How to Invest in Cryptocurrency - Exploring the basics

Cryptocurrency functions as a virtual form of money, akin to physical cash, serving as a means of transaction and investment.

Mar 4, 2024 - 13:59
Mar 24, 2024 - 22:14
How to Invest in Cryptocurrency - Exploring the basics

The increasing fascination, acceptance, and financial commitment towards cryptocurrency, commonly known as crypto, have sparked the interest of numerous investors looking to enter the field. This introductory manual aims to elucidate cryptocurrency as an asset category and walk you through the fundamental principles of investing in it. Explore the definition of crypto, the various variants available, key considerations prior to investment, and crucial details to assess its suitability for inclusion in your investment portfolio. Should you conclude that you're prepared to venture into crypto investment, you'll discover a comprehensive, step-by-step guide to help you initiate your journey.

What is cryptocurrency?

Cryptocurrency functions as a virtual form of money, akin to physical cash, serving as a means of transaction and investment. Similar to traditional investment assets, individuals may acquire cryptocurrencies with the goal of achieving financial gains, but it's important to note that this asset class is known for its substantial price fluctuations.

In contrast to conventional currencies, cryptocurrencies operate in a decentralized manner, meaning they lack central regulation or backing from entities like the U.S. government. These digital units, referred to as coins or tokens, are generated through a digital validation process facilitated by blockchain technology. Blockchain, also recognized as distributed ledger technology, not exclusive to cryptocurrency, creates a secure and encrypted record of each virtual coin's value and its corresponding transactions. These records are widely distributed and interconnected across a network of participating parties or computers accessing the blockchain. Theoretically, anyone with internet access can utilize the blockchain, and the system was specifically designed to prioritize security, transparency, speed, and accuracy.

Types of cryptocurrencies

Although the term "cryptocurrency" broadly refers to virtual currencies utilizing blockchain technology, there exists a diverse range, with over 26,000 identified as of July 2023 by Bitcoin, an early entrant, remains the most widely recognized. Other coin-based virtual currencies collectively referred to as "altcoins" or alternatives to bitcoin have emerged.

In recent years, numerous cryptocurrencies have garnered significant attention, achieving substantial market value and attracting widespread user and investor interest.

Top 10 crytocurrencies by USD market cap

As of November 2023:
  • Bitcoin
  • Ethereum
  • Tether 
  • XRP
  • BNB
  • USDC (US Dollar Coin)
  • Dogecom
  • Cardano
  • Solana 
  • TRON

Predicting the most successful coins in the crypto ecosystem is challenging due to its novelty and the youth of many cryptocurrencies. Despite their significant size, these coins are not without risk. The potential for substantial investment losses is genuine. A notable illustration is the sharp decline in the value of most cryptocurrencies in 2022, following robust gains in 2021. Hence, it is crucial to thoroughly understand each cryptocurrency before considering investment, evaluating whether it aligns with your financial goals.

Factors to ponder prior to making investments in cryptocurrency

Cryptocurrencies exhibit volatility, experiencing significant fluctuations in value within brief timeframes, a factor that might give pause to risk-averse individuals. It's crucial to note that the landscape of cryptocurrency regulation is evolving, and anyone can introduce a new cryptocurrency, emphasizing the importance of thoroughly scrutinizing potential investments to avoid falling victim to scams.

When contemplating cryptocurrency investment, it's beneficial to reflect on your motivations. Are you seeking to capitalize on a trend, or do you have a well-thought-out strategy? It's essential to recognize that there are no effortless ways to amass substantial wealth without risk, and therefore, investing with the mindset of zero potential loss is misguided. Exercise caution, articulate your intentions and expectations clearly in advance, and only entertain cryptocurrency as an investment if you have confidence in its long-term potential and are prepared to endure significant price fluctuations.

