Investing in Cryptocurrency for Beginners

What is cryptocurrency investment?

Cryptocurrency investment is the act of buying digital currencies and holding them in the hope that the market will favor you while your portfolio increases in value. The value of a cryptocurrency is determined by the principle of supply and demand. If the demand for a cryptocurrency rises, its value also increases, and vice versa. There are several indicators that might draw an investor towards a particular cryptocurrency, and investors might have certain criteria that need to be met to invest.

Common types of crypto investing

There are many ways to invest in cryptocurrency, besides directly purchasing coins or tokens through an exchange. Some common types of crypto investing include investing in crypto-oriented or pro-crypto companies, investing in crypto-heavy funds, buying crypto EFTs on a brokerage platform, and incorporating cryptocurrency into your Roth IRA or 401K.

What do I need to know before investing in cryptocurrency?

Before investing in cryptocurrency, there are a few important things to consider. Firstly, cryptocurrencies are unregulated and decentralized, making them potentially risky assets to hold. They are also known for huge fluctuations in price action. Secondly, investors should exercise caution when dealing with ICOs, as they are known for their limited transparency. Thirdly, investors should only invest amounts they are comfortable losing, and should protect their private key, which is an alphanumeric code that acts as a password. Lastly, investors should choose the best coin exchange, broker or wallet to suit their investment needs.

What do I need to invest in cryptocurrency?

Investing in cryptocurrency is easy and simple. You just need some liquid capital in the form of a fiat currency like dollars or pound sterling and an account with a broker or crypto exchange.

To get started, you need to:

  • Choose a broker or exchange that suits you best. This might mean selecting one with an easy-to-use interface if you’re a beginner.
  • Create your account, verify your details, and link it to your bank account.
  • Deposit the amount of fiat currency you’re willing to invest/risk.
  • After assessing the market for a cryptocurrency that interests you, place an order to purchase some, select the amount you’d like to invest, and confirm the order.
  • Store your cryptocurrency. You can do so in:
  • Hot wallets – These are usually on portable devices like laptops and phones and are constantly connected to the internet. Although they’re convenient because they’re always connected, they’re an easier target for hackers.
  • Cold wallets – These wallets are disconnected storage units that hold your cryptocurrency once it’s been procured. Because they’re disconnected, they’re only at risk when they connect, giving hackers a limited window of opportunity.
  • The brokerage account – If you don’t mind keeping portfolios separate, you can just store your entire cryptocurrency holding within your brokerage account.

However, before committing funds to cryptocurrency investments, it’s important to study the fundamentals of investing to limit the risks.

Pros & cons of investing in cryptocurrency

There are many advantages and disadvantages to investing in and trading cryptocurrency. New investors need to consider all of them when opening up an account.

Pros of investing in cryptocurrency

  • Potential for high gains – Because of the volatile nature of cryptocurrencies and the uncertainty surrounding their implementation, they have incredibly high growth potential, meaning a possibly stellar return potential for investors. Cryptocurrencies have been the highest performing assets of the last five years, with Bitcoin and Ethereum growing 1000% and 500% respectively in that time.
  • Government-resistant store of value – Unlike the Federal Reserve, which has the ability to inflate currencies in response to a crisis, cryptocurrencies are governed by their own supply and demand markets. This means they resist fluctuations in fiat currencies. Cryptocurrencies typically have a limited number of coins in circulation, whereas the Federal Reserve can simply print more money.
  • It’s a great way to diversify your portfolio – In addition to commodities like gold and silver, which are a natural hedge against inflation, cryptocurrencies have shown extremely good profit potential that weathers the storm of financial crisis. This helps you reduce risk in your long-term investment portfolio.
  • Accessible 24/7 – Unlike stock markets, which have investing and trading windows to make deals, cryptocurrency markets are open 24/7. This lets investors place orders, take profits, and monitor trends at any time.

Cons of investing in cryptocurrency

  • Market is incredibly volatile – Cryptocurrencies are extremely unregulated. Much of the price fluctuations in the crypto market are governed by speculation based on cryptocurrency owners’ perceptions of their own coins and future projections. With volatility comes the potential for extremely high gains but also substantial losses if they make up too much of your portfolio.
  • Their long-term success is yet to be proved – Despite notable coins like Bitcoin and Ethereum booming in value, many altcoins have seen a peak and have struggled to return to their five-year highs. It’s still unknown if they’re a strong investment or a bubble waiting to burst, leading to recurring economist questioning as to whether the market will survive.
  • It’s confusing for new investors – Navigating the world of cryptocurrency investments, CFDs, leveraged trading, and misinformation can lead to substantial losses for those starting out. It’s critical for those investing to understand the markets and not throw their capital in straight away.
  • Targets for security breaches – The high-value cryptocurrencies locked away in digital wallets are targets for criminals. Phishing attacks on wallet holders and misplaced security keys can give malicious actors instant access to your crypto portfolio, letting them transfer funds from unsuspecting users.
  • Investors must contend with online misinformation – “Get rich quick” schemes and inflated predictions of the success of a cryptocurrency can cloud the judgement of novice investors. With stocks, there is more information to work with including revenue, EPS ratings, price-to-earnings ratios, and compound annual growth rate (CAGR) that let users make informed decisions. Cryptocurrency is more speculative due to its infancy.

Understanding crypto market volatility and risk management

Prices in the crypto market are determined solely by speculation due to the lack of regulation and oversight. While significant events like technical advancements in a cryptocurrency’s blockchain infrastructure can cause hype and rallies, the popularity of a cryptocurrency is largely driven by its owners inflating the strength of their own coins.

To manage risk in the face of volatility, investors and traders can take advantage of features on coin exchanges and brokerage sites. Experienced investors will, for example, diversify their portfolio by allocating only a small portion of their assets to cryptocurrency rather than betting everything on a boom. They will also limit the use of CFDs and leverage and work to a long-term plan based on data-driven predictions and technical and fundamental analysis. Emotion management is also important, as panicking during a bear market can lead to poor decisions.

Tips for investing in cryptocurrency

If you’re new to investing in cryptocurrencies, here are some tips to keep in mind. Use “stop losses” and “take profit” levels to automatically sell investments and limit losses or cash out on profits. Consider using an exchange rather than a broker, as they typically have lower fees. Remember that the markets operate 24/7, and it may be worth automating your investments with tools. You can also use a paper account to practice with fake money and test out strategies. Finally, it’s possible to make money as a cryptocurrency depreciates, but this strategy is typically used by more experienced investors.

Frequently Asked Questions (FAQs)

There is much debate about the long-term potential of cryptocurrencies, tokens, and altcoins. While they have potential for high gains, they also carry substantial risk and are better suited to less risk-averse individuals. However, they can also function as a hedge against inflation and are a viable addition to a diverse investment portfolio.

How much should I invest in crypto?

As a rule of thumb, it is recommended that no more than 20% of your portfolio should be invested in any one market sector.

For beginners, it is advisable to invest a slightly lower percentage of your portfolio in cryptocurrency due to the volatile nature of the markets.

How much should I put into cryptocurrency to make money?

You do not need a large starting capital to invest in cryptocurrencies and make money.

Even though established coins such as Bitcoin and Ethereum are priced in the thousands, brokers and exchanges allow users to invest in coins to the value of their capital.

This implies that if you only have $100 to invest, you can still invest in Bitcoin and you will receive the equivalent value for your portfolio.

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