The Beginner's Guide To Cryptocurrency And Altcoin Investing

Cryptocurrency is a hot topic in investment circles, with its popularity increasing significantly in recent years. It is a risky investment, so it is important to approach it with caution and to not invest more money than you can afford to lose.

Cryptocurrency is a virtual currency that operates outside the regulation of any individual company or government. It is overseen by an online, decentralised network of users and guarded by encryption through blockchain technology.

There are thousands of cryptocurrencies, with Bitcoin and Ethereum being the most established. Cryptocurrency investing can take many forms, from buying cryptocurrency directly to investing in crypto funds and companies.

If you are new to crypto, it is important to conduct thorough research and understand how each type of cryptocurrency functions before making any investment decisions.

Understanding the basics of cryptocurrency

Cryptocurrency is a digital currency, which is an alternative form of payment created using encryption algorithms. It is a virtual currency that, like cash, is a source of purchasing power. It is also an avenue for investment and can be bought with the objective of financial return.

Cryptocurrencies use cryptography, a method of disguising and revealing information, to ensure the security of user information and transactions. Cryptocurrency utilises blockchain technology, a form of distributed ledger technology (DLT), which is a digital ledger that verifies accounts, balances, and transactions. Blockchain technology is a powerful tool that can be used in a vast array of processes, not just for crypto.

Types of Cryptocurrency

There are over 2.4 million cryptocurrencies as of May 2024, according to CoinMarketCap.com. Bitcoin was one of the earliest cryptocurrencies created and remains the best known. All other coin-based cryptocurrencies are called "altcoin", or an alternative to bitcoin. Other popular cryptocurrencies include Litecoin, Ethereum, Tether, Solana, and Binance Coin.

How to Invest

To invest in cryptocurrency, you will need to choose a cryptocurrency to invest in, select a reputable cryptocurrency exchange, explore storage and digital wallet options, decide how much to invest, and stay informed to manage your investments wisely.

Risks and Considerations

Cryptocurrency is a highly volatile and unpredictable asset class. It is important to remember that anyone can launch a cryptocurrency, and how it is regulated is always changing, so it is vital to thoroughly research any potential investments to avoid scams. Cryptocurrency is also susceptible to hacking, and transactions do not come with legal protection.

Pros and Cons

The pros of investing in cryptocurrency include its decentralisation, accessibility, and diversification. Additionally, certain cryptos, such as Bitcoin, are compared to gold as they are both fungible and durable. The cons include the high volatility of the market, the susceptibility of individuals to hacking, and the lack of government regulation.

Security

To keep your cryptocurrency secure, only deal with reputable exchanges and digital wallet providers, protect access with strong passwords and two-factor verification, be vigilant about phishing scams, and never share your password or key with anyone.

How to choose a cryptocurrency to invest in

Understand the Basics

Before investing in any cryptocurrency, it is important to understand the basics of this asset class. Cryptocurrencies are digital currencies that generally operate outside the direct control of any individual company or government. They are often referred to as digital coins or tokens, and they are guarded by encryption through blockchain technology. This makes it harder for hackers to compromise the network integrity behind cryptocurrencies.

It is worth noting that cryptocurrencies are decentralised, meaning they are not issued, backed, or regulated by a central authority like a government. This also means that transactions made in cryptocurrencies are not protected by law in the same way that traditional investments are.

Do Your Research

When choosing a cryptocurrency to invest in, it is important to do your research. Reading a cryptocurrency's white paper, which is published to attract interest in the project, is a good place to start. You should also look at the roadmap for the project and research the team behind it to see if they have the skills to execute their vision.

It is also worth considering how much money has already flowed into a cryptocurrency. If the market cap is already very high, there may not be much potential for growth.

Consider the Supply and Demand

What makes a cryptocurrency increase or decrease in price is simple supply and demand. If there is increased demand and a limited supply increase, the price goes up. So, when evaluating a cryptocurrency, it is important to understand how the supply increases and what will drive demand for the coin higher.

