Following its meteoric rise, Bitcoin has created several billionaires, and you don’t want to be left behind while people make insane amounts of money from this cryptocurrency craze. There are several ways of investing in cryptocurrency. The most common ways of investing in cryptocurrency include buying and holding coins for speculation purposes and trading in cryptocurrencies in the same way people trade in the forex market.
Why Invest in Cryptocurrency?
People make cryptocurrency investments for various reasons. However, there are three important reasons why you should invest in cryptocurrency. First, investing in cryptocurrency is a way of hedging your assets against the impending fall of the dollar imperium. Cryptocurrency is a wave that is silently revolutionizing money. By investing in cryptocurrency, you are essentially betting on the success of this revolution. Second, you should only invest in cryptocurrency if you support the vision behind cryptocurrency – that of universal currency that is free from control by governments. Finally, you should invest in cryptocurrencies only if you understand the technology behind them.
Unfortunately, some people are investing in cryptocurrency because of the fear of missing out (FOMO), in the hopes of making a quick buck. They don’t even understand the technology. This is a very bad investment strategy.
You should also note that cryptocurrencies are not like any ordinary investment. They are more volatile than any other investment class. They are unregulated assets. They are also a very high-risk investment. There is always the risk that you could lose your key, exchange or your wallet might get hacked, or they might even get outlawed altogether.
Which Cryptocurrencies Should You Buy?
For most people, the only cryptocurrency they have thought of investing in is Bitcoin. This is because up until recently, Bitcoin has been the only dominant cryptocurrency. The other altcoins have only been penny stocks with little chance of profitability. However, things have now changed. While Bitcoin remains dominant, its share in the cryptocurrency market has dropped to around 40%, down from 90%. This is mostly a result of the growth of Ethereum as well as the scalability problems facing Bitcoin. This shows why it’s important to always keep yourself abreast of any occurrences in the crypto sphere.
While Bitcoin is still a standard asset to invest in, you should balance and diversify your portfolio. Some good options to consider include Ethereum, Ripple, Dash, Litecoin, Monero, and the other coins as per the latest trends. However, before you invest in a certain cryptocurrency, take your time to do your research on the coin and decide if you believe in their vision and objective. New coins are coming up each day while others are dying each day, so do your research to avoid losing your money.
Some factors you should consider before deciding on whether you want to invest in a specific cryptocurrency include:
- The transaction processing speed
- The number of coins currently in circulation
- Is the supply of coins limited or unlimited? If limited, what’s the limit?
- The real-world applications of the cryptocurrency
- Real-world adoption of the technology
- Background of the founders
- Does the project have any big investors?
How to Buy Your First Coins?
For beginners, the first time buying crypto coins can be confusing and challenging. Before you can buy your first coins, you need to set up your digital wallet. Once your digital wallet is set up, the next thing is to figure out how you are going to pay for your crypto coins. Although they are also a form of money, you have to exchange them for fiat money, similar to how you would exchange your dollars for another currency when traveling abroad. The complexity of buying cryptocurrencies depends on your country’s financial system, though it need not be a complicated process. Some of the methods you can use to pay for crypto coins include:
Bank transfer: This is a simple but slow way of paying for cryptocurrencies. Simply make a transfer to the seller’s account and they will send you your coins the moment they receive the money. Bank transfers take about 1-2 days for the money to reflect in the seller’s account, therefore you will have to wait for 1-2 days before you receive your coins.
Credit card: Despite being the most common online payment method for fiat money, it is widely unaccepted by cryptocurrency sellers. This is because, with credit card payments, malicious buyers can claim chargebacks, therefore defrauding the seller. Since cryptocurrency transactions are irreversible, the seller would have no way of getting back their coins. Still, some exchanges accept credit card payments, though they charge higher prices for cryptocurrencies.
PayPal: Just like credit cards, PayPal payments are widely unaccepted by cryptocurrency sellers because of the issue of chargebacks. Some exchanges support PayPal payments, though they also charge significantly higher prices.
Other payment channels: Different exchanges accept many other different payment methods such as Skrill, Sofort, iDEAL, and many more.
Private payment channels: It’s possible to pay for crypto coins through other private channels such as Western Union, Paysafecard, or using good old cash. Some p2p platforms like LocalBitcoins link buyers and sellers in the same region, allowing them to decide on their own payment methods.
Once you have figured out the best payment method for you, you can now go ahead and purchase your preferred cryptocurrency. Some common places where you can buy cryptocurrencies include exchange platforms, brokers and direct commercial exchanges, p2p markets like LocalBitcoins, gift cards, and vouchers, and cryptocurrency ATMs.
Cryptocurrency Exchanges
If your intention is to get into cryptocurrency trading, then you will definitely need to join a cryptocurrency exchange. These are platforms that allow users to exchange cryptocurrencies for fiat currencies as well as other cryptocurrencies. There are various kinds of exchanges, each meant to serve a specific kind of user. There are advanced exchanges with complex trading tools to serve professional traders, while others are there to serve people looking to make the occasional trade.
The three main types of exchanges are:
Trading platforms: These connect traders and perform the role of an escrow. They handle the processing of orders and charge fees for each transaction.
Direct trading platforms: Also referred to as p2p markets, these link buyers and sellers directly without playing the role of an intermediary. Instead of having fixed prices, they allow sellers to set their own rates.
Brokers and direct commercial exchanges: These work similar to forex brokers, exchanging cryptocurrencies for other cryptocurrencies and fiat money at fixed prices.
