Crypto Investment: Beginner's Guide To Getting Started

Investing in cryptocurrency is a hot topic, but it's also a risky business. Crypto is volatile, and while some investors see it as a legitimate option for any portfolio, others view it as a risky alternative investment. If you're new to crypto, it's important to understand the risks and do your research before investing.

Cryptocurrency is a digital currency that can be used to buy goods and services or traded for profit. It's powered by blockchain technology, which maintains a tamper-proof record of transactions. Crypto isn't issued or backed by a central authority like a government, but by an online, decentralised network of users.

The most well-known cryptocurrency is Bitcoin, but there are nearly 10,000 in total, with a market cap of over $2 trillion.

If you're thinking of investing in crypto, it's recommended that you only invest what you can afford to lose. Crypto is extremely volatile, and you could lose all your money. It's also important to understand the technology and do your research before investing. Due to the high risk, it's recommended that crypto makes up less than 5% of your portfolio.

Understand the technology and risks

Cryptocurrency is a digital currency that can be used to buy goods and services or traded for profit. It is a highly speculative area of the market, and many smart investors have decided to put their money elsewhere. However, if you are a beginner interested in crypto, it is important to understand the underlying technology and the associated risks.

Cryptocurrencies are powered by a technology known as blockchain, which maintains a tamper-resistant record of transactions and keeps track of who owns what. Blockchain is a kind of database that records and timestamps every entry into it, producing a secure encrypted record of the value of each virtual coin and its associated transactions. The records are distributed and linked across a network of parties or computers accessing the blockchain. This system was designed with security, transparency, speed, and accuracy in mind.

Understanding the technology behind cryptocurrencies can help you better evaluate the potential risks and financial health of a particular coin before investing. Here are some key considerations:

• Real-world adoption potential: Assess the potential for the cryptocurrency to be adopted and used in the real world.
• Technical specifications: Review the technical details and capabilities of the cryptocurrency.
• Founders and developers: Evaluate the credibility and expertise of the team behind the cryptocurrency.
• Community engagement: Analyze the level of community engagement and support for the cryptocurrency.
• Competitors: Identify and evaluate any competing cryptocurrencies and their strengths and weaknesses.
• Utility: Understand the practical use cases and benefits of the cryptocurrency.
• Transaction speed and scalability: Consider the speed and scalability of transactions on the network.
• Network security: Evaluate the security measures and protocols in place to protect the network and user data.
• Coding language: Assess the quality and suitability of the coding language(s) used for the cryptocurrency.
• Transparency: Look into the level of transparency and openness provided by the development team.

It is also important to recognize that the cryptocurrency market is highly volatile and subject to dramatic price swings. The regulatory landscape for cryptocurrencies is still evolving, and there are inherent security risks associated with online transactions. Additionally, the environmental impact of some cryptocurrencies, such as Bitcoin, has been a cause for concern due to their energy-intensive mining processes.

By taking the time to understand the technology and risks associated with cryptocurrencies, you can make more informed and strategic investment decisions. Remember to always do your own research and only invest what you can afford to lose.

Research the market

Researching the market is a crucial step in making informed investment decisions, especially when entering the volatile and complex world of cryptocurrencies. Here are some strategies and factors to consider when researching crypto for beginners:

• Understanding the Basics: Start by familiarising yourself with the fundamental concepts of cryptocurrencies. Learn about blockchain technology, the process of mining, and the differences between coins and tokens. Understand that cryptocurrencies are decentralised, unregulated, and highly volatile, making them risky investments.
• Tokenomics Research: Inspect the economic principles and design of the cryptocurrency. Analyse key characteristics such as supply, distribution, utility, and governance. Be cautious of projects that promise high returns without disclosing their sources of revenue.
• Airdrop Research: Evaluate the distribution of crypto by the project. Consider how airdrops may affect the coin's supply, demand, and potential inflation.
• DeFi Research: Assess the role of the project in the Decentralised Finance (DeFi) ecosystem. Does it offer a unique solution or a real use case? Evaluate whether it addresses an existing problem or improves existing solutions.
• NFT Collections: If a project is associated with a Non-Fungible Token (NFT) collection, assess the blockchain network it is released on. Established and trustworthy blockchains are generally more secure and scalable. Evaluate the team behind the project, their industry experience, and the strength of the community engaging with the project.
• Whitepapers and Funding: Review the whitepaper, a technical document outlining the project's features, goals, and potential. It provides insights into the use case and demand for the cryptocurrency. Also, consider the funding and investors behind the project. Prominent backers can indicate a project's legitimacy.
• Social Signals: Monitor platforms like Telegram, Reddit, and Twitter for discussions and opinions about the project. Social signals reflect market sentiment and can help identify potential red flags or legitimacy.
• Risk Management: Recognise that cryptocurrency trading, especially for short-term gains, requires risk management strategies. This may include setting rules for buying or selling based on price movements or allocating a specific portion of your trading money for crypto investments.
• Diversification: Diversifying your crypto investments across different cryptocurrencies and limiting your overall exposure can help manage risks. Consider investing in a mix of larger, more established cryptocurrencies and smaller, speculative ones.
• Regulatory Landscape: Stay informed about the evolving regulatory environment surrounding cryptocurrencies. Understand the lack of government regulation and the associated risks, such as the absence of legal protection for transactions.
• Security and Wallet Options: Prioritise the security of your crypto investments. Choose reputable exchanges and digital wallet providers, enabling strong passwords, two-factor authentication, and secure connections. Consider the advantages of "hot" (online) and "cold" (offline) wallets for storing your private keys.