Assess the Broader Market

It is also worth considering the broader market and how a cryptocurrency fits into it. For example, Bitcoin has a first-mover advantage that has made it widely adopted, giving it a competitive advantage.

Additionally, some cryptocurrencies offer their owners the opportunity to earn passive income through a process called staking, which can allow you to grow your crypto holdings without buying more.

Be Prepared for Volatility

Cryptocurrency is a highly volatile asset class, and prices can change rapidly. This means that you need to be prepared for wild price swings, which can take out your investments in a matter of minutes or hours.

Only Invest What You Can Afford to Lose

Finally, it is crucial to only invest money that you can afford to lose. Investing in cryptocurrency is risky, and there is no guarantee that you will make a profit.

Setting up a secure wallet

Types of Crypto Wallets

Before setting up a crypto wallet, it's important to understand the different types available:

• Hosted Wallets: These are the most popular and easy-to-set-up crypto wallets. When you buy crypto through an app or platform, your crypto is typically held in a hosted wallet. A third party, similar to a bank, maintains your crypto for you. One of the main benefits of a hosted wallet is that if you forget your password, you won't lose your crypto. However, a drawback is that they offer limited access to certain crypto features.
• Self-Custody/Non-Custodial Wallets: These wallets put you in complete control of your crypto, as they don't rely on a third party to keep your crypto safe. While the provider offers the necessary software, the responsibility of remembering and safeguarding your password falls on you. Losing or forgetting your password means losing access to your crypto.
• Hardware Wallets: Hardware wallets are physical devices, similar in size to a thumb drive, that store your private crypto keys offline. They are more complex and costly but offer enhanced security, especially if your computer is hacked.

Steps to Set Up a Secure Crypto Wallet

Now, let's go through the steps to set up a secure crypto wallet:

• Choose the Right Wallet for You: Consider your needs and preferences. If you want something simple and don't mind a third party holding your crypto, a hosted wallet may be suitable. If you prefer more control and advanced crypto activities, a self-custody wallet could be the better option. For maximum security, especially if you're worried about computer security, a hardware wallet might be ideal.
• Select a Reliable Provider: Research different wallet providers, considering their security protocols, features, and reviews. For hosted wallets, choose a platform you trust, prioritizing security, ease of use, and compliance with regulations. For self-custody wallets, popular options include Coinbase Wallet. As for hardware wallets, Ledger and Trezor are well-known brands.
• Create Your Account: If you're using a hosted wallet, you'll need to provide personal information and choose a secure password. It's recommended to enable two-factor authentication (2FA) for added security. With self-custody wallets, you typically don't need to share any personal info, not even an email address. However, it's crucial to write down and securely store your private key or seed phrase, as losing this will result in losing access to your crypto.
• Transfer Your Crypto: For hosted wallets, you can buy or transfer crypto. Most platforms allow purchases using a bank account or credit card. With self-custody wallets, it's usually not possible to buy crypto with traditional currencies, so you'll need to transfer crypto from elsewhere. For hardware wallets, you'll also need to transfer crypto, as they typically don't support traditional currency purchases.
• Install Software (For Hardware Wallets): If you're using a hardware wallet, you'll need to install the required software provided by the brand. Follow the instructions to set up your wallet, connecting the device to your computer or mobile device.

By following these steps, you can set up a secure crypto wallet that suits your needs. Remember to always prioritize security and conduct thorough research before choosing any crypto-related service.

