Understanding The Basics Of Crypto Investing

Cryptocurrency is a digital currency that can be used to buy goods and services or traded for a profit. It is a peer-to-peer system that does not rely on banks to verify transactions. Instead, it uses a decentralised system called blockchain technology to record and verify transactions.

Anyone can create a cryptocurrency, and there are thousands in existence. The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the most well-known and commonly traded.

Cryptocurrencies are created through a process called mining, which involves using computer power to solve complicated mathematical problems that generate coins. They can also be bought from brokers and stored in digital wallets.

Investing in cryptocurrency is considered high-risk due to its extreme volatility. The value of a cryptocurrency can fluctuate at extreme levels based solely on market speculation. It is also subject to fewer regulatory protections than traditional financial products.

Understand the basics: Crypto is a digital currency that doesn't require a bank to verify transactions

Crypto, or cryptocurrency, is a digital currency that doesn't require a bank or financial institution to verify transactions. It is a peer-to-peer system that enables anyone, anywhere, to send and receive payments. Crypto transactions are verified and recorded on a blockchain, an unchangeable ledger that tracks and records assets and trades.

Cryptocurrencies are created through a process called mining, which involves using computer power to solve complicated mathematical problems to generate coins. Mining can be an energy-intensive process and often requires specialized hardware and software. However, not all cryptocurrencies are created through mining. Some are created through a process called a hard fork, which creates a new chain in the blockchain.

Crypto is stored in digital wallets, which can be online (hot wallets) or offline (cold wallets). Hot wallets are stored on the internet and are more susceptible to cyber-attacks, while cold wallets are stored on external drives or hardware devices not connected to the internet, offering more protection from hackers.

When investing in crypto, it is important to understand the potential upside and downside. Cryptocurrencies are highly volatile and can fluctuate based on market speculation and other factors. It is also important to remember that past performance does not guarantee future results. Crypto investments should be treated as high-risk, speculative investments, and you should only invest what you can afford to lose.

Know the risks: Crypto is a high-risk, volatile investment with potential for significant gains or losses

While investing in crypto has its potential benefits, it's important to remember that it is a high-risk and volatile investment option. Here are some critical risks to consider before investing in cryptocurrencies:

Price Volatility and Manipulation

Crypto prices are extremely volatile and susceptible to significant swings, making it challenging for investors to build confidence and secure gains. This volatility is driven by factors such as news and sentiment, speculation, and market manipulation by crypto exchanges, media owners, and influential investors. The unregulated and anonymous nature of the market further contributes to price fluctuations.

Security and Custody

The decentralized nature of cryptocurrencies makes them vulnerable to security breaches and theft. Hacking is a constant threat, and if cryptocurrencies are not properly secured, investors may lose their assets with little recourse for recovery. Custody solutions provided by financial institutions offer some protection, but the risk remains high.

Regulatory Uncertainty

The lack of consistent regulation in the crypto space creates uncertainty for investors. The possibility of future restrictions or bans on cryptocurrencies is a concern, and the complex and disorganized nature of existing regulations, especially regarding tax treatment, can make it challenging for investors to comply with their obligations.

Limited Market Adoption

Despite the hype, market adoption of cryptocurrencies remains low due to regulatory concerns, technology shortfalls, volatility, and public misunderstandings. There is a chance that this asset class may never gain broad acceptance, leading to a complete loss of value.

Loss of Private Key

Cryptocurrencies are typically stored in digital wallets, and access is controlled by both public and private keys. If the private key is lost, destroyed, or compromised, investors may permanently lose access to their crypto assets. If acquired by a third party, they may gain unauthorized access.

In summary, investing in crypto carries significant risks, including high price volatility, security threats, regulatory uncertainty, and the potential for total loss. It is crucial for investors to carefully consider these risks and conduct thorough research before deciding to invest in cryptocurrencies.

