A Complete guide for people who want to start investing in cryptocurrency.
Even though cryptocurrency is known to be volatile, it is on fire, and many investors are looking to make money off of it. Cryptocurrencies like Bitcoin and Ethereum go down for a while and then go up, and this is also true of many other popular digital currencies. Cryptocurrencies have been a source of speculation for years, but what if you’re new to the market and want to get in on the action?
Here’s how to start investing in cryptocurrency and what to watch out for.
How to Invest in Cryptocurrency in 5 Steps
First of all, if you want to invest in crypto, you need to make sure all your money is in order. This means having an emergency fund, a manageable amount of debt, and, ideally, a portfolio of investments with a variety of assets. Your crypto investments can become another part of your portfolio. Hopefully, this will help you get a better return on your total investments.
As you start to invest in cryptocurrencies, you should also pay attention to these five other things.
1. Know what you’re putting your money into
As with any investment, you should know what you’re putting your money into. If you want to buy stocks, you should read the prospectus and do a thorough analysis of each company. Plan to do the same with all cryptocurrencies, since there are thousands of them, they all work differently, and new ones are being made every day. For each trade, you need to know the investment case.
Many cryptocurrencies are backed by neither hard assets nor cash flow. This is the case with Bitcoin, where investors can only make money if someone buys the asset for more than they paid for it. In other words, unlike stocks, where a company can make more money and increase your returns by doing so, many crypto assets require the market to become more optimistic and bullish for you to make money.
Ethereum, Dogecoin, Cardano, and XRP are some of the most well-known coins. Solana has also been a coin that has done very well. So, before you invest, you should know what the possible pros and cons are. If you don’t have an asset or cash flow to back up your investment, it could end up being worthless.
2. Don’t forget that the past is over
Many new investors make the mistake of looking at the past and assuming that it will be the same in the future. Yes, Bitcoin used to be worth pennies, but now it’s worth a lot more. The important question is, “Will this growth continue in the future, even if it’s not quite at this meteoric rate?”
Investors look at what an asset will do in the future, not what it did in the past. What will cause returns in the future? Traders who buy a cryptocurrency today are looking for gains for tomorrow, not for yesterday.
3. Keep an eye on that change
The prices of cryptocurrencies are about as unstable as it is possible for an asset to be. They could fall quickly in a matter of seconds based on nothing but a rumour that turns out to be false. That can be good for experienced investors who can make trades quickly or who have a good understanding of the basics of the market, how it works, and where it might go. It’s a minefield for new investors who don’t have these skills or the high-powered algorithms that guide these trades.
Wall Street traders with lots of money play a game called “volatility” in which they try to beat other wealthy investors. Volatility can make it easy for a new investor to lose everything.
This is because volatility scares away traders, especially those who are just starting out. In the meantime, other traders may come along and buy cheaply. In short, volatility can help experienced traders “buy low and sell high,” while inexperienced investors “buy high and sell low.”
4. Take care of the risks
When you trade an asset for a short amount of time, you need to manage your risk. This is especially important with volatile assets like cryptocurrency, which can change a lot. So, if you’re a new trader, you’ll need to learn how to handle risks and come up with a way to limit your losses. And this process can be different for each person:
For a long-term investor, it might be enough to just never sell, no matter what the price is. The investor can stay in the position because they are thinking about the long term.
A short-term trader, on the other hand, might set strict rules about when to sell, like when an investment has dropped by 10%. The trader then follows the rule by heart so that a small drop doesn’t turn into a huge loss later on.
Traders who are just starting out might want to set aside a certain amount of money and only use a portion of it at first. If a position goes against them, they will still have money to trade with later. The main point is that if you don’t have money, you can’t trade. So, putting some money aside means you’ll always have enough money to trade.
Risk management is important, but it will cost you emotionally. Even though it hurts to sell a losing position, doing so can help you avoid bigger losses in the future.
5. Don’t risk more than you can afford to lose.
Lastly, it’s important not to put money you need into risky investments. If you can’t afford to lose it all, you can’t afford to put it in risky assets like cryptocurrency or other market-based assets like stocks or ETFs.
Money that you will need in the next few years should be kept in safe accounts so that it will be there when you need it. This could be for a down payment on a house or an important purchase. And if you want a sure thing, the best thing you can do is pay off your debt. No matter how much interest you pay on your debt, you are sure to earn (or save) the same amount. There’s no way to lose.
Lastly, don’t forget to think about how safe any exchange or broker you use is. Even if you legally own the assets, someone still has to keep them safe, and that safety has to be tight. If they don’t think their cryptocurrency is safe enough, some traders buy a crypto wallet to store their coins offline, where hackers and other people can’t get to them.
