The Basics Of Investing In Crypto Stock

Investing in cryptocurrency is risky and volatile, but it has produced top returns for investors over time. Cryptocurrencies are digital currencies that operate on a blockchain, a peer-to-peer medium of exchange without a central authority. There are thousands of cryptocurrencies in existence, and they can be bought and sold on exchanges such as Coinbase, Gemini, and Binance.US. Cryptocurrency can also be bought via brokers such as Robinhood and SoFi. It's important to note that investing in cryptocurrency is very different from investing in stocks, as cryptocurrency has zero intrinsic value.

How to pick a cryptocurrency to invest in

Do your research

Before investing in any cryptocurrency, it is important to do your research. This includes understanding the fundamentals of the cryptocurrency and the problem it is trying to solve, as well as the team behind the project, their expertise and track record.

Read the white paper

The white paper outlines the purpose of the coin, its technology, how it works and its overall vision. It is important to read this before investing to evaluate the fundamentals of the coin.

Assess the leadership and team

The success of a cryptocurrency is often steered by its leadership team. It is important to research the team, their achievements and their reputation in the industry.

Analyse the community

A cryptocurrency's success is often linked to its following. Look for cryptocurrencies with strong communities and loyal followers as this indicates a genuine interest and belief in the project.

Evaluate the technology

The underlying technology of a cryptocurrency is key to its success. Look for cryptocurrencies with innovative technology that can disrupt the industry and perform well against competitors.

Consider the reputation and credibility

It is important to assess the reputation and credibility of a cryptocurrency before investing. This includes researching its online presence and what people are saying about it, as well as its leadership team's reputation.

Understand the risks

Cryptocurrency is a highly volatile and risky investment. It is important to only invest what you can afford to lose and to be comfortable with the risks involved.

Diversify your portfolio

Diversifying your portfolio across several cryptocurrencies can help to mitigate some of the risks involved. It is recommended to hold no more than 2% of your overall portfolio in any one cryptocurrency to limit crypto-specific risks.

Choose established cryptocurrencies

For beginner investors, it is advisable to invest in more established cryptocurrencies with larger market caps, as these tend to be less risky than smaller, newer coins.

Assess the supply and demand

The price of a cryptocurrency is influenced by supply and demand. It is important to understand how the supply increases and what will drive demand for the coin.

Consider the utility

Some cryptocurrencies have additional utility, such as being used to pay for goods and services or providing access to projects or discounts. This can add value to the investment.

Be prepared for volatility

Crypto investing is often a wild ride, with price swings of 10% or more in just a few hours being common. As a crypto investor, you need to be prepared for this volatility and the potential impact on your investments.

How to invest in cryptocurrencies

Before investing in cryptocurrencies, it is important to understand the basics of what you are investing in. Cryptocurrency is a type of digital currency that does not rely on a central authority, like a bank, to verify transactions or create new units. Instead, it uses cryptography to prevent counterfeiting and blockchain technology to support the currency. Blockchain technology consists of individual blocks of data that contain information, such as transactions made in a specific cryptocurrency. Each block of data references the previous block, creating a chain of blocks. The cryptography ensures that the chain remains immutable so that hackers cannot change the data.

It is also important to note that investing in cryptocurrency is risky and the market is extremely volatile. The value of cryptocurrency is largely dependent on supply and demand. If there is an increased demand and a limited supply increase, the price goes up.

When picking a cryptocurrency to invest in, it is important to do your research. Understand how the supply increases and what will drive demand for the coin. Read the white paper published by the cryptocurrency team, look at the roadmap for the project, and research the team behind it. Try to find a community of people already investing in the cryptocurrency and gauge their sentiment. Additionally, consider how much money has already been invested in the cryptocurrency and whether there is potential for growth.

Once you have found a cryptocurrency you want to invest in, the next step is to open an account with a cryptocurrency exchange. Most stock brokers do not support trading in cryptocurrency. Popular exchanges include Coinbase, Gemini, Robinhood, and SoFi. Just be sure that the exchange you choose also supports the cryptocurrency you want to buy.

After opening an account, you will need to fund your account with fiat currency. You can then place an order to buy your chosen cryptocurrency. The exchange will match your buy order with a sell order at the same price and make the trade.

As a crypto investor, it is important to be prepared for volatility. Crypto is generally more volatile than traditional asset classes such as stocks. Price swings of 10% or more in just a few hours are common. Therefore, it is important to consider how much of your portfolio you want to allocate to a specific cryptocurrency and give yourself wide bands of acceptable allocations.

There are also tax consequences to buying and selling cryptocurrencies. In the U.S., cryptocurrencies are taxed as property, so when you sell them, you will pay tax on the capital gains. If you are given crypto as payment or as a reward, you will be taxed on the value at the time you received it.

Finally, remember that cryptocurrency is a relatively risky investment. It is generally recommended that high-risk investments make up a small part of your overall portfolio. Make sure to do your homework and research the projects behind the cryptocurrencies you are investing in.

Risks of investing in cryptocurrency

Volatility and Manipulation

Cryptocurrency prices are volatile and subject to sharp, sudden, and dramatic swings, which can be challenging to predict. This volatility is influenced by market sentiment, speculation, and potential manipulation by crypto exchanges, media owners, and influential investors. The unregulated and anonymous nature of digital asset markets contributes to price volatility, and the lack of regulatory frameworks creates uncertainty.