When engaging in investments, adopting a long-term outlook is of utmost importance. This holds particularly true for assets like cryptocurrencies, known for their rapid and unpredictable fluctuations. Investing in highly volatile assets poses the risk of succumbing to emotional impulses, like buying in a surge due to fear of missing out or selling in a downturn. Emotional decisions of this nature typically prove detrimental to one's investment strategy.

Interested in delving deeply into the world of cryptocurrencies? Explore over 100 cryptocurrency statistics in this comprehensive read.

Does investing in cryptocurrency represent a favorable financial choice?

The potential suitability of cryptocurrency as an investment hinges on various factors. Similar to any investment decision, considerations such as your risk tolerance, both financially and psychologically, along with your investment horizon and the diversification of your portfolio play crucial roles. The inherent volatility in the cryptocurrency market implies that the value of your digital assets can fluctuate rapidly and, at times, substantially.

Merely having the option to trade an asset doesn't automatically make it the ideal investment for your circumstances. Additionally, it's important to acknowledge that all investments involve the inherent risk of potential financial losses, as discussed earlier.

What amount is advisable to allocate for investment in cryptocurrencies?

Certain professionals suggest limiting your investment in cryptocurrency to a range of 1% to 5% of your total net worth. It is crucial to control your exposure to crypto within your portfolio, emphasizing the importance of investing only what you can afford to lose. While a modest exposure to crypto may enhance the risk-adjusted return of a diversified portfolio, the decision on the extent of investment in crypto should be influenced by your overall investment portfolio and risk tolerance.

Furthermore, diversification within the realm of cryptocurrencies is an essential consideration. The choice of specific cryptocurrencies matters, as some exhibit better long-term potential and are less susceptible to price manipulation.

Although the cryptocurrency market is known for its unpredictability and volatility, opting for larger, more widely traded cryptocurrencies may involve less risk compared to smaller, more speculative counterparts. Nevertheless, even major cryptocurrencies can experience significant price fluctuations. Hence, it is advisable to carefully assess the assortment of cryptocurrencies in your portfolio and the total investment amount in order to manage risk effectively.

Advantages of engaging in cryptocurrency investments

Before 2022, the values of cryptocurrencies were not closely linked to those of other types of investments, such as stocks and bonds. Thus, having a limited exposure to the potentially lucrative cryptocurrency market could enhance returns while managing risk. Although correlations between cryptocurrencies and traditional asset classes increased in 2022, it remains uncertain whether this represents a lasting trend.

Some experts draw parallels between certain cryptocurrencies, like Bitcoin, and precious metals such as gold. Both are fungible and durable, resistant to destruction, scarce due to limited supply, and not subject to control by any central authority. The decentralized and transparent nature of the distributed ledger makes it challenging to compromise the integrity of the cryptocurrency network.

Drawbacks of engaging in cryptocurrency investment

  • The cryptocurrency market exhibits significant volatility, making it challenging to forecast the timing of value fluctuations. The factors behind substantial shifts in value may not always be apparent.
  • At present, cryptocurrencies face minimal government oversight, resulting in transactions lacking legal safeguards, unlike conventional investments such as stocks.
  • While it is challenging to hack crypto blockchains, individuals remain vulnerable to hacking due to the inherent risks associated with any online activity.

Ways to ensure the security of your cryptocurrency

Securing your cryptocurrency investment comes with specific considerations. Here are some tips to help protect it:

  • Use reputable exchanges and digital wallet providers.
  • Secure access with strong passwords, two-factor authentication, and safe internet connections.
  • Stay alert for phishing scams targeting cryptocurrency users.
  • Never share your password or private key with anyone.

