Cryptocurrencies and the blockchain business are growing stronger despite the risks. Investors are gaining access to institutional-grade custody services as market makers develop the much-needed financial infrastructure. Professional and private investors are progressively gaining access to the tools required to manage and protect their crypto holdings.
Numerous corporations are gaining direct exposure to cryptocurrency as crypto futures markets develop and align with the DeFi market. On their famous platforms, financial behemoths like PayPal are facilitating the purchase and sale of cryptocurrencies.
Although various factors continue to influence the riskiness of cryptocurrencies, the accelerating adoption rate is an indicator of an industry’s maturation. Individual investors and corporations are seeking direct exposure to cryptocurrencies because they view them as a secure asset class for large-scale investments.
Although investing in crypto assets is risky, it may also be profitable if done correctly. Bitcoin and altcoin prices climbed tremendously in the past, but it has since fallen in 2022. Therefore, it is crucial that you enter into your crypto investment with open eyes.
Let’s know some cryptocurrency basics first before zeroing in on cryptocurrency investment particulars.
What is cryptocurrency?
Cryptocurrency has features similar to traditional currency, except that it is purely digital. Another major difference between both cryptocurrency and traditional money is decentralization. This means that cryptocurrency is directly traded between two people without the involvement of a bank or third party. There are no geographical or political restrictions and all cryptocurrency owners get to store their digital money in an online, personal wallet.
Types of cryptocurrency
There are around eight (8) types of cryptocurrencies according to function and formulation which include utility, exchange, payment, security, stablecoins, DeFi tokens, NFTs, and asset-backed tokens. We can simplify by grouping them into two major categories, differentiated by their formulation or code: Coins versus Tokens.
1. Coins
All crypto coins without exceptions run on their own blockchains. Native cryptocurrencies running on original chains and on their forks (new chains created as a result of some changes in the protocol) are considered coins. Coins can function as digital money as they have the attributes of traditional currencies. In most blockchains, new coins are issued by a process called mining.
Payment and utility cryptocurrencies include Bitcoin and altcoins, which are simply alternatives in contrast to Bitcoin as the principal cryptocurrency. Aside from Ethereum, the majority of the initial ones were forked from Bitcoin while some altcoins like Wave, Omni, Ethereum, and NEO have their blockchains. These do not have their investment backed or guaranteed by regulation.
2. Tokens
Tokens are digital images of a specific resource or utility in a blockchain. A token is a digital unit of value that represents an asset or utility. Unlike coins, tokens do not have their own blockchain and are issued on top of existing networks. Unlike coins, tokens are not mined in the process of transaction validation. Instead, they are minted.
Tokens can be used to raise funds or to give access to particular services. Some tokens can even represent coins on a different network. Such tokens are called “wrapped tokens” and follow the price of the underlying asset. Examples of tokens are Tether, USD coin, Binance USD, Dai Wrapped Bitcoin, Shiba Inu, Chainlink, and a lot more.
2.1 Value tokens
These are like customary stocks in structure and activity with the exception that proprietorship and transaction happen digitally. Financial backers are qualified for profits from administrative and guarantor activities and choices. Obligation tokens address momentary advances that convey pre-characterized loan fees.
2.2 Resource-upheld tokens
These are supported by genuine land, workmanship, carbon credits, or items of fundamental value. They convey attributes of gold, silver, oil, and so forth. They are tradable, and so on.
2.3. Stablecoins
A very popular type of token is a stablecoin, for example, a token that follows the price of the U.S. dollar.
What is a crypto wallet?
You need a digital wallet to store your crypto coin. A digital wallet is a secure account that you can set up through a crypto exchange or payment services provider (PSP) in order to hold your encrypted digital currency.
The crypto wallet can take various forms but the function is to purchase and hold additional cryptos, pay for purchases directly using the contents of your digital wallet, or sell your crypto coins and convert them back into a traditional currency like US dollars (USD).