Factors to Consider When Choosing an Exchange
Type the words ‘cryptocurrency exchange’ into your browser and you will find several exchanges to choose from. With such a wide pool to choose from, you want to make sure you join a cryptocurrency exchange that best serves your needs. Some factors to keep in mind when choosing a cryptocurrency exchange include:
Reputation: Before joining, find out what other users are saying about the exchange. Read online reviews and scour cryptocurrency communities and forums.
Fees: Cryptocurrency exchanges make money by charging transaction, deposit, and withdrawal fees. Find out the fee structure of exchange before joining to avoid unanticipated charges.
Payment methods: Does the exchange support payment methods that are convenient for you? You should also keep in mind that charges will be higher for exchanges that accept PayPal and credit card payments and that bank transfers are not convenient when you need to make fast transactions.
Verification requirements: Are you looking for complete anonymity? Most exchanges will ask you for identity and proof of address documents before you can start trading. Are you willing to provide this information?
Geographical restrictions: Does the exchange offer full support in your geographic region?
Exchange rates: Cryptocurrency exchanges also make profits from their spreads. Check their rates and spreads to ensure you are getting the best deal.
Evaluating an exchange based on the above considerations will ensure that you join a cryptocurrency exchange that is best suited to your needs. Some popular cryptocurrency exchanges that you might consider include Coinbase, Kraken, Poloniex, Shapeshift, and LocalBitcoins.
When Should You Buy?
If you listen to cryptocurrency traders, you will hear them talking about good and bad times to buy. So, when is the best time to buy? There is no rule of the thumb as to when you should buy cryptocurrencies. However, you should avoid buying at the peak of a bubble. Neither should you buy when prices are crashing? As the trader’s saying goes, ‘Never catch a falling knife’. The best times to buy are when prices are relatively low and stable.
To be a successful trader, you need to learn how to determine when a bubble is about to burst and when the price hits the bottom after falling. However, no one can predict this with ultimate certainty. For instance, when Bitcoin rose to $1000, many people were afraid of buying, thinking that this was the peak of the bubble. The price rose to $10000 and many more thought that this must certainly be the peak. However, Bitcoin defied their prediction and continued rising, nearly hitting the $60000 mark. You should also avoid comparing cryptocurrency bubbles to financial bubbles since cryptocurrencies are highly volatile.
Risks of Investing / Trading In Cryptocurrency
Despite some people have become instant millionaires and billionaires through cryptocurrency investing and trading, this does not mean that there are no risks in it. Here are some risks you face when you decide to become a cryptocurrency investor.
Some technologies will fail: You should keep in mind that cryptocurrencies are basically software or lines of code. Remember the dot.com bust? Some cryptocurrencies will fail in the same way that some software companies failed in the dot.com era. Back in the ‘90s, there was a lot of hype about the new thing known as the internet, which promised to change the world. Well, the internet did change the world. It created overnight billionaires. However, a lot of people also lost their money there as well. The same thing will happen with cryptocurrency. By investing in a cryptocurrency, you are simply betting on that software. Some will change the world and create immense wealth, while others will fade from the face of the earth. Learn to differentiate winners from losers.
It requires technical savvy: Cryptocurrencies were developed by super-geeks, and to most people, cryptocurrencies are still geeky. To get into cryptocurrency, you need to be good with computers. At least until more user-friendly cryptocurrency interfaces are built. Why are we saying this? With cryptocurrencies, you are dealing with cash. You need to be well-versed with various aspects of computer and internet security. Otherwise, you might wake up to find a zero balance on your digital wallet. You also need to understand the basics of how cryptocurrencies work to enable you to bet on those with the highest chance of success.
Broker and technology risk: Cryptocurrency is still in its infancy, therefore there are still lots of unknowns. Many things could change. New security vulnerabilities might emerge. Remember how millions of traders lost their money after the hacking of MtGox? If anything, you should consider dealing with cryptocurrency brokers to be about twice as risky as dealing with forex brokers.
Factors That Affect the Price of A Cryptocurrency
Cryptocurrency prices are affected by several factors, sometimes leading to very abrupt changes. Some factors you need to keep in mind include:
Exchange listing: This is a major mover of cryptocurrency prices. Whenever a large cryptocurrency exchange announces that they will start listing a certain cryptocurrency, you can expect the price to shoot in the near future.
Software upgrades: Cryptocurrencies undergo software upgrades either to solve existing challenges in the network or to improve functionality. For example, there was a hotly debated argument about making a software upgrade to improve Bitcoin’s transaction processing speed. This argument ended with the split of Bitcoin Cash from Bitcoin. Watch out for software upgrades since they are highly likely to affect the price of a cryptocurrency.
Public hype: Just like company stocks, cryptocurrency prices can be affected by fake news.
Wallet improvements: Some investors buy cryptocurrencies and hold them for a couple of years as they wait for prices to rise. Therefore, storage is an important part of the cryptocurrency equation. In their initial stages, most cryptocurrencies are still geeky, with wallets that are not beginner-friendly. This keeps the non-techie investors from these cryptocurrencies. Therefore, cryptocurrencies without good wallets are often undervalued. The introduction of a better, user-friendly wallet opens these cryptocurrencies to the masses and therefore often leads to an increase in price.
Platform applications: Some cryptocurrency platforms are more than digital currencies. For instance, Ethereum is a platform that allows the building and deployment of other applications. If one of the applications built on a cryptocurrency platform does well, it can lead to an increase in the value of the underlying platform. Therefore, it’s good to watch out for any promising apps that are hosted on the cryptocurrency platform you are trading in.
Government regulation: Government policies also have an effect on the effect of cryptocurrencies. For instance, Bitcoin prices fell before rebounding in September 2017 after China announced that it had banned cryptocurrency trading in the country. You should keep abreast of any government policy trends and avoid cryptocurrencies that are likely to be red-flagged by governments.
