Investing In Cryptocurrencies: Anytime, Day Or Night?

Investing in cryptocurrencies is risky due to the volatile nature of the market, but it can also be rewarding. Cryptocurrencies are decentralised and secured by blockchain technology, which offers new investment opportunities. The most popular cryptocurrencies are Bitcoin and Ethereum, but there are thousands of others to choose from. You can buy and sell cryptocurrencies on trading platforms or directly from other users. It's important to do your research and understand the risks involved before investing in cryptocurrencies.

Understand the risks

Before investing in cryptocurrency, it is important to be aware of the risks involved. Here are some key considerations:

• Price Volatility: Cryptocurrency prices are extremely volatile and can fluctuate dramatically, with high highs and low lows. The value of an investment can drop from thousands of dollars to hundreds overnight, and there is no guarantee that it will rise again.
• Security Breaches: Cryptocurrency exchanges are vulnerable to hacking and other criminal activities. Security breaches have resulted in significant losses for investors, and there are limited legal protections or avenues for recourse.
• Storage Risks: Safely storing cryptocurrencies can be challenging. Centralized exchanges may be convenient, but they give you less control over your assets and are susceptible to freezing or bankruptcy. Offline cold storage options, such as hardware wallets, carry the risk of losing your private key, making it impossible to access your crypto.
• Scams and Uncertainty: The crypto space is rife with scams, and it can be challenging to separate legitimate projects from fraudulent ones. Regulatory uncertainties also exist, and a sudden crackdown by authorities could impact your ability to use or access your crypto.
• No Guarantees: As with any investment, there are no guarantees in cryptocurrency. No one can promise you risk-free profits, and celebrity endorsements do not equate to a sound investment.
• Criminal Activity: Cryptocurrencies have been associated with criminal activities, including money laundering, illicit purchases, and ransomware. The pseudonymous nature of transactions allows for some level of anonymity but also opens up the possibility of being tracked by law enforcement agencies.
• Market Manipulation: Market manipulation is a significant issue in the crypto space, with influential people, organizations, and exchanges acting unethically.
• High Energy Consumption: Cryptocurrency mining, particularly for popular coins like Bitcoin, requires significant energy consumption, contributing to environmental concerns.
• Regulatory and Tax Risks: The regulatory landscape for cryptocurrency is still evolving, and a sudden change in government policies could impact the value and accessibility of your investment. Additionally, cryptocurrencies are taxed differently than traditional investments, and it is important to understand the tax implications before investing.
• Counterparty and Management Risks: Many investors rely on exchanges or custodians to store their crypto, but theft or loss by these third parties could result in the loss of your entire investment. Deceptive or unethical management practices have also led to significant investor losses.

Research the market

Researching the cryptocurrency market is an important step before investing. Here are some key steps to help you research and understand the market:

• Start with the basics: If you are new to crypto, it is recommended to start with well-established cryptocurrencies like Bitcoin and Ethereum. There are plenty of free resources available online to help you understand the basics of blockchain technology and specific cryptocurrencies. For example, you can read the original Bitcoin Whitepaper by Satoshi Nakamoto or the book "Mastering Bitcoin" by Andreas Antonopoulos. This will give you a foundation to build on as you explore other cryptocurrencies and blockchain projects.
• Review the project's website and whitepaper: For any cryptocurrency project, carefully review the project's website and whitepaper. Check if the website looks legitimate, with important information such as contact details, terms of use, privacy policy, etc. Pay attention to the content, grammar, spelling, and whether the site links to external pages. The whitepaper should provide technical details, the problem it aims to solve, and the project's goals and roadmap. Be cautious if a project doesn't have a whitepaper or if it lacks specific details.
• Understand the team and leadership: Research the team behind the cryptocurrency project. Look beyond just names and titles on the website. Review their professional experience, previous projects, and qualifications. Check their profiles on LinkedIn, Twitter, or other platforms to assess their credibility and activity. Contact the team to ask questions and gauge their dedication and responsiveness.
• Analyze the coin or token: Understand the purpose and use case of the cryptocurrency or token. Evaluate whether it has a real-world application and value beyond speculation. Check if it is a token or a coin, the total supply and distribution, and whether the developers have built a deflationary mechanism. Assess the amount held by the company and the level of centralization or decentralization.
• Explore the industry and competitors: Gain a clear understanding of the industry the crypto project is targeting and the issues it aims to solve. Identify whether it is a new or established market and the challenges faced by businesses in that industry. Research the project's competitors and how they differ. This will help you evaluate the project's unique selling points and potential advantages.
• Study the consensus algorithm: Understand the consensus algorithm used by the blockchain project, as it indicates the level of centralization or decentralization. A more decentralized project generally provides greater trust and security.
• Review the project's roadmap: A roadmap helps you understand the project's timeline and expected progress. Software projects often face delays, so be cautious if the roadmap is too aggressive or if developers consistently miss milestones.
• Evaluate strategic partners: Established partners can add credibility to a crypto project. Look for projects with renowned companies, official institutions, or research institutes as partners. Analyze how the cooperation is portrayed and whether there is detailed information available.
• Utilize external sources and social media: Don't rely solely on information provided by the developers. Use external sources, news websites, analysts' reports, and social media to gather additional insights. Check if the project is active on social media and if there is a positive sentiment surrounding it. However, be aware that social media can also be a source of hype and emotional attachment.
• Check GitHub for open-source projects: Many crypto projects claim to be open source, so they should have their code posted on GitHub. While you may not understand the code, you can see the number of contributors and the last update date.
• Understand purchasing and storage options: Find out how and where to buy the project's token or cryptocurrency. Assess the risks associated with different purchasing methods, such as ICOs or exchanges. Consider the market cap, liquidity, and hardware wallet support.
• Evaluate the information: Not all information sources are equally trustworthy. Assign varying weights to different sources, such as press releases, comments on Reddit, or social media posts. Create a list of positive and negative aspects to help you compare different cryptocurrencies and make a well-informed decision.

