Have you been hearing a lot about cryptocurrency lately and wondering what all the fuss is about? You’re not alone! With the rising interest and adoption of digital currencies like Bitcoin and Ethereum, more and more investors are considering adding crypto to their investment portfolio.
If you’re new to the world of crypto, don’t worry – we’ve got you covered. In this beginner’s guide, we’ll break down what cryptocurrency is and walk you through the basics of investing in it. You’ll learn about the different types of crypto, what to consider before investing, and how to determine if it’s right for you.
And if you’re ready to take the plunge and invest in crypto, we’ll give you a step-by-step guide to get started. So whether you’re a seasoned investor looking to diversify your portfolio or a beginner just starting out, this guide will provide you with the information you need to confidently navigate the world of cryptocurrency investing.
Table of Contents
- What is Cryptocurrency?
- How Does It Work?
- Types of Cryptocurrencies
- Why Do People Invest in Cryptocurrencies?
- How to Invest in Cryptocurrency in 2023
- Other Ways to Invest in Cryptocurrency
- Pros of Investing in Cryptocurrency
- Cons of Investing in Cryptocurrency
- Your Decision: Is Cryptocurrency A Good Investment?
- Cryptocurrency Investing FAQs
What is Cryptocurrency?
Cryptocurrency, or “crypto” for short, is a type of digital asset that serves many purposes. For instance, Bitcoin was created as a way to pay for things without relying on a government or any central authority; Ethereum lets developers build automated applications in the world of Decentralized Finance, which is pretty cool; and Tether is a stablecoin whose value is tied to the U.S. dollar.
What makes cryptocurrency so special? Well, it’s all in the name: “crypto” comes from the use of cryptography, which is basically a way of making sure transactions are secure without needing a third party (like a bank) to confirm them.
Unlike regular money, cryptocurrencies are decentralized, which means they’re not issued, backed, or controlled by any one central authority, like the U.S. government. As Feldman says, “this decentralization idea is an important feature of its design.”
How Does It Work?
Cryptocurrency units, or coins and tokens, are created through a validation process that relies on blockchain technology. Blockchain is a powerful tool that can be used in lots of different ways, not just for crypto. Essentially, it’s a secure and encrypted record of each coin’s value and its transactions.
The really cool thing is that these records are shared across a network of computers, so anyone with an internet connection can access the blockchain. That makes it fast, accurate, and transparent – and, of course, very secure.
Types of Cryptocurrencies
According to CoinMarketCap.com, there are around 22,000 types of cryptocurrencies out there as of February 2023. Yeah, that’s a lot!
The first-ever cryptocurrency was Bitcoin, and it’s still the most popular one around. All the other coins are referred to as “altcoin” or the alternative to Bitcoin.
In recent years, some cryptocurrencies have gained massive market value, and many people have become interested in investing in them. Here are the top 10 cryptocurrencies ranked by their USD market cap as of February 16, 2023:
- USDC (US Dollar Coin)
- Binance Coin
Now, keep in mind that the crypto world is still pretty new, and many of these coins are young. It’s tough to say which ones will be the most successful in the long run, and they all come with risks. In 2022, many cryptocurrencies experienced a significant drop in value, despite having strong gains in 2021.
That’s why it’s essential to learn about each crypto before investing and decide if it’s the right move for you. Always remember that investing in cryptocurrencies involves a real possibility of substantial loss.
Why Do People Invest in Cryptocurrencies?
Cryptocurrencies like Bitcoin and Ethereum have taken the world by storm, and one of the main reasons people invest in them is because they believe that if the demand for a particular cryptocurrency rises, its value will too.
Let’s take Bitcoin as an example. If consumers and businesses start preferring Bitcoin over the US dollar, the demand for Bitcoin would increase, and as a result, its price in dollars would also go up. If you had bought Bitcoin before this increase in demand, you could theoretically sell it for more US dollars than you originally paid for it and make a profit.
The same goes for Ethereum. Ether is the cryptocurrency of the Ethereum blockchain, and developers use it to build financial apps without the need for a third-party financial institution. As more apps are built on the Ethereum blockchain, the demand for Ether could increase.
However, it’s worth noting that not everyone sees cryptocurrencies as investments. Bitcoin enthusiasts, for instance, believe it to be a much-improved monetary system over our current one and would like to see it used as everyday payment.
How to Invest in Cryptocurrency in 2023
Cryptocurrency has become an attractive investment option for many people. However, before jumping in, it’s important to understand the risks and carefully evaluate different cryptocurrencies. Here are five steps to help get you started.
Step 1: Evaluate the Cryptocurrency
Just like when you invest in traditional stocks, you should evaluate the potential risks and financial health of a company before investing. Similarly, you should carefully evaluate each cryptocurrency before investing in it.
Be aware that cryptocurrencies are a popular vehicle for fraud, so it’s important to do your research and avoid pump-and-dump schemes. Be cautious of smaller or newer cryptos being heavily promoted on social media platforms.
