Investing In Cryptocurrency Early: A Beginner's Guide

Investing in cryptocurrency is a hot topic, but it's also a risky business. If you're thinking of investing early, you need to be aware of the potential pitfalls. Cryptocurrency is a virtual currency that is secured by blockchain technology. It's decentralized, meaning it's not issued or backed by a central authority like a government. This also means it's largely unregulated, so it can be difficult to predict when values will rise or fall.

If you're thinking of investing, it's important to do your research and understand the market. You should also only invest what you can afford to lose, as the prices of cryptocurrencies are volatile and subject to dramatic price swings. It's a good idea to treat crypto investing like any other investment and consider your risk profile and investment goals.

There are several ways to invest in cryptocurrency, from buying it directly to investing in crypto funds, companies, or exchange-traded funds (ETFs). You can also invest in a cryptocurrency Roth IRA, which offers tax advantages.

To buy cryptocurrency, you'll need to use a crypto exchange or app, or a broker-dealer. Popular exchanges include Coinbase, Binance, and Kraken. You'll need to set up an account, fund it with fiat money, and then place a buy order for your chosen cryptocurrency.

Remember, investing in cryptocurrency is risky, so make sure you understand the market and only invest what you can afford to lose.

Understand what you're investing in

Before investing in cryptocurrency, it is important to understand what you are investing in. As with any investment, it is crucial to conduct thorough research and due diligence. Here are some key points to consider:

• Understand the Basics: Cryptocurrency is a digital or virtual currency secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. It is typically decentralised and operates outside the control of governments and central authorities. Cryptocurrencies are often referred to as digital coins or tokens, and they are guarded by encryption through blockchain technology.
• Do Your Research: Take the time to learn about the different currencies available. With thousands of options, look beyond the most popular ones like Bitcoin or Ether. Understand the investment case for each trade, as there are many differences in how they function and are backed. For example, Bitcoin is not backed by any hard assets or cash flow, relying solely on market demand.
• Read White Papers: Every cryptocurrency project should have a white paper that outlines the specifics of the project, including its purpose, technology, and roadmap. A well-written white paper with specific details and a clear timeframe is a positive sign. Be wary of projects with incomplete or misleading white papers or those that continuously miss their stated timelines.
• Understand Market Caps: Market capitalisation, or market cap, refers to the total dollar amount a company or cryptocurrency is valued at. It is calculated by multiplying the number of outstanding coins/tokens by their current market price. Understanding market caps can help you gauge the potential for growth, risk, and sensitivity to economic changes.
• Know the Risks: Cryptocurrencies are highly volatile and speculative, making them risky investments. There are various risks associated with investing in cryptocurrencies, including user risk (e.g., sending to the wrong address), regulatory risks, counterparty risks (e.g., exchange hacks or failures), management risks, programming risks, and market manipulation.
• Consult Experts: Seek information from reliable sources and consult experts with a history of successful investing and an understanding of digital assets. Avoid falling prey to get-rich-quick schemes or making decisions based solely on social media buzz.

Research market caps

When investing in cryptocurrency, it's important to understand market caps. A market cap is the total dollar amount a company is valued at based on the stock market. It is calculated by multiplying the number of outstanding shares a company has by its current market price (CMP).

Market cap is a good indicator of a company's growth potential. It informs the level of risk associated with an investment, growth potential, and how sensitive it is to economic changes. For example, a company with a high market cap may be less sensitive to economic changes, while a company with a low market cap may be more sensitive.

When investing in cryptocurrency, it's important to remember that it is a highly speculative area of the market. Many smart investors have decided to put their money elsewhere. For beginners, it is recommended to start small and only use money that you can afford to lose.

• Do your due diligence: Make sure you do your research and vet your sources. Cryptocurrency generates a lot of buzz, especially on social media, but it's important to have data-driven information to make informed decisions.
• Make trades based on data: Keep track of how the data develops over time and ensure your trades are motivated by quantifiable data, not personal opinion.
• Keep emotions out of investing: Investing is a long-term commitment. Don't be thrown by short-term fluctuations if you've done your research and made strong calculations.
• Invest with a strategy: Gather data and information to create a strategy, and know what you are willing to invest in terms of money and time.

Choose a broker or exchange

Choosing a broker or exchange is an important step in investing in cryptocurrency. There are two ways to purchase Bitcoin and other cryptocurrencies: through a broker or a cryptocurrency exchange.

Cryptocurrency Brokers

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

Cryptocurrency Exchanges

Cryptocurrency exchanges such as Coinbase, Gemini, and Binance.US offer platforms for buying and selling digital currencies. These platforms can be overwhelming for new investors, and user-friendly options usually come with 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, you may want to consider factors such as security, fees, trading volume, minimum investment requirements, and the types of cryptocurrency available for purchase.

It is also important to note that crypto exchanges are often vulnerable to theft or hacking. Losing or forgetting the access codes to your account could result in the loss of your investment. Therefore, it is crucial to keep your cryptocurrencies in a safe storage place.

Set up an account

Setting up an account is the second step to investing in cryptocurrency. After selecting a cryptocurrency broker or exchange, you will need to create an account. This generally involves signing up and providing personal information to verify your identity, often known as Know Your Customer (KYC) protocols. This may include entering information from your driver's license or passport, and sometimes a photo of yourself or a form of identification.

The specific information required varies depending on the exchange or broker you choose. For example, Coinbase requires users to provide their full name, email address, password, country, and state of residence. Binance, on the other hand, asks for an email address, password, and referral ID (if applicable). It is important to carefully review the requirements of the platform you are using to ensure you have all the necessary information to set up your account successfully.

Once you have completed the sign-up process and provided the necessary information, you can move on to the next step of funding your account and initiating your first cryptocurrency transaction.

Manage your investments

Once you have bought your chosen cryptocurrency, you will need to store it in a digital wallet. This can be hosted by the cryptocurrency exchange or an independent wallet provider.

If you are keeping your cryptocurrency on the same platform where you bought it, make sure it is a reputable platform that will be responsible for the custody and safekeeping of your assets. Such platforms are regulated, have strong protection against hackers and online threats, and carry financial insurance.

If you choose not to hold your cryptocurrency on the more popular platforms, you will need a crypto wallet. A hot wallet is accessible via the internet and is generally more convenient. A cold wallet is a physical storage device, much like a USB drive, that keeps your cryptocurrency keys completely offline and is generally more secure.

If you are buying cryptocurrency through a broker, your crypto is usually held in a crypto wallet linked to the exchange. If you are dissatisfied with the exchange's service provider or prefer a more secure storage option, you may transfer your assets to a separate hot or cold wallet.

It is important to manage risk, but this will come at an emotional cost. Selling a losing position may hurt, but it can help you avoid worse losses later. Risk management for a long-term investor might simply be never selling, regardless of the price. The long-term mentality allows the investor to stick with the position.

Remember, there is no such thing as an easy way to make a lot of money without risk, so it is important to never invest in anything with the belief that you can't lose.

Frequently asked questions