Ever since Bitcoin first appeared in 2008, cryptocurrency has been gaining increasing amounts of attention from the public. Right now, there are over 20,000 cryptocurrencies in circulation, with a handful standing out as attractive investment opportunities.
However, the notion of cryptocurrencies has always been a bit confusing for the uninitiated. People are left wondering what this popular term represents, how it works, where it gets its value from, whether it’s worth putting money into, and how even to start investing as a beginner.
The following article will answer those and other questions, so you can make an informed decision about whether buying crypto is a good investment opportunity for you.
Before talking about investing in crypto, we need to explore the term itself. Simply put, it is a digital currency that works as a part of a decentralized system, in contrast to fiat money.
Namely, fiat money is represented by physical tokens such as coins and paper bills, governed by a centralized system, such as the Federal Reserve in the USA. This centralized authority decides on the available supply of money and other important factors without involving the people who own the money in its operations.
On the other hand, cryptocurrency involves no physical representation of its value. It exists as a code in a purely digital form. It also works on a decentralized network called blockchain, where the information about transactions is distributed between the network nodes.
These nodes are data blocks connected into a chain, with each new block containing the information of all the previous blocks. When a new block gets created, the network uses special consensus mechanisms to validate its accuracy. This creates a robust system that is difficult to hack as its information is immutable.
Another important aspect of cryptocurrencies is that some crypto networks allow you to not only buy and trade coins but also stake them as a way to earn passive income. Staking means locking up some of your tokens in the network to contribute to it. Doing this can bring you rewards in the form of more crypto coins you can then keep, sell, or stake.
Value of Cryptocurrency
Cryptocurrencies have become an attractive investment opportunity because of the high value some of them can reach. However, if cryptocurrency exists in a purely digital form, it is reasonable to wonder what gives it its value.
To explain this, we can compare crypto to stocks and real estate. We know that the value of a property or stock increases with the demand. The demand for a house or an apartment is influenced by factors such as a desirable location or the comfort level it provides. Similarly, the value of stocks increases with the success of the company they belong to.
The value of cryptocurrency works similarly in terms that it is influenced by supply and demand. However, compared to stocks and real estate, cryptocurrency has no intrinsic value. Its worth is determined solely by demand — that is, the more people are interested in and buy a certain cryptocurrency, the higher its value is.
The demand for cryptocurrency can be influenced by its representation in the press and mainstream media, endorsements by prominent business figures or important individuals, and even stock manipulations. These factors make cryptocurrency extremely volatile, meaning its price can change quickly, making it highly unpredictable.
Tips for Investing in Cryptocurrency
Regardless of the high volatility crypto comes with, many people are still interested in investing in it. Let’s look at some of the most important things beginner investors should have in mind before putting their money into this popular asset.
- Do a lot of research — The basis of a good investment is knowing the asset you’re investing in and the ability to predict its value. Therefore, it’s very important to learn as much as possible about the cryptocurrency you’d like to buy. This helps you understand the different ways a specific cryptocurrency helps you gain profit and predict whether the demand can increase, driving the value up.
- Monitor the market — Given the relatively unpredictable ebb and flow of crypto prices, you’ll need to watch the market closely for any changes. Ideally, you want to buy the tokens when their price is low and sell them when it reaches a higher point. This way, you can turn a profit on your investment.
- Create a risk-management plan — Monitoring the market for changes is necessary, but it’s often not enough. You’ll also need to have a solid plan of action that will help you decide when to buy or sell. This will prevent you from running the risk of acting too soon or too late and losing money.
- Know how much you can invest — When you first enter the crypto world, putting as much money as you can into it can be tempting. However, you must remember that this is risky, so you should only invest the money you can afford to lose.
How to Buy Cryptocurrency
Now that we’ve covered the basics of cryptocurrency and talked about some investment precautions, we can take a look at the asset-buying process. Here are the steps you need to take:
1. Pick a crypto exchange or broker — Crypto exchanges are platforms like Gemini, Coinbase, and Binance that let you buy, sell, and trade cryptocurrency. You should choose a platform that accepts fiat currency and utilizes a beginner-friendly user interface. If this process seems too complex, you use a broker or website to buy crypto for you on an exchange. Ideally, you want to choose a broker that has low fees and allows you to transfer your coins out of the platform.
2. Register and deposit money — When you decide on the platform you’d like to use, you must create an account in your own name. You will also need to verify your identity by submitting copies of government-issued documents, such as an ID. Then, you should deposit some money using your preferred payment method.
3. Buy the coins — When your deposit goes through, you are ready to use the money to buy the cryptocurrency you want. Find it in the list of available cryptocurrencies or type its ticker symbol together with the amount you want to buy and confirm your transaction.
4. Store your crypto safely — Most brokers and crypto exchanges will let you keep your tokens right on their platform. However, this is not the best option for storing your crypto due to certain security risks. We suggest you use online or hardware crypto wallets as they are password-protected and provide greater security.
We hope that this guide has helped clear any doubts or confusion you might have had about investing in cryptocurrency. As we’ve seen, the crypto world is quite intriguing for prospective investors as it has become very popular and can provide good earning potential. If you know what you’re doing and get a little lucky, cryptocurrencies can prove a lucrative investment. However, given the volatility and uncertainty of the market, make sure to invest only the amount of money you can afford to lose.