Cybersecurity Threats and Human Error

Cryptocurrency exchanges and personal wallets are susceptible to hacking, technical glitches, and human error. Investors need to be vigilant about cybersecurity practices and choose platforms with robust security measures. Losing access to private keys or having them compromised can result in the loss of cryptocurrency holdings.

Regulatory and Tax Uncertainty

Cryptocurrencies face varying levels of regulation and legal status worldwide. The lack of clear regulatory frameworks and inconsistent tax laws across jurisdictions creates uncertainty for investors. It is the individual's responsibility to ensure compliance with tax obligations, and the classification of cryptocurrencies for taxation purposes varies.

Limited Market Adoption and Institutional Involvement

The cryptocurrency market faces challenges due to low market adoption, regulatory concerns, technology shortfalls, public misunderstandings, and the emerging nature of the technology. The lack of broad adoption could lead to a complete loss of value. Institutional investors tend to be cautious due to the regulatory and legal uncertainties surrounding cryptocurrencies.

Centralization and Governance Risks

While blockchains and cryptocurrencies are often decentralized, the business entities issuing them may not be. Some cryptocurrency projects are centralized, with governance rights and control held by a core business entity rather than distributed among token holders. This centralization introduces risks of mismanagement, divergence of interests, and potential malicious actions by team members.

How to make money with cryptocurrency

Cryptocurrencies have been touted as the future of finance, and they have certainly made waves in recent years. However, investing in crypto is not without its risks, and it is important to understand how to make money in this volatile market. Here are some ways to make money with cryptocurrency:

Buying and Holding

The simplest strategy is to buy cryptocurrencies and hold them, hoping for gains over time. This is a long-term strategy, and investors need to be prepared for the inherent volatility of the crypto market. For example, Bitcoin has seen dramatic rises and falls, from a surge of around 2000% in 2017 to a 57% drop from its all-time high as of August 2023.

Trading

Crypto investors can also capitalise on the market's volatility by actively trading cryptocurrencies. This involves monitoring price movements and capitalising on fluctuations. Traders can place "good 'til canceled" orders, which are executed once the crypto reaches a set limit price, reducing the time spent monitoring portfolios.

Crypto Staking

Crypto staking is a way to earn passive income with certain cryptocurrencies, such as Ethereum and Cardano. It involves holding coins in a wallet to facilitate the smooth functioning of the blockchain network and validate transactions. Staking can generate yields of 5% to 10% for some tokens, similar to collecting dividends from stocks.

Diversification

Diversification is a key strategy in any investment portfolio, and it applies to crypto as well. Investors can choose from thousands of altcoins to diversify their crypto holdings. Besides Bitcoin and Ethereum, top altcoins by market cap include Cardano (ADA), XRP (XRP), Solana (SOL), and Dogecoin (DOGE).

Understanding the Market

Before investing, it is crucial to research and understand the cryptocurrency market. Evaluate the white paper published by the crypto team, the roadmap, and the skills of the people behind the project. Additionally, consider the market cap and whether there is potential for growth. A high market cap may indicate limited future growth as it can curb demand and increase supply.

Choosing the Right Platforms

When investing in crypto, it is important to select reputable and user-friendly platforms. Beginners may benefit from using well-known crypto exchanges like Coinbase, Gemini, or Robinhood, which offer easy-to-use interfaces. These platforms may charge higher fees, but they provide more security and convenience.

Managing Risk

Crypto is a high-risk investment, and it's important to manage your risk. Consider treating it as a small part of your overall portfolio, typically no more than 10%. Diversifying your crypto holdings can also help insulate you from losses, as different cryptocurrencies may rise and fall at different rates.

In conclusion, while the cryptocurrency market offers several opportunities for monetary gains, it is essential to approach it with caution and a thorough understanding of the risks involved.

Pros and cons of cryptocurrency

Pros of Cryptocurrency

• Decentralization: Cryptocurrencies are not owned by a single financial or government entity, removing the monopoly of money and ensuring that their value is not dictated by a central bank or authority.
• Lower transaction fees: The fees for transacting in cryptocurrency are often minimal or non-existent, as third parties and intermediaries such as VISA and PayPal are cut out of the process.
• Inflation protection: Cryptocurrency is often seen as a hedge against inflation due to its limited supply. For example, the number of coins that can be minted for Bitcoin is capped at 21 million.
• Potential for high returns: Most cryptocurrency investments yield high returns. In 2022, the size of the worldwide cryptocurrency market reached $4.67 billion.
• Accessibility: Cryptocurrencies operate on decentralized networks and can be accessed by anyone with an internet connection and a crypto wallet, providing financial services to the unbanked and underbanked populations worldwide.
• 24/7 trading: The crypto markets are always open, allowing investors to generate returns outside of normal working hours.

Cons of Cryptocurrency

• Extreme price volatility: Cryptocurrency prices fluctuate wildly, making it a risky investment choice, especially for those seeking stable returns.
• Lack of regulation: Cryptocurrency is not legally regulated by central governments, increasing the risk of scams and market manipulation.
• Security concerns: Security lapses and hacking attempts are on the rise in the cryptocurrency ecosystem, and it is difficult to recover funds once they have been stolen.
• Risk of losing coins: If a private key is lost or stolen, it is impossible to demonstrate another proof of ownership or recover the cryptocurrency tokens.
• High energy consumption: Mining cryptocurrency requires a large supply of electricity and other resources, leading to increased pollution, noise, and greenhouse gas emissions for communities living near mining sites.
• No refund or cancellation: Cryptocurrency transactions are non-refundable, making it easy for people to defraud others.

Frequently asked questions