What to know before investing in cryptocurrencies
1. Take an in-depth look into the crypto markets
The year 2022 will be remembered as one of the worst for cryptocurrency investors and the crypto market at large. Despite some minor gains in recent weeks, the cryptocurrency market as a whole is mainly stagnant. Although no one can be certain, several experts believe that cryptocurrency prices may fall considerably further before a sustainable rebound.
People continue to be interested in digital assets, and it is a popular topic in both popular culture and among investors. However, the crypto market is still young and continually changing. That explains, in large part, why any new high for bitcoin can quickly be followed by steep falls.
Forecasting the long-term direction of events takes professional skills and long time exposure to the industry. To gain a deeper understanding of the market, experts are keeping an eye on issues like legislation and institutional acceptance of crypto payments in the coming months. Fundamental analysis requires a full picture of cryptocurrency investment, and examination of the full scope of a cryptocurrency project to develop a more comprehensive outlook. Making people part with their hard-earned money is serious business.
If you decide on cryptocurrency investing, base your decision on the truth rather than the hype—and there is a lot of hype. Knowing the dangers can help you decide whether investing in digital currency is a good choice for you and your personal finances before you buy and sell.
2. Know how to keep your crypto safe
Several indicators demonstrate that cryptocurrency is not necessarily a safe investment. Cryptocurrencies are not a good investment, according to the Bank of England. Governor Andrew Bailey cautioned that investors must prepare to lose their whole savings. On the other extreme of the investment spectrum meantime, several indicators suggest that cryptocurrency is here to stay.
Based on the past year’s events, it is safe to assert that cryptography and blockchain technology is effective. However, investors cannot say the same about centralized crypto entities and the faces behind the operations. Before we can determine how safe the industry is, here is an understanding of how the industry works. DYOR or doing your own research is the best equipment to get for now.
3. Understand the operations of the crypto market
Bitcoin and altcoins (bitcoin alternatives) use blockchain technology. A blockchain is a technique for distributed ledgers that miners power. The processing power of Bitcoin’s network is around 10 to 20 times that of Google’s servers. This makes it one of the world’s most secure networks.
Interestingly, blockchain technology achieves this great level of security by providing financial disincentives for tampering. In order to assure safety and functionality, blockchain relies on probabilistic reasoning rather than absolute certainty.
To hack a blockchain, you would need to control 51% of the network’s miners simultaneously, making security breaches extremely unfeasible. However, crypto exchanges remain vulnerable to hacking. If you do not store your cryptocurrency in a hardware wallet.
Despite the near-impenetrability of blockchains, Bitcoin and other cryptocurrencies are risky investments. In a bear market, such as the one observed in 2022, it is not uncommon for Bitcoin to decline by 80 to 90 percent.
Bitcoin lost 84% of its value in 2015 and nearly 85% of its value in the 2018 bear market. However, as more institutions and long-term participants enter the market, volatility is projected to diminish significantly.
Ethereum’s blockchain is second-most secure after Bitcoin’s. After that, things become more complex. Because security is directly proportional to the capacity to control 51 percent of a network, smaller networks are smaller targets but intrinsically less safe. Cryptographic “security” is not universal.
4. Mitigate risks involved in crypto investments
Governments and banking regulators in virtually every nation have cautioned investors about the risks associated with buying cryptocurrencies. And the warnings have been so vehement and pervasive partly due to the hoopla around digital currency.
When an investment makes news for skyrocketing returns, is featured in advertising, or is advocated by celebrities as a way to become wealthy, it is considered a get-rich-quick scheme. Consequently, investors can invest without considering the prospective implications.
Thefts of digital currencies have resulted in substantial losses for investors whose assets were compromised. This has prompted a number of exchanges and third-party insurers to offer protection against hacking. Additionally, securely holding cryptocurrencies is more difficult than owning stocks or bonds.
Over the last 12 months, the overall crypto market cap has dropped to unprecedented levels. The recent collapse of FTX, a cryptocurrency exchange, has brought to light the dark side of cryptocurrency trading. Crypto investing has been put to the test and found wanting.
As crypto exchanges battle hacks, here are some of the security and risky concerns facing the crypto industry.
