How To Invest In Cryptocurrency Beginners Guide
Cryptocurrency is on fire, despite the fact that its volatility is widely known, and many investors are seeking to make a profit off of its skyrocketing price. There is a downward trend followed by an upward trend in the value of cryptocurrencies such as Bitcoin and Ethereum, as well as in the value of many other prominent digital currencies. Traders with years of experience have been making bets on cryptocurrency for years, but what should you do if you’re new to the market and want to join in on the action?
Here’s how to start investing in cryptocurrency and what you need to watch out for.
5 steps for investing in cryptocurrency
To begin, if you want to invest in cryptocurrency, you need to have your finances in order before you even start looking into it. This necessitates the establishment of an emergency fund, the maintenance of an appropriate amount of debt, and, ideally, the creation of a diverse investment portfolio. Your cryptocurrency holdings have the potential to become an additional component of your portfolio, which, if successful, should contribute to an increase in your overall profits.
As you begin to invest in cryptocurrencies, it is important that you pay attention to the following five additional items.
1. Understand what you’re investing in
Understand the specifics of the investment you are making, just as you would for any other kind of investment. When investing in stocks, it is essential to study the company prospectus and do in-depth research on the respective firms. Make a plan to follow this procedure with all cryptocurrencies, since there are hundreds of them, each of which operates in a distinctive manner, and new ones are formed each day. It is necessary for you to have a solid understanding of the investing case for each transaction.
When it comes to the majority of cryptocurrencies, their value is not supported by anything at all, not even tangible assets or steady cash flow. For instance, this is the situation with Bitcoin, where investors are solely dependent on another party paying a higher price for the product than what they themselves paid for it. To put it another way, unlike stocks, where a corporation may increase its revenues and hence generate returns for you, many crypto assets need the market to become more enthusiastic and bullish for you to profit from them. This is in contrast to the situation with stocks.
Ethereum, Dogecoin, Cardano, and XRP are just some of the most widely used cryptocurrencies today. Solana is another another cryptocurrency that has had an incredible amount of success. Therefore, prior to making an investment, it is important to evaluate the prospective benefits and risks. It is possible that your financial investment may wind up being worthless if it is not supported by a tangible asset or a steady flow of cash.
2. Remember, the past is past
When making predictions about the future, many inexperienced investors make the error of looking at the past and extrapolating from there. It’s true that one bitcoin was formerly worth just a few cents, but now days one bitcoin is worth a lot more. However, the most important question to ask is this one: “Will that growth continue into the future, even if it’s not exactly at that precipitous rate?”
When making decisions, investors focus on the future rather than the performance of an asset in the past. What factors are going to influence future returns? Traders who purchase a cryptocurrency today are looking for profits in the future, not gains from the day before.
3. Watch that volatility
The values of cryptocurrencies are very volatile, even by the standards of the asset market. They might fall precipitously in a matter of seconds based on nothing more than a rumour that turns out to be unfounded. That may be very beneficial for knowledgeable investors who are able to carry out transactions quickly or who have a firm grip of the fundamentals of the market, how the market is going, and where it could go from here. It is a minefield for inexperienced investors who do not possess these expertise or the high-powered algorithms that drive the transactions in these markets.
Wall Street traders with a lot of power and large pockets play a game called volatility in which they compete with one another to see who can make the most money. A novice investor has a far higher risk of being decimated by the market’s volatility.
This is due to the fact that volatile markets encourage investors, particularly novices, to flee the market in fear. In the meanwhile, further market participants may enter and purchase at a discount. To summarise, volatility may be beneficial to experienced traders by allowing them to “buy low and sell high,” whereas novice investors tend to “buy high and sell low.”
4. Manage your risk
You need to have a risk management strategy in place if you are going to engage in short-term trading of any asset, but this may be particularly important with highly volatile assets like cryptocurrencies. Therefore, as a trader with less experience, you will need to have an understanding of how to effectively manage risk and devise a procedure that assists you in minimising losses. And each person’s experience of this process might be uniquely their own:
- It’s possible that the best method of risk management for a long-term investor is to never sell, regardless of the price. The mindset of looking at things over the long term enables an investor to maintain their position.
- However, risk management for a trader with a short-term horizon can include establishing stringent guidelines on when to sell, such as when an investment’s value has dropped by 10 percent. The trader will then proceed to execute the rule mechanically in order to prevent a relatively little loss from developing into a devastating one in the future.
Traders who are just starting out might think about putting aside a particular amount of money for trading and then just utilising a percentage of that money, at least to begin with. In the event that a position goes against them, they will still have money in reserve to trade with at a later time. The bottom line is that if you don’t have any money, you can’t engage in business activities like trading. You may ensure that you will always have a bankroll to fuel your trading by setting aside part of your money as a reserve.
It is essential to control risk, but doing so will come at the expense of your mental well-being. Although it’s painful to get out of a losing position, doing so might assist you prevent suffering even greater losses in the future.