Choosing a cryptocurrency exchange

There are hundreds of cryptocurrency exchanges to choose from, so it's important to do your research and select the right one for your needs. Here are some key factors to consider when choosing a cryptocurrency exchange:

• Security: The safety of your funds should be a top priority when choosing an exchange. Look for exchanges that have robust security protocols in place, such as two-factor authentication, encryption, and cold storage of assets. It is also essential to check the exchange's history and ensure they have not been hacked or compromised in the past.
• Reputation and Regulation: Choose an exchange with a good reputation and a physical address. Read reviews and check if there have been any issues with security or regulatory compliance in the past. Ensure the exchange complies with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
• Fees: Trading fees, withdrawal fees, and other transaction fees can quickly add up, so it's important to understand the fee structure of the exchange. Some exchanges offer volume discounts or lower fees for holding their native cryptocurrency.
• Supported Assets: Consider the range of cryptocurrencies supported by the exchange. If you are interested in trading a specific coin or altcoin, make sure the exchange offers it.
• Payment Methods: Check what payment methods the exchange accepts. Most exchanges support wire transfers, while some also allow credit card or debit card deposits.
• Customer Service: If you are new to cryptocurrency, you may need assistance at some point. Choose an exchange that offers excellent customer support and is responsive to your queries.
• User Interface: Look for an exchange with a user-friendly interface, especially if you are a beginner. Some exchanges can be overwhelming for new investors, so opt for one with a simple and intuitive platform.
• Advanced Features: If you are an experienced trader, consider an exchange that offers advanced features like margin trading, futures trading, and limit orders.
• Geographic Availability: Not all exchanges are available in every country or state. Check that the exchange is accessible in your region before signing up.

Some popular cryptocurrency exchanges include Coinbase, Kraken, Gemini, Crypto.com, and KuCoin. Each exchange has its own strengths and weaknesses, so be sure to do your research and choose one that aligns with your investment goals and risk tolerance.

Managing your investments

As a beginner, it's important to understand that cryptocurrencies are highly volatile and susceptible to dramatic price swings. This means that you could make substantial gains or incur significant losses. Therefore, it's crucial to approach crypto investing with caution and treat it as a high-risk, speculative investment. Here are some tips to help you manage your crypto investments:

• Diversify your portfolio: Investing in various cryptocurrencies can help spread out your risk. Consider investing in a range of well-established coins, such as Bitcoin and Ethereum, as well as some smaller altcoins with potential. However, always conduct thorough research before investing in any crypto project.
• Have a long-term perspective: Cryptocurrencies can experience wild price fluctuations, and it's easy to get caught up in the excitement or panic. Try to maintain a long-term perspective and avoid making impulsive decisions based on short-term price movements.
• Don't invest more than you can afford to lose: Crypto investing carries significant risks, and it's possible to lose your entire investment. Only invest what you can afford to lose, and ensure that your crypto holdings are a small part of your overall portfolio.
• Regularly review and rebalance your portfolio: Keep a close eye on your crypto investments and be prepared to make adjustments. If a particular coin is performing well, consider taking some profits. Conversely, if a coin is underperforming, you may want to cut your losses and reinvest in more promising projects.
• Consider dollar-cost averaging: Instead of investing a lump sum, consider investing smaller amounts regularly. This strategy, known as dollar-cost averaging, can help smooth out the impact of price volatility and reduce the risk of buying at the wrong time.
• Set realistic expectations: Crypto investing is a long-term game, and it's unlikely that you'll get rich quickly. Have realistic expectations and be prepared for potential losses. Remember that crypto investing should be part of a broader investment strategy that includes more traditional assets like stocks and bonds.
• Stay informed: The crypto market is highly dynamic, and it's essential to stay up-to-date with the latest news and developments. Follow reputable sources, join crypto communities, and keep track of market trends to make informed investment decisions.
• Consider tax implications: In many countries, cryptocurrencies are taxed as capital gains or property. Understand the tax regulations in your jurisdiction and plan accordingly. Consult a tax professional if needed to ensure you're complying with the relevant laws.
• Secure your crypto holdings: The safety of your crypto investments is paramount. Utilize secure wallets, enable two-factor authentication, and back up your private keys and seed phrases. Be vigilant about potential scams and phishing attempts to protect your investments.

Frequently asked questions