5 Things You Need to Understand for Successfully Investing in Cryptocurrency
Financial experts across the world often advise people to diversify their investments. As the old quote says, never put all of your eggs in a single basket. The Covid-19 pandemic has only reassured that statement as nothing seems to be a safer investment now.
Yes, neither real estate nor stock markets and even cash deposits. Nothing seems to give decent returns as almost covid has impacted every industry. Even the Governments suffer due to reduced cash flow among the citizens. And, it is time now to act wise and build a diversified investment portfolio.
Thus, many people are now eyeing cryptocurrencies. Cryptocurrencies that came into existence a decade ago have started gaining popularity.
Even financial experts suggest cryptocurrencies as an alternative investment. It is mainly because the sovereign /fiat currency values will not impact the cryptocurrency values.
Thus, cryptocurrencies seem to be an alternative investment that is worth considering. Even if all other investments fail, it may save you from going bankrupt. Plus, it can act against inflation.
But, of course, nothing is ideal, and you need to play safe with cryptocurrencies too; like with any other investment. Any investment carries its own risk, and the investors need to think twice before investing their hard-earned money.
Before moving on to investing in cryptocurrencies, let’s cover the basics first.
What are Cryptocurrencies?
Cryptocurrency is a digital currency that uses a decentralized online ledger based on blockchain technology. Thus, all its transactions and records are decentralized using cryptography rather than by a centralized authority. It is nearly impossible for hackers to break the secured digital ledger and gain access.
5 Things You Need to Understand for Successfully Investing in Cryptocurrency
Always put the excess money that you can afford to lose
You have to figure out in advance how much of your portfolio you want to reserve for cryptocurrency. As the cryptocurrency market is highly volatile, it is tough to predict it as a complete beginner. You can study charts and trends, but playing with real money on the line is the actual game. Hence, it is always wise to invest an amount that you are comfortable losing.
Neither fear nor greed should play with your cryptocurrency investment decisions. You can consider the below points and make rational decisions when it comes to investing in cryptocurrencies:
- At any cost, cryptocurrencies should hold only a minor part of your investment portfolio. You can analyze and decide how much amount you are comfortable investing in cryptocurrencies. But, it is highly advisable not to invest more than 10%.
- Cryptocurrencies are different from stocks, and they work differently. Unlike stocks, they do not pay interests or dividends. For instance, it is more like investing in gold or silver. Yes, the returns depend on its price significantly.
- Cryptocurrencies are not actual investments. They are alternatives to fiat currencies like dollars, euros, and more. You can say cryptocurrency is a digital currency, and its market determines its value. Its value is unaffected by fiat currencies, and hence cryptocurrencies can safeguard you against inflation.
- You cannot exchange cryptocurrencies everywhere. Only a few merchants accept them, and so most trading happens among individuals.
2. Choose Your Cryptocurrency
Cryptocurrencies are not only Bitcoin. There are thousands of cryptocurrencies available in the market. Of course, the largest cryptocurrency is Bitcoin.
But, there are other cryptocurrencies like Ethereum, Zcash, Dash, and Ripple. They are also gaining popularity among investors in recent times. However, some cryptocurrencies have even disappeared in the few years they entered the market. Thus, cryptocurrencies always carry the risk of going to zero.
Bitcoin seems to be the most reliable of all available cryptocurrencies. Thus, most people assume cryptocurrency means Bitcoin.
Though some cryptocurrencies performed well, it is wise to invest in Bitcoin. Nevertheless, Bitcoin holds its dominant position constantly. But you can always try investing in other cryptocurrencies for a smaller amount.
3. Pick the Right Platform to Buy Cryptocurrencies
You cannot buy cryptocurrencies from financial places like banks or other investment brokerage firms. You can buy, hold and sell cryptocurrencies from dedicated cryptocurrency exchanges.
Here are a few reputed cryptocurrency exchanges that work predominantly for US markets:
eToro is an online broker and investment platform that offers various investment options, including cryptocurrency investments. The advanced crypto investment platform provides unique investment options like CopyTrader Technology. With this technology, one can copy the most successful crypto trader’s investment strategies on the forum.
The platform also provides CopyPortfolios that work like crypto Robo advisors, offering professional portfolio management. Moreover, eToro also renders virtual portfolios that allow you to trade up to $100,000 in a paper account without risking your money.
The platform allows users to store crypto in a digital wallet other than trading cryptocurrencies. It also provides handy crypto information and various tools. Gemini even pays you interest if you hold your cryptocurrencies in your Gemini account.
Robinhood is one such investment broker that offers commission-free cryptocurrencies. Moreover, the platform offers various cryptocurrencies like Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, Litecoin, and Dogecoin.
Robinhood is a less expensive and convenient platform to hold your cryptocurrencies.
You can also buy and sell cryptocurrencies directly to individuals other than cryptocurrency exchanges. However, you will need to make some arrangements to store them.
4. How to Store Your Cryptocurrency?
Users can store cryptocurrencies in a cryptocurrency wallet, ideally a digital wallet. However, to understand it better, let’s delve deeper. A cryptocurrency wallet stores the public and private keys needed to buy cryptocurrencies.
A crypto wallet provides digital signatures, authorizing every transaction. These digital wallets can be either a device, a program on an app, or a website.
In other words, wallets don’t store your cryptocurrency but enable you to access it with your public key. A public key is nothing but your cryptocurrency address that the other party in the transaction can see, whereas you only know the private key.
You will need both public and private keys to complete a transaction. They are often known as keys because they allow us to unlock our cryptocurrency on the blockchain. Apart from sending and receiving cryptocurrencies, a digital wallet provides transaction records and your current balance.
Various digital wallets are available like:
- Desktop Wallets:
One can install desktop wallets on their personal computer. It is safe to store it on your PC rather than other online wallets.
- Online Wallets:
These wallets are on the cloud, and you can access them from any device. Of course, it is very convenient, but a third party controls your private key, making it less secure.
- Mobile Wallets:
It is an app on your smartphone. You can use mobile wallets to make purchases if they accept cryptocurrencies.
- Hardware Wallets:
These wallets store your private key on a hardware device like a USB. Since the private key is not stored online, they are more secure. Moreover, you can access your cryptocurrency from multiple devices.
You can choose any digital wallet based on your security and convenience preferences. Some cryptocurrency exchanges even offer digital wallets for your cryptocurrencies.
5. Safeguard Your Keys
Last but not least, it is highly crucial to protect your private key phrase. Above all, you cannot access your cryptocurrency if you lose your keys.
Moreover, anyone can access your crypto if they have your key phrase. Thus, never store it on any device without password protecting it. Else, you can either memorize it or have it written on multiple pieces of paper.
In a Nutshell
It is always preferable to learn about various investment options. It is not about investing in cryptocurrencies right away, but there is no harm in learning about them.
Often people react two ways when it comes to new investments. They either do it just because others are doing it or fear change and ignore learning about them.
But, you should be flexible and explore various investment options. It is always wise to diversify your investment portfolio in this highly volatile market.
Cryptocurrencies are worth considering as an alternative investment to your traditional investment methods. But, cryptocurrencies do carry risks like any other investment. So, it is advisable to start small and go slow.
Hopefully, this blog would have shed some light on cryptocurrencies and investing in them. Now, you can do your research before investing in cryptocurrencies. Diversifying your investments will allow you to maximize your gains and minimize your losses.