Cryptocurrencies have displayed high levels of volatility since their inception. However, this volatility can present profitable trading opportunities for those interested in investing in digital assets. Although popular cryptocurrencies like Bitcoin and Ethereum have experienced substantial growth since their introduction, they have also declined significantly from their peak values. While seasoned traders have been speculating on cryptocurrencies for years, newcomers to the crypto market may wonder how to get started. This guide will explain how to begin investing in cryptocurrency and the considerable risks that you should be aware of.
To begin with, before investing in cryptocurrency, it’s crucial to ensure your finances are well-organized. This includes having an emergency fund set up, manageable debt levels, and ideally, a diversified investment portfolio. By incorporating cryptocurrency investments into your portfolio, you can potentially boost your overall returns. As you embark on your cryptocurrency investment journey, keep these five factors in mind.
Don’t risk more than you can afford to lose
It’s crucial to avoid investing money that you need into speculative assets like cryptocurrencies. If you can’t afford to lose all of it, then you can’t afford to risk it on such high-risk investments. Any funds that you require in the next few years, such as a down payment for a house or an important purchase, should be kept in a safe account to ensure they’re available when needed.
Moreover, if you’re seeking a completely safe return, paying off debt is your best option. You’re guaranteed to earn or save the interest rate you’re paying on the debt, so there’s no risk of loss.
Lastly, it’s important not to overlook the security of the exchange or broker you’re using for cryptocurrency investments. While you may legally own the assets, it’s critical that they’re securely stored. If you’re concerned about the security of your cryptocurrency, consider investing in a crypto wallet to store your coins offline and make them inaccessible to hackers or other malicious actors.
When trading any asset, particularly volatile assets like cryptocurrency, it’s essential to manage your risk, especially when trading on a short-term basis. As a new trader, it’s crucial to understand how to manage risk and develop a process that helps mitigate losses. This process can vary depending on the individual’s trading style.
For long-term investors, risk management might mean never selling, regardless of the price, allowing them to stick with their position. However, for short-term traders, risk management might involve setting strict rules on when to sell, such as selling when an investment has fallen 10 percent. By strictly following this rule, a relatively small decline won’t result in a substantial loss later on.
Newer traders should consider setting aside a certain amount of trading money and only using a portion of it, at least initially. If a position moves against them, they’ll still have money in reserve to trade with later. The key point is that you can’t trade if you don’t have any money, so keeping some money in reserve means you’ll always have a bankroll to fund your trading.
Managing risk comes at an emotional cost, and it can be difficult to sell a losing position. However, doing so can help prevent worse losses later on.
Cryptocurrency prices are highly volatile, which means they can drop rapidly in seconds based on nothing more than a rumor that turns out to be untrue. This can be an advantage for sophisticated investors who can make rapid trades or who have a solid understanding of market fundamentals, trends, and potential directions. However, for new investors without these skills or the advanced algorithms that guide trades, it can be a dangerous minefield.
Volatility is a game for high-powered Wall Street traders who compete to outdo each other. New investors can easily be overwhelmed by the volatility, as it can cause traders, especially beginners, to become frightened and sell their assets at a loss. In contrast, other traders may take advantage of the low prices and buy in. Essentially, volatility can enable sophisticated traders to “buy low and sell high,” while inexperienced investors “buy high and sell low.”
Past is Past
Many new investors make the mistake of focusing too much on an asset’s past performance and assuming that it will continue into the future. For example, while it is true that Bitcoin used to be worth only pennies and now has significantly increased in value, the critical question is whether this growth will persist in the future, even if it is not at the same meteoric rate.
Successful investors always look towards the future and consider what will drive future returns, rather than just what an asset has accomplished in the past. For traders who invest in cryptocurrencies, it is essential to focus on the gains of tomorrow rather than those of yesterday. By keeping an eye on future developments and trends, traders can make more informed decisions and avoid the pitfalls of blindly following past trends.
Know what you’re investing in
To make informed investment decisions, it’s crucial to have a clear understanding of what you’re investing in. For instance, when investing in stocks, reading the annual report and SEC filings can provide a comprehensive analysis of the company. Similarly, when investing in cryptocurrencies, it’s essential to research and comprehend each crypto asset’s investment case. With thousands of cryptocurrencies in existence, each functioning differently, and new ones being created frequently, you need to be well-informed to make a sound investment.
Many cryptocurrencies lack the backing of hard assets or cash flow, making them riskier investments. For example, Bitcoin’s value depends solely on finding someone willing to pay a higher price than what you paid for it. In contrast, companies can increase their profits, which can lead to higher returns on stocks. Therefore, to invest in cryptocurrencies, you’ll need to rely on the market’s bullish sentiment.
Some of the most popular cryptocurrencies are Ethereum, Dogecoin, Cardano, and XRP. Before investing, it’s crucial to weigh the potential risks and rewards carefully. If your financial investment lacks asset or cash flow backing, it could be worthless.