Tax laws
Crypto was created to be decentralized and far above the reach of governments and financial regulators. However, centralized entities all over the world have begun crypto taxations. As a result of their classification as capital assets, cryptocurrencies are subject to the same tax requirements as stocks. Here is a case example from the United States:
According to the IRS, you are subject to capital gains tax when you use cryptocurrencies to purchase goods and services or swap them for other currencies. Additionally, any bitcoin mined is subject to taxation.
Investors in cryptocurrencies must include their profits as income on their tax returns. Not all cryptocurrency transactions are taxable, though. The purchase, storage, and transfer of bitcoins between exchanges or wallets remain excluded.
Volatile market
Volatility is one of the most fundamental measures of a financial asset’s health, and cryptocurrencies are among the most volatile investing possibilities available. Extreme volatility is a distinguishing characteristic of cryptocurrencies. While big gains are possible, you might also lose everything.
In addition, wild speculations over the future of a cryptocurrency drive the price up and down. The cryptocurrency market is driven by speculation, with some individuals buying and selling their holdings at the first sign of a price decline. A single negative tweet or news report might cause the price of a cryptocurrency to drop precipitously.
Still, there are indications that the crypto market is gaining control of its volatility. Recently, large trading and investment firms have accumulated substantial holdings in the majority of cryptocurrencies. Due to the stabilizing influence of these significant corporations, the volatility of these cryptocurrencies may begin to approach a healthy level.
Rug pulls and scams
In 2022, crypto fraud cases reached an all-time high. On this basis, the SEC fined celebrities such as Kim Kardashian for promoting fraudulent schemes. In the future, the scope of crypto fraud will increase significantly. Moreover, cryptocurrency exchanges may exaggerate how much investors could earn by investing in cryptocurrencies while downplaying the associated risks.
How to Invest in Cryptocurrency Step-by-Step
Starting out, picking just a tiny bunch of cryptocurrencies and HODLing them for a long time truly is the brilliant rule of cryptocurrency investment. As a matter of fact, some new software has truly changed the image of cryptocurrency. When your own research has shown that a specific coin (or a number of coins) truly is probably going to see the value before long, the main advice is to stay with them, paying little heed to what else occurs.
1. Lay out your investment plan
For beginners, like crossing a busy street, the best strategy is to stop, look and listen. Bravado will not do you any good, but extra precaution will shield you from future heartaches. Thus, you will be safe if you steer clear of the worst advice, and having done the preparatory steps mentioned previously, you have a good idea of what coin/coins you want to invest in.
2. Decide how much to invest to start, etc
You can never go wrong with the major coins, for a start, but when your capital outlay is conservative, you could do well with altcoins that show a lot of promise based on the coin’s utility, community size, and market capitalization.
Keep your expectations low and set goals that are attainable goals. You can set a goal of 20–25 percent profit, but if 10% turns up, spread your investments. Also, one must avoid investing in shares that make hoax promises of higher profits.
Build well-considered threat management procedures before investing in any cryptocurrency. Therefore, in the beginning, you should start investing a small amount. Most exchanges have a minimum initial deposit of $50, and the feature has helped investors protect their capital by not investing heavily.
Avoid compulsive decisions and develop better strategies and set achievable goals in accordance with them. Know what’s on offer in the different exchanges, and go to forums with your queries. For example, know what’s staking. Or learn to farm. Where is the yield better? These are worth studying if suitable for your risk appetite. You might also consider an Automated Market Maker (AMM) as a beginner.
3. How to pick the right exchange
When selecting the best cryptocurrency exchange for your needs, take into account the comments by the community about the platform’s reliability, platform fees, security, trading volumes, instructional materials, support, and whether an exchange lists the cryptocurrencies you’re interested in purchasing.
Spreading crypto purchases over various exchanges can help you reduce your risk exposure. Alternately, make it a practice to transfer your cryptocurrency assets from an exchange’s default wallet to a personal, secure “cold” wallet.