Always analyze the investment risk of a given cryptocurrency yourself and don’t rely solely on social media experts. Keep in mind that although investing through a large, reputable platform can minimize your exposure to fraud and cybersecurity risks, it’s impossible to eliminate these risks completely.
Step 2: Choose an Exchange
To invest in cryptocurrency, you must buy it through an exchange or investment platform. When selecting an exchange, consider factors such as security, fees, trading volume, minimum investment requirements, and the types of cryptocurrency available for purchase. Choose an exchange that suits your investment goals and risk tolerance.
Step 3: Securely Store Your Cryptocurrency
As cryptocurrency is entirely digital, you need a digital place to store the coins you own. Your investment platform is one option for storage. Choose a platform that will be responsible for the custody and safekeeping of your assets. This type of platform will be regulated, well-protected against hacking and cyber threats, and carry lots of financial insurance.
If you choose not to hold your cryptocurrency on the more popular platforms, you’ll need a crypto wallet. Crypto wallets hold the private keys that allow you to access your cryptocurrency. You can choose between a “hot” or “cold” digital wallet. A hot wallet is accessible via the internet and is generally more convenient, while a cold wallet is a physical storage device that keeps your cryptocurrency keys completely offline and is generally more secure. Holding your cryptocurrency in a wallet provides an extra layer of protection.
Step 4: Determine How Much to Invest
Investing in crypto, like any other type of investment, requires careful consideration of various factors, including your budget, risk tolerance, and investment strategy. When deciding how much to invest, it’s also essential to consider any minimum investment requirements and transaction costs charged by different crypto exchanges.
If you’re interested in investing in cryptocurrencies with a high value per coin, it’s worth noting that many exchanges allow you to invest based on the dollar amount you want to put in, rather than buying a whole coin. This means that you don’t have to come up with a large amount of money to invest in Bitcoin or other expensive cryptocurrencies.
Instead, you can focus on the total amount you want to invest and not the number of coins you wish to purchase. However, always remember that investing in crypto comes with risks, so it’s crucial never to invest more than you can afford to lose.
Step 5: Decide How to Manage Your Crypto Holdings
Cryptocurrency is a unique investment because you can use it to buy things, and it can also be held as a long-term investment. How you manage your crypto holdings depends on your investment strategy and goals. If you’re looking for a strategy that focuses on regular investing, diversification, and long-term growth, you may wish to consider the Stash Way.
This philosophy emphasizes building a portfolio that includes exposure to cryptocurrencies and other investments while regularly contributing to it over time. Stash can help you manage your crypto investments by providing automated investing portfolios that include exposure to cryptocurrency, making it easier to build and manage your portfolio over the long term.
Other Ways to Invest in Cryptocurrency
Cryptocurrency has become a hot topic in the financial world. While buying cryptocurrency directly is the most popular way to invest in it, there are other ways for traders to get involved. In this article, we’ll discuss four different approaches to investing in cryptocurrency.
1. Crypto Futures
Crypto futures allow you to bet on the price swings of cryptocurrencies, such as Bitcoin, through leverage. This means you can generate significant returns, but also significant losses. Keep in mind that futures are a fast-moving market and exacerbate the already volatile moves in crypto.
2. Crypto Funds
Crypto funds like the Grayscale Bitcoin Trust provide a convenient way to buy into cryptocurrency price swings for Bitcoin, Ethereum, and other altcoins. This is a straightforward method to invest in cryptocurrency through a fund-like product.
3. Crypto Exchange or Broker Stocks
Investing in stocks of companies like Coinbase or Robinhood can be a way to profit from the rise of cryptocurrency regardless of which one emerges as the winner. These companies derive a significant portion of their revenue from crypto trading, making them an interesting option to consider.
4. Blockchain ETFs
A blockchain ETF allows you to invest in companies that may profit from the emergence of blockchain technology. However, keep in mind that these companies often do more than just crypto-related business, diluting your exposure to cryptocurrency and reducing your potential upside and downside.
Each of these approaches comes with varying degrees of risk and exposure to cryptocurrency. It’s crucial to understand what you’re investing in and whether it suits your needs before making any investment decisions.
Pros of Investing in Cryptocurrency
If you value your privacy, then investing in cryptocurrency is the way to go. Unlike traditional payment methods, you don’t need to reveal your private information to complete a transaction. Your payment details are kept completely confidential, and nobody can access them without your permission.
2. Low Transaction Costs
One of the most significant advantages of cryptocurrency is that there are no transaction fees. Unlike other investments like property or bank accounts, you don’t have to pay a commission to transfer ownership. It’s a straightforward process that only requires the other person’s private key.
Investing in cryptocurrencies can help diversify your portfolio. Historically, the price of cryptocurrencies has not been highly correlated with other investment classes like stocks and bonds, which means you can potentially improve risk-adjusted returns by adding them to your investment mix.