Choose a cryptocurrency

When deciding which cryptocurrency to invest in, there are several factors to consider.

Firstly, it is important to understand the market capitalisation of the cryptocurrency. This will show which cryptos are currently ranked the highest, as well as the curve of their value. It is also important to be aware of world events that can affect the prices of cryptocurrencies. For example, Elon Musk's purchase of Twitter influenced the value of various cryptocurrencies.

Secondly, it is worth considering whether there is a limited supply of the particular coin. For example, Bitcoin has a limited number of coins, and as more people invest in it, the demand increases while the supply stays the same.

Thirdly, it is important to review the cryptocurrency's white paper, which should include details about the coin, its utilities, and its purpose, as well as the technology behind it. This will give you important information about the coin and assure you of its legitimacy.

Finally, the coin's utility and use cases are important factors when it comes to attracting investors and users. If the coin has some high-quality use cases or great potential for more, it is a plus for your investment.

Other factors to consider include the reputation of the exchange, the security measures in place, and the fees involved. It is also worth noting that investing in cryptocurrencies is risky, and it is possible to lose all of your invested money.

Use a crypto exchange

Crypto exchanges are a common method for investing in cryptocurrencies. These are marketplaces that allow users to buy, sell, and trade cryptocurrencies. Crypto exchanges can be decentralised or centralised.

Decentralised exchanges (DEXes) are not run and managed by a single entity, but instead, the code it's built on allows for peer-to-peer crypto transactions without intermediaries. Popular DEX options include Uniswap, SushiSwap, dYdX and 1inch. There is no central authority or middleman between you and your assets, and your assets cannot be frozen or constrained by the exchange. However, DEXes can be complex and less intuitive for those used to traditional finance applications, and there is little recourse for users who lose funds on these exchanges.

Centralised exchanges are managed by a single company and include Coinbase, Gemini, Kraken, and Binance. They offer certain protections that some investors might welcome, including insurance in case of cybersecurity breaches, regulatory clarity, and help with safeguarding assets. They also have more intuitive user interfaces, making them more accessible for new cryptocurrency investors. However, your assets can be frozen or constrained by the exchange, and they must collect and verify personally identifying information, which may be undesirable for individuals who want to preserve their privacy.

When choosing a crypto exchange, it is important to consider the fees, the cryptocurrency selection, advanced trading options, and customer service offerings. It is also worth noting that crypto trading is not subject to the same investor protections as traditional investments. For example, U.S. Securities Investor Protection Corp. insurance doesn't apply to cryptocurrency, so if your exchange fails, you could lose your investment.

Store your cryptocurrency

When it comes to storing your cryptocurrency, there are several options available, each with its own advantages and disadvantages. Here are some detailed instructions and considerations to help you make an informed decision:

Hot Wallets vs. Cold Wallets:

Firstly, you need to understand the difference between hot wallets and cold wallets. Hot wallets are connected to the internet, making them easily accessible and convenient for frequent trading and spending of cryptocurrencies. Examples of hot wallets include online exchanges, mobile wallets, and software wallets. However, due to their connectivity, hot wallets are more vulnerable to hacking and theft. On the other hand, cold wallets are not connected to the internet, offering a higher level of security. Hardware wallets and paper wallets are types of cold wallets. While they provide better security, they are less convenient for frequent transactions and may be more challenging to use.

Choosing the Right Wallet for You:

When deciding where to store your cryptocurrency, consider a combination of hot and cold wallets. Many investors opt to use both types of wallets, storing more valuable or long-term holdings in a cold wallet and keeping smaller amounts for frequent transactions in a hot wallet. This strategy balances security and convenience.

Security Considerations:

It is crucial to prioritize the security of your cryptocurrency holdings. Always choose reputable and secure wallet providers, whether for hot or cold wallets. Additionally, consider implementing two-factor authentication and other enhanced security measures to protect your accounts. Remember that losing your private keys or access credentials can result in irreversible loss of access to your funds.

Diversification and Backup Strategies:

Diversifying your storage methods can provide an extra layer of protection for your cryptocurrency. Consider using multiple hot wallets and cold wallets from different providers to minimize the risk of losing access to all your funds if one wallet is compromised. Additionally, regularly back up your wallet data and private keys, storing them in secure offline locations.

Research and Due Diligence:

Before choosing a cryptocurrency wallet, conduct thorough research and due diligence. Compare different wallet providers, read reviews, and assess their security features and track records. Understanding the pros and cons of each wallet type and provider will help you make an informed decision.

Storing on Cryptocurrency Exchanges:

While it is convenient to store your cryptocurrency on exchanges like Coinbase, it comes with risks. Exchanges have access to your keys, and there is a potential risk of losing your funds if the exchange fails or is hacked. Therefore, consider using a combination of exchange-based hot wallets and non-custodial cold wallets to balance convenience and security.

Remember, there is no one-size-fits-all solution for storing your cryptocurrency. The best approach is to educate yourself about the various options, assess your risk tolerance and trading frequency, and make informed decisions to protect your investments.

Frequently asked questions