Examine the accessible cryptocurrencies on a certain exchange with care. You may be alright using a cryptocurrency exchange that trades merely a few coins.
We have a list of top crypto exchanges with distinction according to security, available coins, fees, and instructions for use.
| EXCHANGE | PROS | CON |
|---|---|---|
| Coinbase | Funds are privately insured in case of a cybersecurity breach Easy-to-use interface for beginners Has a fiat-to-crypto buying gateway with several payment options More than 80 currency pairs to choose to trade from. Allows minimum trades of $2 Allows all states of the United States of Ameria | High trading fees Lagging customer support service |
| Etoro | Easy-to-use interface for beginners Very safe for trading as it’s regulated by US regulatory body. Supports buying about 30 cryptocurrencies using fiat. Easy account opening. Demo account with $100,000 virtual money A feature to copy trades of professional traders | Limited to just 43 US states Despite having ETF and Forex features, only crypto trading is allowed for US residents. High trading fees |
| Crypto.com | Low trading fees Good security More than 150 currencies to trade Offers a visa card with 8 percent cash back on transactions Best for staking | Quite difficult to navigate Lagging customer support service. |
| Gemini | Available in all US states Secured against possible cybersecurity hacks Offers a large number of cryptocurrencies to trade. Covers several trading options | High trading fees Difficult to navigate |
| Kraken | Very low fees A large variety of cryptocurrencies to trade Offers several types of trading ranging from Futures trading, Forex trading to OTC, and much more | Very little learning materials High Instant buying fees. |
| Kucoin | Best for altcoin trading, a large variety of coins Low fees Good security Easy-to-use platform or beginners Loyalty program to earn KCS | Low liquidity |
| Binance | High trade volume A high number of digital currency pairs Numerous services to earn from Low transaction fees | Not available in all states of the US Tough KYC verification process Lagging customer support service. |
| Robinhood | Secured to trade Available in all states of the US Offers ETF, commission-free stocks, and options trading Low trading fees | Lagging customer support service. Few trading features |
| Uphold | User-friendly platform No hidden fees Several cryptocurrencies to trade Available in all states in the United States | less learning materials |
| Coinmama | Good customer support service User-friendly interface A great guide for trading | High trading fees Europeans are only allowed to sell bitcoin Limited features |
As an example, let’s take ADA, the native currency of the Cardano network:
How to Buy Cardano (ADA) – Brief Steps
- Get an ADA wallet.
- Note your Cardano wallet address.
- Find an exchange, which offers ADA trading.
- Buy ADA.
- Send your Cardano tokens to your wallet address for storage.
Please refer to the detailed steps here.
What’s the best form of crypto investment?
Investing in the DeFi sector
Many investors view cryptocurrencies as long-term investments. Some investors assert that they would never sell their crypto coins because they believe they will eventually replace both gold and fiat currency.
Nevertheless, cryptocurrencies have endured multi-year bear markets, forcing tens of thousands of investors to lose at least 70% of their portfolios. Regardless, Bitcoin’s price has repeatedly surpassed all-time highs. However, the inference here is that survivor bias inflates bitcoin returns.
Specifically, investors prefer to interpret the performance of existing cryptocurrencies such as Bitcoin and Ethereum (BTC and ETH) as a representative and exhaustive sample, ignoring the hundreds of cryptocurrencies that have failed.
Some crypto traders, on the other hand, some crypto traders view cryptocurrencies as short-term investments. Some traders will purchase worthless bitcoin tokens because they believe the price will climb regardless.
Crypto on a short-term investment basis
Traders that invest in cryptocurrencies for the short term are more concerned with the price history of the coin than with its utility. Many short-term crypto investors, for instance, invest in SHIB, which has no competitive edge over Bitcoin and other larger cryptocurrencies. In an effort to generate quick returns, these traders purchase meme coins due to their high volatility.
Other short-term traders purchase Bitcoin during price spikes, hoping to ride out the enthusiasm. Some traders can profit in this manner, but the majority of people are better off simply purchasing and holding their cryptocurrency for the long term.