Another advantage of cryptocurrencies is their decentralized nature. They’re not controlled by any government or organization, which means no one can manipulate the value of the coin. This decentralization keeps the currency stable and safe, unlike fiat currencies that are subject to government control.
The governance and upkeep of any currency are crucial factors in its growth. In the case of cryptocurrencies, developers and miners maintain transaction records, ensuring accuracy and keeping data decentralized. This ensures the cryptocurrency’s integrity and helps preserve its value over time.
Cons of Investing in Cryptocurrency
1. Illicit Activities
While the security and anonymity of Bitcoin transactions have their benefits, they have also been used for illicit activities in the past. Cryptocurrency has been used to purchase narcotics on the dark web and for money laundering purposes.
The lack of regulation and control over transactions makes it difficult for authorities to track down users engaging in such activities. Therefore, it is essential to do your research and ensure that the cryptocurrency you are investing in has a good reputation.
2. Lack of Ownership
Another disadvantage of crypto investing is the lack of ownership and control over your investment. Since no company controls the money, there is no recourse if something goes wrong. If you lose your Bitcoin due to a technical issue in the wallet, there is no way to recover it. Additionally, there are no regulations in many countries governing cryptocurrency, so it is essential to be aware of the current regulations in your country before investing.
3. Market Volatility
The crypto market is highly volatile, and predicting the value of Bitcoin is incredibly challenging. It is difficult to anticipate when values will rise or fall, and investing in cryptocurrency requires a lot of research, analysis, and preparation for any circumstance.
4. Security Concerns
While cryptocurrencies themselves are secure, the exchanges used to buy and sell them are not always safe. Hackers can gain access to user accounts by stealing wallet information stored on the exchange. In recent years, several high-profile exchanges have been hacked, resulting in millions of dollars worth of Bitcoin being stolen. While most exchanges are now highly secure, there is always a risk of another hack occurring.
5. Lack of Refunds
Finally, there are no refunds when it comes to cryptocurrency transactions. If money is sent to the wrong wallet address or parties are at odds, the sender cannot reclaim their funds. This lack of refunds makes it easy for scammers to defraud others of their money, so it’s important to be cautious when conducting transactions.
Your Decision: Is Cryptocurrency A Good Investment?
Cryptocurrency has become a hot topic in recent years, with some people making a fortune while others have lost their life savings. So, should you invest in cryptocurrency? The short answer is that it can be a risky investment, and it should only be a small part of your overall portfolio. Here are some things to consider before investing in cryptocurrency.
First, make sure your retirement savings are on track, pay off any debt, and invest in less volatile funds made up of stocks and bonds. Investing in high-risk assets should be done with caution and only after other financial obligations are met.
If you do decide to invest in cryptocurrency, diversify your portfolio by investing in several different products. This way, if one of your holdings suffers losses, you are insulated to some extent.
It’s important to do your homework before investing in cryptocurrency. Cryptocurrencies are often linked to specific technological products, and it can be difficult to discern which projects are viable. If you have a financial advisor who is familiar with cryptocurrency, it may be worth asking for input.
It’s also important to examine how widely a cryptocurrency is being used. Look for publicly available metrics that show how many transactions are being carried out on the platform. If use of a cryptocurrency is growing, that may be a sign that it is establishing itself in the market.
If you’re considering investing in less established crypto products, ask questions such as who’s heading the project, are there other major investors, will you own a portion in the company, and is the currency already developed?
Finally, be aware of fraudsters who see cryptocurrencies as an opportunity to bilk investors. It takes a lot of work to comb through a prospectus, but the more detail it has, the better your chances it’s legitimate. Legitimacy doesn’t mean the currency will succeed, though. That’s an entirely separate question, and it requires a lot of market savvy.
In summary, investing in cryptocurrency can be risky, so make sure you do your homework, diversify your portfolio, and be cautious with high-risk investments.
Cryptocurrency Investing FAQs
How much money do I need to start investing in cryptocurrency?
You can technically invest in cryptocurrency with just a few dollars. However, watch out for fees that may eat up a significant portion of your investment. Look for a broker or exchange that offers minimal fees.
How does a blockchain work?
Blockchain is a database that records and timestamps every entry into it, creating a receipt of transactions. Many crypto blockchain databases operate on decentralized computer networks, where redundant computers verify transactions to ensure their accuracy.
How do you mine cryptocurrency?
Some cryptocurrencies reward miners for verifying transactions on the blockchain database. Mining involves solving complex mathematical problems, which requires powerful processing units that consume a lot of energy.
How can I invest in Bitcoin?
You can invest in Bitcoin through various platforms, including crypto exchanges, traditional brokers, and financial apps. Be mindful of the fees that you’re paying.
What are altcoins?
Altcoins are alternative cryptocurrencies to Bitcoin. While Bitcoin used to dominate the market, other altcoins have gained popularity in recent years, making the term “altcoin” somewhat outdated.