5. Don’t invest more than you can afford to lose
Last but not least, it is essential to steer clear of investing money that you need in speculative assets. If you can’t afford to lose it all, then you can’t afford to put it into hazardous assets like bitcoin, or other market-based assets like stocks or ETFs, for that matter. If you can’t afford to lose it all, then you can’t afford to put it into dangerous assets.
Whether it’s a down payment for a home or an essential impending purchase, money that you need in the next few years should be stored in secure accounts so that it’s there when you need it. This is true whether the money is being saved for a down payment or an important forthcoming purchase. Paying off debt is the finest investment you can make if you want a return that is one hundred percent guaranteed. You may count on earning (or saving) an amount equal to the interest rate that you are now paying on the loan. There is no possibility of failure.
Last but not least, be sure that you don’t ignore the safety measures taken by any exchange or broker that you work with. Even if you are the legal owner of the assets, someone else must nevertheless take responsibility for protecting them, and that protection must be very thorough. Traders who are concerned about the safety of their cryptocurrencies may decide to purchase a cryptocurrency wallet in order to store their money in an offline location, making them unavailable to anybody who may try to steal them.
Other ways to invest in cryptocurrency
Putting money straight into bitcoin may be the most common method to do so, but investors also have access to alternative entry points into the cryptocurrency market, some of which are more direct than others. These are the following:
- Cryptocurrency futures: Futures are another method to bet on the price fluctuations of Bitcoin, and you can utilise the power of leverage to earn large gains using futures. Futures are a kind of derivative financial instrument (or losses). The already erratic price movements of cryptocurrency are made even more so by the rapid pace of the futures market.
- Crypto funds: There are a few crypto funds (such as the Grayscale Bitcoin Trust) that enable you to gamble on the price swings in Bitcoin, Ethereum, and a few other altcoins. These funds allow you to speculate on the price movements of Bitcoin and Ethereum. As a result, they may facilitate the purchase of cryptocurrency by functioning as a kind of fund.
- Crypto exchange or broker stocks: Investing in the shares of a firm that stands to benefit from the increasing value of cryptocurrencies irrespective of whether one emerges victorious might also be an intriguing choice. And this is the potential that lies inside an exchange like as Coinbase or a broker such as Robinhood, both of which get a significant portion of their income from cryptocurrency trading.
- ETFs that Invest in Blockchain Technology Blockchain ETFs provide investors the opportunity to invest in businesses that stand to gain from the development of blockchain technology. You may get exposure to some of the most important publicly listed firms in the blockchain field by investing in the best blockchain exchange-traded funds. Your exposure to bitcoin is diluted, which reduces the potential gain and downside of your investment. However, it is crucial to keep in mind that these firms often engage in activities that are unrelated to cryptocurrencies.
Because the levels of risk and exposure to bitcoin that each of these approaches entails are different, it is essential that you fully comprehend what it is that you are purchasing and evaluate whether or not it satisfies your requirements.
How much money do I need to start investing in cryptocurrency?
Theoretically, all that is required to make an investment in bitcoin is a few bucks. For example, the majority of cryptocurrency exchanges require a minimum trading amount of at least $5 or $10. There is a possibility that some cryptocurrency trading applications have a minimum that is even lower.
If you’re just trading a tiny quantity of cryptocurrencies, though, many trading platforms can charge you a significant percentage of your whole investment as a fee. This is something you need to be aware of. Therefore, it is essential to search for a broker or exchange that will reduce the costs you are required to pay. In point of fact, many so-called “free” brokers include costs in the price that you pay for your cryptocurrencies. These fees are referred to as spread mark-ups.
How does a blockchain work?
Blockchain technology is the foundation of the cryptocurrency market. A blockchain is a kind of database that logs and stamps the time of each transaction that occurs inside it. The most helpful approach to conceptualise a blockchain is as a continuously updated ledger of transactions. When a cryptocurrency is powered by a blockchain database, the database records and validates transactions in the cryptocurrency. This confirms the movement of the money as well as who owns it.
Decentralized computer networks are used to manage the majority of the blockchain databases for cryptocurrencies. In other words, the database is operated by many redundant computers, each of which checks and double-checks the transactions to guarantee that they are correct. In the event that there is a discrepancy, the connected computers are obligated to find a solution.
How do you mine cryptocurrency?
Mining is the process of verifying transactions on a blockchain database, and certain cryptocurrencies provide rewards for individuals who participate in mining. As an example, the miners that participate in Bitcoin do things like solve very difficult mathematical problems as part of the verification process. Miners are promised a certain amount of bitcoins regardless of whether or not their mining efforts are successful.
In order to mine bitcoins, miners need to have access to powerful processing units that need a significant amount of electricity. In order to get these benefits, a large number of miners run enormous rooms packed with mining rigs of this kind. As of the beginning of 2022, the operation of the Bitcoin system used the same amount of energy as a nation of around the same size.
The cryptocurrency market is characterised by high levels of speculation, and as a result, many astute investors have chosen not to place their capital there. Start out with a little amount of money and only trade with funds that you can afford to lose if you are a newbie who is interested in trading cryptocurrencies. This is the greatest piece of advise that can be given.