There are other ways to buy cryptocurrency.
Even though buying cryptocurrency directly may be the most common way to do so, traders can get into the crypto game in other ways, some of which are more direct than others. These things are:
Crypto futures: Futures are another way to bet on how the price of Bitcoin will change, and they let you use leverage to make big money (or losses). Futures are a fast-moving market that make moves in crypto even more wild than they already are.
Crypto funds: Some crypto funds, like the Grayscale Bitcoin Trust, let you bet on how the prices of Bitcoin, Ethereum, and a few other altcoins move up and down. So they can be a simple way to buy cryptocurrency through a product that works like a fund.
Crypto exchange or broker stocks: Buying stock in a company that stands to make money from the rise of cryptocurrency no matter who wins could also be a good idea. And that’s the potential for a cryptocurrency exchange like Coinbase or a broker like Robinhood, which makes a big part of its money from cryptocurrency trading.
Blockchain ETFs: With a blockchain ETF, you can invest in companies that might make money when blockchain technology takes off. The best blockchain ETFs let you invest in some of the most important public companies in the space. But it’s important to remember that these companies usually do a lot more than just crypto-related business. This means that your exposure to cryptocurrency is spread out, which lowers your potential gains and losses.
Each of these ways is different in how risky it is and how much cryptocurrency it uses, so you’ll need to know what you’re buying and if it fits your needs.
FAQs about investing in cryptocurrency
How much money do I need to start investing in cryptocurrencies?
In theory, all you need to invest in cryptocurrency is a few dollars. Most crypto exchanges, for instance, have a $5 or $10 minimum trade. Some crypto trading apps might have even lower minimums.
But it’s important to know that if you trade small amounts of cryptocurrency, some trading platforms will take a big chunk of your investment as a fee. So, it’s important to find a broker or exchange whose fees are as low as possible. In fact, many so-called “free” brokers add fees to the price you pay for your cryptocurrency. These fees are called “spread markups.”
How does a chain of blocks work?
The blockchain is what makes cryptocurrency possible. Blockchain is a type of database that keeps track of every entry and when it was made. The best way to think of a blockchain is as a list of transactions that keeps getting added to. When a blockchain database is used to power a cryptocurrency, it keeps track of and verifies all of the currency’s transactions. This shows how the currency moves and who owns it.
Many crypto blockchain databases are run by computer networks that are not based in one place. That is, the database is run by many redundant computers, which check and recheck the transactions to make sure they are correct. If there is a difference, the networked computers must figure out how to fix it.
How do you mine for crypto?
In a process called “mining,” people who check the transactions on the blockchain database get a reward. As part of the verification process, these Bitcoin miners, for example, have to solve very hard math problems. Miners are given a set number of bitcoins if they are successful.
Miners need powerful computers that use a lot of power in order to mine bitcoins. In order to get these rewards, a lot of miners run huge rooms full of these mining rigs. As of early 2022, it took as much energy to run the Bitcoin system as a medium-sized country.
How do I put money into Bitcoin?
If you want to invest in Bitcoin, you can do so in a number of ways and with a number of companies, such as:
Crypto exchanges: Exchanges have some of the largest selections of cryptocurrencies and tend to have the most competitive prices. Coinbase, Kraken, and Binance are three of the biggest players, but there are dozens more.
Traditional brokers: A lot of traditional brokers let you trade Bitcoin as well as stocks and other financial assets, but they don’t have as many other cryptocurrencies to choose from. Interactive Brokers, TradeStation, and tastyworks are all big names in this field.
Financial apps: You can now trade Bitcoin and a few other cryptocurrencies on a lot of financial apps. Robinhood, Webull, and payment apps like PayPal, Venmo, and Cash App are among the best in this area.
If you want to buy Bitcoin, you should pay close attention to the fees you pay. Here are some other important things to keep an eye out for when you buy Bitcoin.
What do altcoins mean?
An alternative to Bitcoin is an altcoin. Traders used the word in a bad way many years ago. Because Bitcoin was the biggest and most well-known cryptocurrency, everything else was measured against it. So, everything that wasn’t Bitcoin was put into a derogatory group called “altcoins.”
Even though Bitcoin is still the largest cryptocurrency by market capitalization, it is not as dominant as it was when cryptocurrencies first started. Other altcoins, like Ethereum and Solana, have become more popular, making the word “altcoin” seem a little out of date. Now that there are reportedly 15,000 or more cryptocurrencies, it makes less sense than ever to say “Bitcoin and then everything else” to describe the industry.
Cryptocurrency is a very risky market segment, so many smart investors have decided to put their money somewhere else. But if you want to start trading crypto, the best thing to do is start small and only use money you can afford to lose.