As an investment asset, cryptocurrency has become mainstream. Many people find it difficult to understand the technology behind cryptocurrency. The value of cryptocurrency has risen beyond expectations over the past decade.
This beginner guide will show you how to invest in crypto currency, and the value of the crypto currency, if you decide that it is the right investment for you.
Crypto or Cryptocurrency, a digital currency, doesn’t depend on any central authority to verify transactions and create new units. It relies on cryptography to stop counterfeiting.
Blockchain technology is the basis for cryptocurrency. Blockchain technology is made up of blocks of data. Each block can contain information about any topic, including transactions in specific currencies. Each block of data refers to the previous block and creates a chain. Cryptography is used to make sure that the reference chain is immutable, so hackers cannot alter it.
Right now, there are many cryptocurrencies. This is due to the ease with which you can create a new currency using smart contracts. You can easily create new crypto by piggybacking on an existing blockchain, which already has a network of computers verifying each block.
What is the value of crypto?
You may be asking: how to value a cryptocurrency?
Market factors determine the value of most assets. Let’s look at the real estate market as an example. What factors determine the property’s value? If a property is in a desirable area, more luxurious or much safer, or more convenient, these factors might be valued higher.
What about stocks? The success or impending success of a company is a major factor in determining stock value. Generally, stock prices will rise if there are higher profits and higher dividends.
The value of cryptocurrency is also affected by the market but in a different manner. The local economy doesn’t affect any physical assets. The value of a cryptocurrency is not tied to corporate profits. In fact, cryptocurrency is a form of ownership that has zero intrinsic value.
Simple supply and demand are what determine whether a cryptocurrency’s price will rise or fall. Price goes up if there is more demand than supply. Price goes up if supply is constrained. When evaluating cryptocurrency, it is important to ask the following questions: How does the supply increase? And what will drive the demand higher for the coin?
These questions can be answered by looking at the whitepaper published by cryptocurrency teams to attract interest in their projects. Take a look at the project’s roadmap to see what could be triggering increased demand. Look into the team behind a project to see if they are capable of executing their vision. Find a group of key opinion leaders (KOL) who are already investing in cryptocurrency to gauge their sentiment.
Also, it is important to look at how much money has flowed into cryptocurrencies. A high market cap means that there is not much growth potential. High prices will reduce demand and increase supply, as early investors try to cash out.
How do you invest in cryptocurrency?
You may start to buy cryptocurrency once you believe it will be a good investment.
First, open an account on a cryptocurrency exchange. Most stock brokers don’t support trading in cryptocurrency. Coinbase is a popular exchange that’s easy to use for beginners. Robinhood and SoFi are also available. Make sure that the exchange you choose supports the cryptocurrency you wish to purchase.
The hard part is not buying cryptocurrency. You must be ready for volatility as a crypto investor. Crypto is generally more volatile than other assets like stocks. It is not uncommon for prices to swing by 10% or more within a matter of hours.
You should also consider how much of your portfolio is to be allocated to a particular cryptocurrency.
The advantages & disadvantages of investing in cryptocurrency
There are a few benefits to investing in cryptocurrency:
Diversification: There is no apparent correlation between the value of cryptocurrency and stocks, bonds, or any other asset class. However, the existence of cryptocurrency is only a decade old, so data in this area is very limited. It makes sense, however, that the crypto price is not related to traditional assets.
Potential return: As cryptocurrency adoption grows, it has shown a very strong return potential. The expected return on a solid cryptocurrency investment is higher than for stocks, according to return on investment performance.
Other utilities: Some cryptocurrencies offer additional utility. Bitcoin Cash (CRYPTO.BCH) can, for example, be used to purchase goods and services. Some tokens can also be used to access projects or participate in DAO activities.
However, there are also some major disadvantages for investors:
High volatility: Investing with cryptocurrency is risky. Daily, cryptocurrency prices can fluctuate wildly. Investors may find it difficult to accept such large price swings.
Limited regulation: The cryptocurrency industry is not regulated as heavily as the stock market. This means that you won’t be protected the same way you would when you invest in highly regulated stocks. Your investment could be lost if your account is hacked. There is nothing you can do if the crypto you invested in turns out not to be real. Additionally, regulation could reduce the demand for certain cryptocurrencies, increasing the risk of the investment.
Different types of cryptocurrency investing
Although buying cryptocurrency directly is the best way to increase your crypto exposure, there are other options.
Investing in cryptocurrency-related companies: You can choose to invest in companies that have a focus on cryptocurrency. There are many options: You can invest in cryptocurrency mining companies or cryptocurrency exchanges, like Coinbase (COIN), as well as companies such Robinhood Markets Inc.(HOOD), and PayPal Holdings Inc. (PYPL), which support cryptocurrency. And MicroStrategy Inc., which holds large amounts of cryptocurrency on its balance sheets, is another option.
Invest in cryptocurrency ETF: If you don’t want to choose any individual cryptocurrency or company, then you can decide to invest in a cryptocurrency ETF instead. There are many ETFs available, including futures and index funds. You also have the option of investing in a variety of cryptocurrency investment trusts.
You can become a validator or crypto miner: This is the quickest way to invest in crypto. Validators and cryptocurrency miners earn crypto-based rewards that they can use to invest in other currencies or trade for their own.
Top cryptocurrencies for beginners
You shouldn’t attempt to find a gem in the rough as a beginner cryptocurrency investor. Start by learning about more established cryptocurrencies and the support networks they have.
It is easy to get started with Bitcoin (CRYPTO.BTC). All cryptocurrency exchanges will allow you to trade Bitcoin. It is well-established and you will know what you are getting with Bitcoin. Although it’s not fancy, it has an advantage known as the first cryptocurrency that has made it adopted. This gives Bitcoin an advantage in terms of being able to be used as a medium for exchange.
For beginners, Ether (CRYPTO ETH) is a great choice. The Ethereum blockchain is the backbone of most DeFi projects. These DeFi projects use Ethereum to execute smart contracts and provide financial services that are not controlled by a central authority. To add a smart contract to Ethereum’s blockchain, a user must pay Ether. An increase in DeFi application adoption will result in a greater demand for Ether.
Cryptocurrency investing requires that you do your research and have enough confidence in your investment to endure what is sure to be an exciting ride.