Choose a platform: Select a traditional broker or a dedicated crypto exchange to buy and sell

When investing in crypto, you can choose between a traditional broker or a dedicated crypto exchange to buy and sell. Here are some of the key differences between the two:

Traditional Broker

Traditional brokers typically don't offer direct trading in crypto but instead provide access to futures contracts. This means you can speculate on the price of crypto without owning the underlying asset. Brokers also give you the advantage of having all your investments in one place, including stocks, bonds, and other securities.

Some examples of traditional brokers that offer crypto trading include:

• Interactive Brokers: Offers trading in four cryptocurrencies and the ability to buy Bitcoin and Ethereum futures.
• Robinhood: Allows trading in a handful of cryptocurrencies with no commissions but has a built-in spread markup.
• Fidelity Investments: Provides a broad selection of crypto ETFs and offers commission-free Fidelity crypto ETFs.

Dedicated Crypto Exchange

Dedicated crypto exchanges offer a wider array of cryptocurrencies beyond the most popular ones like Bitcoin and Ethereum. They also allow you to own the currencies directly. Here are some popular crypto exchanges:

• Coinbase: Offers more than 200 tradable cryptocurrencies and an easy-to-use interface.
• Binance: Provides access to over 300 cryptocurrencies and charges low fees that decrease with higher trading volume.
• Crypto.com: Supports more than 250 cryptocurrencies and offers a user-friendly mobile app.
• Kraken: Allows trading in over 200 cryptocurrencies and provides advanced trading features with low fees on its Kraken Pro platform.

When choosing between a traditional broker and a dedicated crypto exchange, consider factors such as the range of cryptocurrencies offered, fees, security, and your level of trading experience. Traditional brokers may be more suitable for those who want a single platform for all their investments, while dedicated crypto exchanges provide more options and direct ownership of the currencies.

Fund your account: Use fiat currency to fund your account and begin trading

Funding your account with fiat currency is a simple process, but there are a few things to keep in mind. Fiat wallets are available on the Crypto.com app, allowing users to deposit and withdraw funds to and from their bank accounts. Most crypto exchanges allow users to purchase crypto using fiat currencies such as the US Dollar, the British Pound, or the Euro. You can use your debit or credit card, although this varies by platform, and some exchanges and credit card companies don't support these transactions. Some platforms also accept ACH and wire transfers.

It's important to note that crypto purchases with credit cards are considered risky, and it's not advisable to risk going into debt for these types of assets. Additionally, there may be deposit and withdrawal transaction fees, as well as trading fees, which vary by payment method and platform. Be sure to research the fees associated with your chosen platform and payment method before proceeding.

Once you've selected your platform and payment method, you can proceed to fund your account. Depending on your chosen method, you may need to wait a few days for the funds to clear into your crypto account. After that, you're ready to start trading!

Place an order: Decide whether to buy or sell, choose the order type and amount, and confirm

When you're ready to place an order, you'll need to decide whether you want to buy or sell crypto. This will depend on your investment goals and risk appetite. If you're planning to invest for the long term, you may want to take a buy-and-hold approach, whereas if you're looking for short-term gains, you might consider trading or investing in more volatile assets.

Once you've decided on the direction of your trade, it's time to choose the order type. The two most common types of orders are market orders and limit orders. A market order is an instruction to buy or sell a security immediately at the best available price. This type of order is suitable if you want to execute your trade as soon as possible and are willing to accept the current market price. However, it's important to note that the price you receive may differ from the quoted price, especially in fast-moving and volatile markets.

On the other hand, a limit order allows you to specify the maximum price you're willing to pay for a purchase or the minimum price you're willing to accept for a sale. This type of order is useful if you want more control over the price you receive but are willing to wait for the market to reach your desired level. It's important to remember that your limit order may not be filled if the market price doesn't reach your specified level.

When placing an order, you'll also need to decide on the amount you want to buy or sell. This will depend on your risk tolerance, investment strategy, and available capital. It's generally recommended to diversify your investments and not put all your capital into a single asset or trade.

Finally, review your order details and confirm the trade. Remember that trading cryptocurrencies carries risks, and you could lose some or all of your investment. It's important to do your own research and only invest what you can afford to lose.

Frequently asked questions