Cryptocurrency is a digital currency that employs cryptography to ensure secure transactions and generate new currency units. Removing the need for central banks or trust, it's faster and less expensive than other payment methods.
Blockchain technology lets you send it globally at the lowest possible cost.
We know how confusing it can be to understand cryptocurrencies and how to invest in them wisely. So here's our Investor's guide to cryptocurrency.
That definition might seem downright cryptic right now. But, by the end of this overview, you won't need a decryption key to understand crypto.
As goes with any form of investing, one must first understand what they are getting into before putting any money into the same.
Before you begin trading cryptocurrencies, keep the following points in mind:
1. Caution first:
The crypto market is just a decade old and is still in its early stages. Hence, it is much more volatile and still needs a form of regulation from authorities. This makes it nearly impossible to recover any investments in case of fraud or hacks.
2. Invest only what you can afford to lose:
Ensure that your long-term financial security is taken care of through Fixed Deposits, Equity Mutual Funds, Debt Funds, necessary insurance, emergency funds, etc.
If you still have any surplus after this security, consider investing in cryptocurrencies, as this is a fund you can afford to lose and remain unaffected financially.
3. Do your research:
It is easy to blindly invest by taking tips from friends or acquaintances. Yet, know that this is your money, and no one will rescue you if the investment fails.
Hence, it is better to understand the cryptocurrency market first before investing any money into the same. Read about the dominant cryptocurrencies such as Bitcoin, Ethereum, Tether, Polygon, and more. Learn about their use cases and potential before making any investment decisions.
4. Use a trusted exchange:
It is not uncommon for cryptocurrency exchanges to get hacked or scam investors. Therefore, ensure that you make your account with an extensive exchange that is historically credible and has insurance in place in case of a hack.
5. Learn the technicalities:
If you are more serious about cryptocurrency investments, it makes sense to learn how to create digital wallets or purchase a trusted hard wallet to safeguard your assets. Learn about liquidity mining, staking, decentralized finance, and more to broaden your scope of knowledge.
Find reputable news sources.
There will always be many opposing opinions about cryptocurrencies and those who own them. Unfortunately, many think crypto is just a fad, and those who engage in it will only be disappointed.
Learn the uses of both hot and cold wallets.
While crypto exists digitally, you can still store them online and offline—through hot and cold wallets. If you are a beginner, easy access to hot, offline wallets will prove more valuable and versatile.
However, cold wallets offer more protection from hackers and other miscreants. So, as part of your journey into diversifying your assets, learn to use both types of wallets.
Ensure due diligence for lower-priced cryptos.
Lower-priced crypto assets have been gaining immense popularity among new traders in the crypto space. The vertical gain in percentage terms takes center stage when such cryptocurrencies rise. These attractive gains often lure traders who buy these assets in heavy quantities without sufficient research.
Keep emotions in check.
Emotions like fear and greed can change a trading strategy's results. They tend to escalate when a trader experiences large swings in their profit and loss account, which is quite familiar with cryptocurrency holdings amidst their erratic movements.
Therefore, traders must be disciplined to stick with their respective trading plans and understand when to book profits and losses.
The leading theory underlying cryptocurrency value is that if a large number of people agree it is valuable, it will become more valuable. Without regulation, demand can fluctuate – and sometimes change dramatically – depending on other factors such as availability, utility, and competition.
The process of creating new cryptocurrency tokens is known as mining. This process involves using software to verify the block on the blockchain to decentralize and form the token.
Participants must use computing power to verify the blockchain and solve transaction-related algorithms. However, there is a competition to mine specific cryptocurrencies mainly due to the miners racing each other to confirm the next block, making it more difficult to mine.
Mining costs rise when more powerful equipment is required, which can be expensive. Higher mining costs raise the value of the cryptocurrency to cover production costs.
Because the prices are high, attackers use cryptojacking with unauthorized other systems to mine cryptocurrency for the power demands.
Cryptojacking can also be completed by a crypto mining bot installed on a target system.
Cryptocurrency plays an important role in portfolio and portfolio management as cryptos are now the new asset class.
While cryptocurrencies have piqued the interest of investors by offering outsized returns and the opportunity to own an early stake in potentially transformative innovation, they have also shown significant price volatility and dramatic drawdowns.
The daily flow of digital currency news is accompanied by an ongoing debate about its legitimacy and applications, including as a legitimate asset class.
Cryptocurrency can be an excellent investment, yielding astronomically high returns in a few days; however, there is a significant downside.
Investors should analyze whether their time horizon, risk tolerance, and liquidity requirements fit their investor profile.
Investors must do their homework, allocate an appropriate investment amount, and learn how to invest.