Although investing directly in cryptocurrency is the most popular way to get involved, there are other options available to traders, some of which are more direct than others. These options include:
Futures provide another way to bet on the price fluctuations of Bitcoin. With futures, you can use leverage to generate significant returns (or losses). The futures market is fast-paced and increases the already volatile swings in crypto.
A few crypto funds, such as the Grayscale Bitcoin Trust, enable you to bet on the price fluctuations of Bitcoin, Ethereum, and a few other altcoins. Therefore, they are an easy way to invest in crypto through a fund-like product.
Buying stock in a company that’s poised to benefit from the growth of cryptocurrency, regardless of the winner, could be an interesting option. This is the case with exchanges like Coinbase or brokers like Robinhood, which generate a significant portion of their revenue from crypto trading.
A blockchain ETF enables you to invest in companies that may profit from the emergence of blockchain technology. The top blockchain ETFs provide exposure to some of the key publicly traded companies in the space. However, it’s important to note that these companies often do much more than crypto-related business, meaning your exposure to cryptocurrency is diluted, reducing your potential upside and downside.
Each of these methods varies in terms of riskiness and exposure to cryptocurrency. As a result, you should thoroughly understand what you’re buying and whether it meets your requirements.
Altcoin, a term that was once used pejoratively to describe any cryptocurrency that was not Bitcoin, is now an alternative to Bitcoin. In the early days of cryptocurrency, since Bitcoin was the most prominent and popular digital currency, everything else was labeled as an altcoin.
Despite Bitcoin’s market capitalization remaining the largest in the cryptocurrency market, it is no longer as dominant as it was in the early days. Other altcoins such as Ethereum and Solana have gained popularity, rendering the term altcoin somewhat outdated. With over 15,000 cryptocurrencies in existence, it no longer makes sense to define the industry as “Bitcoin and then everything else.”
How to invest in Bitcoin?
There are various ways to invest in Bitcoin, and you can partner with different companies, such as:
Exchanges offer a vast selection of cryptocurrencies and are usually the most competitive in terms of pricing. Some of the top players in this field are Coinbase, Kraken, and Binance, among dozens of others.
Apart from stocks and other financial assets, many traditional brokers allow you to trade Bitcoin, although their selection of other cryptocurrencies is relatively limited. Some of the top players in this category include Interactive Brokers, TradeStation, and tastyworks.
Numerous financial apps now enable you to trade Bitcoin and a few other cryptocurrencies. Some of the top players in this area are Robinhood and Webull, as well as payment apps like PayPal, Venmo, and Cash App.
Mining is a process in which some cryptocurrencies reward those who verify transactions on the blockchain database. For instance, Bitcoin miners solve extremely complex mathematical problems as a part of the verification process, and if they succeed, they receive a predetermined award of bitcoins.
To mine bitcoins, miners require powerful processing units that consume a vast amount of energy. Many miners operate vast rooms filled with such mining rigs to extract these rewards. As of late 2022, the Bitcoin system consumed as much energy as a medium-sized country.
The foundation of cryptocurrency is blockchain technology, which is a type of database that records and timestamps every entry made into it. One can think of a blockchain as a continuously updating receipt of transactions. When blockchain technology powers cryptocurrency, it records and validates transactions in the currency, verifying the currency’s movement and ownership.
A lot of cryptocurrency blockchain databases operate on decentralized computer networks, meaning many redundant computers manage the database by verifying and double-checking transactions for accuracy. If any discrepancies are found, the networked computers work together to resolve them.
In theory, investing in cryptocurrency requires only a small amount of money. Many crypto exchanges, for instance, offer a minimum trade amount of $5 or $10, while other trading apps may have even lower minimums.
However, it’s crucial to note that some trading platforms charge a significant portion of your investment as a fee if you’re trading small amounts of cryptocurrency. Therefore, it’s essential to find a broker or exchange that minimizes your fees. In fact, some “free” brokers incorporate fees, known as spread mark-ups, into the cryptocurrency price you pay.
Cryptocurrency is known to be a volatile and speculative market, and as a result, many seasoned investors have chosen to steer clear of it. However, for beginners who are interested in trading cryptocurrencies, it is advisable to start with a small amount of money that they can afford to lose. It is important to understand that investing in cryptocurrency is a high-risk endeavor that could result in substantial gains or significant losses. Therefore, it is essential to take a cautious and thoughtful approach to investing in this market. As with any investment, it is critical to conduct thorough research and consult with financial advisors before making any decisions. Additionally, it is recommended to invest in a diverse portfolio that includes a mix of assets and not to put all of one’s investment into cryptocurrency.
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I'm Carina, a passionate crypto trader, analyst, and enthusiast. With years of experience in the thrilling world of cryptocurrency, I have dedicated my time to understanding the complexities and trends of this ever-evolving industry.
Through my expertise, I strive to empower individuals with the knowledge and tools they need to navigate the exciting realm of digital assets. Whether you're a seasoned investor or a curious beginner, I'm here to share valuable insights, practical tips, and comprehensive analyses to help you make informed decisions in the crypto space.