralized, distributed ledger technology called blockchain, which is similar to the technology used by Bitcoin. This technology allows for a secure and transparent way of recording transactions on a public ledger.
The most notable difference between Bitcoin and altcoins is that altcoins have their own unique features, such as faster transaction speeds, different mining algorithms, or unique functionality. For example, Ethereum, one of the most popular altcoins, has its own programming language, which allows for the creation of decentralized applications (dApps) on its blockchain. Litecoin, another popular altcoin, has faster transaction speeds and a different mining algorithm compared to Bitcoin. There are also altcoins that focus on privacy and anonymity, such as Monero and Zcash.
Altcoins are created through a process called mining, which is similar to the process used by Bitcoin. Miners use powerful computers to solve complex mathematical equations, which in turn verify and record transactions on the blockchain. As a reward for their work, miners are given a certain amount of the altcoin they are mining. The total supply of an altcoin is capped, and the number of coins released into circulation decreases over time, similar to Bitcoin. The value of an altcoin is determined by supply and demand on cryptocurrency exchanges, and like other investments, their value can fluctuate greatly.
How can I invest in Bitcoin?
If you want to invest in Bitcoin, there are many ways to do so, and you can work with a number of companies, including:
Crypto exchanges: Some of the most popular cryptocurrencies are traded on exchanges, which also tend to have the most competitive prices. Coinbase, Kraken, and Binance are three of the biggest players, but there are dozens more.
Traditional brokers: Many traditional brokers let you trade Bitcoin as well as stocks and other financial assets, but they don't have as many other cryptocurrencies to choose from. Interactive Brokers, TradeStation, and tastyworks are all big names in this field.
Financial apps: You can now trade Bitcoin and a few other cryptos with a lot of financial apps. Robinhood, Webull, and payment apps like PayPal, Venmo, and Cash App are among the best in this area.
How much money do I need to start investing in cryptocurrency?
In theory, all you need to invest in cryptocurrency is a few dollars. Most crypto exchanges, for instance, have a $5 or $10 minimum trade. Some crypto trading apps might have even lower minimums.
But it's important to know that if you trade small amounts of cryptocurrency, some trading platforms will take a big chunk of your investment as a fee. So, it's important to find a broker or exchange whose fees are as low as possible. In fact, many so-called "free" brokers add fees to the price you pay for your cryptocurrency. These fees are called "spread markups."
Cryptocurrency is a very risky market segment, so many smart investors have decided to put their money somewhere else. But if you want to start trading crypto, the best thing to do is start small and only use money you can afford to lose.