However, analysts note that long-term investments are typically more advantageous than short-term ones. An altcoin portfolio’s underlying goal is to hold long enough to experience a market outlier move.
Crypto on a long-term investment basis
If you believe in blockchain technology, cryptocurrencies are an excellent investment in the long run. Bitcoin is the only major cryptocurrency project with an unidentified origin and organic growth. Ethereum is the second-largest cryptocurrency in terms of market capitalization.
However, it is vital to highlight that Bitcoin and Ethereum investments are not direct investments in blockchain technology. Future iterations of blockchain technology may come to dominate the market, making Bitcoin and Ethereum obsolete.
Before investing in a long-term cryptocurrency investment, it is important to understand what you are investing in. Assess what problem the cryptocurrency is attempting to solve, and then evaluate whether there is a meaningful benefit to incorporating blockchain technology into the solution.
Some cryptocurrency companies use a token to acquire capital from unaccredited investors readily, yet, being on a blockchain provides no competitive advantage for these enterprises.
The future of the crypto industry
Although cryptocurrency regulation is sometimes a contentious issue, many experts believe it will benefit both investors and the sector as a whole. Increased regulation may lead to greater stability in the famously unstable cryptocurrency market.
Transparency on the crypto balance may also serve to safeguard long-term investors, stop fraudulent conduct inside the crypto ecosystem, and offer clear guidelines to encourage business innovation in the sector.
In already unpredictable markets, regulatory announcements can have an impact on a cryptocurrency’s price. Due to market volatility, experts advise limiting your cryptocurrency investments to no more than 5% of your whole portfolio and never putting money at risk.
Cryptocurrency has historically been an excellent investment. In contrast to other asset classes like equities, traditional commodities, and real estate, cryptocurrency investment is inherently riskier.
Ethereum might upend the whole financial services sector, while Bitcoin aspires to displace gold as a store of value. The growth potential for cryptocurrencies is unlike that of any other investment, albeit being ambitious.
Advantages of crypto investments
The greatest benefit of crypto investment is its upside potential. Each Bitcoin would be worth over $500,000 if it were to replace gold as a store of value. Some investors want Bitcoin to hit $1 million, arguing that it will be a superior and more accessible store of value than gold at that point.
Ethereum possesses comparable upside potential. Anyone who wants to make a financial transaction with DeFi must pay in Ether tokens. Additionally, investors are locking up their Ether in order to collect interest via DeFi. As a result, the scarcity of Ethereum tokens will increase as new use cases are developed.
Disadvantages of crypto investments
Risk is a price you pay for a reward. Cryptocurrencies are risky investments with daily percentage changes that can easily reach double digits. There will be some cryptocurrencies that fail, rendering their tokens useless. Investments in coins with higher market caps, like Bitcoin and Ethereum, are typically safer than those in less well-known coins.
Since blockchain technology is still in its infancy, many cryptocurrencies are uncontrolled. Before making an investment, be sure the currency has a trustworthy staff and a strong basis.
Final verdict
If you feel that the use of cryptocurrencies will become more widespread over time, it makes sense to include some cryptocurrencies in a diversified portfolio. Ensure that, for any cryptocurrency in which you invest, you have a solid investment thesis explaining why that currency will endure.
Can you get rich with cryptocurrencies? Given the inherent volatility of crypto assets, most involve a high degree of risk while others require domain knowledge or expertise. Trading cryptocurrencies is one of the answers to how to make money with cryptocurrency. So, yes, you can actually get filthy rich in a short time due to rapid price increases compared to assets that attract more cautious investors.
You should be able to manage the investment risk as part of your total portfolio if you do your own research and understand as much as possible about how to invest in cryptocurrencies. If buying cryptocurrency seems too dangerous, you can examine alternative opportunities to profit from the cryptocurrency market’s ascent.
Many large financial institutions are now dipping their toes into digital assets, driven by increasing demand from clients for access to crypto products such as futures contracts, custody services, ETFs, and more. That should ensure steady growth for cryptocurrencies in terms of both price action and market capitalization during 2023.
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