Strategies for investing in cryptocurrency in 2024

Interested in investing in cryptocurrency? Knowing where to purchase and store it is crucial. Cryptocurrency investing is increasingly accessible, with numerous exchanges akin to those used for traditional investments now accessible. Setting up an account can be done in minutes. However, as with any investment, researching a specific currency before investing is advisable. If you're new to cryptocurrency investing, the following five steps can help you get started:

  1. Decide on which cryptocurrency to invest in
  2. Choose a cryptocurrency exchange
  3. Look into storage and digital wallet choices
  4. Determine the amount to invest
  5. Handle your investments

1.Decide which cryptocurrency to invest in

Just as you would assess the risks and financial stability of a company before buying its stock, it's important to understand and carefully evaluate the unique characteristics of each cryptocurrency you're considering for investment. You might opt to invest in one or several cryptocurrencies.

Vetting cryptocurrencies can be challenging due to the prevalence of fraud, such as pump-and-dump schemes. To avoid falling victim to a scam, steer clear of smaller or newer cryptocurrencies that are heavily promoted on social media platforms. Analyzing the investment risk of a cryptocurrency is crucial, as social media influencers may not have your best interests at heart.

While investing through a large, reputable platform may help minimize your exposure to fraud and cybersecurity risks, it's impossible to completely eliminate these risks in an unregulated industry. For instance, in 2022, it was revealed that FTX, once regarded as reputable, was being operated by individuals who misused clients' funds. Additionally, on November 2, 2023, the founder of FTX, Sam Bankman-Fried, was convicted of fraud and money laundering.

2.Select a cryptocurrency exchange

To acquire cryptocurrency, you need to use an exchange or investment platform like Coinbase, Gemini, or Kraken. When choosing an exchange, factors to consider include security, fees, trading volume, minimum investment requirements, and the variety of cryptocurrencies available for purchase.

3.Explore storage and digital wallet choices

Cryptocurrency is entirely digital, so it's important to have a secure digital storage solution for your coins. One option is to store them on the same platform where you're investing, which is a popular choice among new cryptocurrency investors. However, it's essential to choose a platform that offers custody and safekeeping of your assets, is regulated, has strong protection against hackers and online threats, and provides financial insurance.

If you prefer not to store your cryptocurrency on popular platforms, you'll need a cryptocurrency wallet. These wallets store the private keys that allow you to access your cryptocurrency by unlocking the digital identity associated with your ownership, recorded on the blockchain. You can choose between a "hot" or "cold" digital wallet. A hot wallet is accessible via the internet and is generally more convenient, while a cold wallet is a physical storage device, similar to a USB drive, that keeps your cryptocurrency keys completely offline and is generally more secure. Storing your cryptocurrency in a wallet adds an extra layer of protection.

4.Determine the amount you wish to invest

Like any investment, the amount you decide to invest in cryptocurrency will be influenced by various factors, including your budget, risk tolerance, and investment strategy. It's also important to consider any minimum investment requirements and transaction costs, which can vary between different cryptocurrency exchanges.

If you're interested in investing in a cryptocurrency with a high value per coin, many exchanges allow you to invest based on a dollar amount, rather than requiring you to purchase a whole coin. This means you don't need a large sum of money to invest in cryptocurrencies like Bitcoin. Focus on the total amount you want to invest, rather than the number of coins you aim to buy. Additionally, it's crucial to remember not to invest more than you can afford to lose. Stash recommends holding no more than 2% of your overall portfolio in any one cryptocurrency to mitigate crypto-specific risks.

5.Oversee your investments

Cryptocurrency presents a unique investment opportunity as it can be used for transactions and held as a long-term investment. How you manage your cryptocurrency holdings depends on your investment strategy and objectives. You might consider adopting the Stash Way, which emphasizes consistent investing, diversification, and a long-term investment horizon.

Other investment options to consider

If you're not yet prepared to venture into cryptocurrency, there are alternative investments to explore. For instance, some Exchange Traded Funds (ETFs) provide indirect exposure to the crypto market without directly holding cryptocurrency or its derivatives. Typically, these ETFs invest in companies that are involved in processes related to cryptocurrency, such as mining or holding significant amounts of cryptocurrency on their balance sheets. These investments allow you to participate in the evolving crypto landscape without directly investing in cryptocurrency.

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