Know your budget

Before investing in cryptocurrency, it is important to understand your budget and how much you can afford to invest. Here are some things to consider:

Assess Your Finances

Before entering the crypto market, ensure that you have your finances in order. This includes having an emergency fund in place, managing your debt, and, if possible, diversifying your investment portfolio. It is crucial to remember that investing in cryptocurrency is risky, and you should only invest what you can afford to lose.

Understand the Costs

When investing in cryptocurrency, there are various costs and fees to consider. These include transaction costs, such as deposit and withdrawal fees, as well as potential trading fees. Some platforms may charge higher fees than others, so it is important to compare and choose a platform that minimises these costs. Additionally, look out for hidden fees, such as spread mark-ups, which are embedded in the price you pay for your cryptocurrency.

Determine Your Investment Amount

When deciding how much to invest in cryptocurrency, it is generally recommended to allocate a small percentage of your net worth or investment portfolio. Some sources suggest investing no more than 1% to 5% of your net worth, while others recommend a maximum of 2%. This helps to limit your exposure to risk and ensures that cryptocurrency investments are just one part of a diversified portfolio.

Choose the Right Cryptocurrency

When allocating your budget, consider investing in major cryptocurrencies like Bitcoin and Ethereum, as they have larger market capitalisations and have weathered market downturns. These established cryptocurrencies have first-mover advantages and are tied to financial products like ETFs. However, it is important to research and understand the fundamentals of each cryptocurrency before investing, including its utility, transaction speed, security, and the team behind it.

Long-Term Perspective

Investing in cryptocurrency should be approached with a long-term perspective. The market is highly volatile, and prices can fluctuate dramatically over short periods. Therefore, it is crucial to assess your risk tolerance and ensure that you are prepared for potential losses. Remember, investing in cryptocurrency should not be a short-term get-rich-quick scheme but rather a strategic decision based on your financial goals and risk appetite.

Choose a platform

You can buy cryptocurrency through a broker or a cryptocurrency exchange. Both options have their pros and cons, so it's important to understand the differences before making a decision.

Brokers

Cryptocurrency brokers simplify the process of buying crypto but may charge higher fees or restrict moving holdings off their platform. Examples of brokers include Robinhood and SoFi. Some investors prefer holding coins in crypto wallets offered by these platforms for added security.

Cryptocurrency Exchanges

Cryptocurrency exchanges such as Coinbase, Gemini, and Binance offer platforms for buying and selling digital currencies. These platforms can be overwhelming for new investors, and user-friendly options usually have higher fees compared to standard trading platforms. To minimize expenses, consider mastering a standard trading platform before or shortly after your first cryptocurrency purchase.

When selecting an exchange, consider factors such as security, fees, the volume of trading, minimum investment requirements, and the types of cryptocurrency available for purchase.

Store your crypto

Storing your cryptocurrency safely is essential. You can't store it in a regular bank account; it has to be kept in a crypto wallet on reputable crypto exchanges/apps or specialised devices. You need to choose a storage option that is both secure and accessible.

Crypto Wallets

Crypto wallets are devices or programs that keep your crypto assets, private keys, and wallet addresses (public keys) in the same place. There are several types of crypto wallets:

• Hot wallets: These are connected to the internet and are generally more convenient. Most crypto exchanges provide free hot wallets with little to no setup required. However, they are more susceptible to hacks. Examples include Guarda and Mycelium.
• Cold wallets: These wallets are not connected to the internet, keeping your crypto safe from hackers. They are ideal for storing large amounts of cryptocurrency. Popular cold wallets include Trezor and Ledger.
• Paper wallets: These are a less common, old-fashioned way of storing your crypto credentials. They are relatively safe but vulnerable to physical damage or wear and tear.

Crypto Exchanges

Crypto exchanges are applications that let you access and carry out transactions with your crypto. Examples include Coinbase, Binance, and Kraken. While storing your crypto on an exchange is convenient if you plan to trade frequently, it is also riskier as exchanges are a prime target for hackers. If you choose this option, only keep the amount of crypto you need for trading on the exchange.

Decentralised Exchanges (DEXs)

DEXs don't require you to give up control of your private keys. While they may not match centralised exchanges in terms of liquidity and speed, they have improved in recent years. Examples include KyberSwap and Synthetix.

Software Wallets

Software wallets for desktop and mobile are another option. While they may not be as secure as hardware wallets, they are safer than exchanges if you follow best security practices and store private keys and recovery phrases offline. Examples include Exodus and Jaxx Liberty.

Hardware Wallets

Hardware wallets are considered the most secure way to store your crypto as your private keys cannot leave the device. However, they are better suited for long-term holding than active trading. Popular options include Trezor One and Ledger Nano.

Frequently asked questions