Beginner's Guide To Investing In Cryptocurrency With Howtoseo

Cryptocurrency is a digital currency, such as Bitcoin, that is used as an alternative payment method or speculative investment. It gets its name from the cryptographic techniques that let people spend them securely without the need for a central government or bank. Cryptocurrency is supported by blockchain technology, which maintains a tamper-resistant record of transactions and keeps track of who owns what.

Cryptocurrency investing can take many forms, from buying cryptocurrency directly to investing in crypto funds and companies. For direct investing in crypto coins, you can buy cryptocurrency using crypto exchanges or apps or through certain broker-dealers.

If you're looking to invest in cryptocurrency, it's important to understand the significant risks that come with it. Cryptocurrencies are known for their extreme price fluctuations, and the market is extremely volatile. It's also important to note that cryptocurrencies aren't regulated like traditional investments, so there is a higher level of risk involved.

Despite the risks, cryptocurrency investing can be attractive due to its decentralized nature, lack of government control, and potential for high returns. When investing in cryptocurrency, it's crucial to do your research, understand the technology behind it, and only invest what you can afford to lose.

Understand the basics of cryptocurrency

Cryptocurrency is a digital currency that is secured by blockchain technology. It is a broad term for digital assets with transactions that are verified and records maintained by a decentralized blockchain system using cryptography, rather than by a centralized authority like a bank.

Unlike traditional money, or 'fiat', which is printed and backed by a centralized government, cryptocurrency has no physical form and exists digitally on a blockchain as tokens. Cryptocurrencies are often referred to as digital coins or tokens, and they are guarded by encryption.

You can use these "coins" to buy things online, just like you would with regular money. However, your options for merchants that accept crypto are more limited than those who accept traditional currencies.

When you conduct a crypto transaction, a group of computers using blockchain software checks if the payment is valid. If everything is in order, the transaction is processed and recorded in a digital public ledger. Miners or validators check these transactions and get paid for their work. After a transaction is checked and confirmed, the person receiving the money can access it using their secret code, often called a private key.

Cryptocurrency is decentralized, meaning it is not issued, backed, or regulated by a central authority like the U.S. government. Units of cryptocurrency, known as coins or tokens, are created digitally through a validation process that relies on blockchain technology.

There are thousands of cryptocurrencies in existence, and the number is constantly growing. The ease of creating a new currency using smart contracts means new coins can simply piggyback on an existing blockchain.

The value of cryptocurrency fluctuates and can be extremely volatile. The prices of cryptocurrencies, even the most established ones, are much more volatile than the prices of other assets like stocks. This volatility is driven by supply and demand. If there is increased demand and a limited supply increase, the price goes up. If supply becomes constrained, the price goes up, and vice versa.

Cryptocurrency is also subject to large swings in value over short periods of time, and it can be difficult to predict when these swings will occur. This volatility is partly due to the fact that anyone can launch a cryptocurrency, and how it is regulated is constantly in flux.

Cryptocurrency is considered a risky investment due to its volatile nature and limited regulation. If you are considering investing in cryptocurrency, it is important to do your research, understand the technology behind it, and only invest what you can afford to lose.

Research the market

Researching the market is a crucial step in investing in cryptocurrency. Here are some tips to help you get started:

• Understand the basics: Cryptocurrency is a digital currency that operates independently of central authorities like banks or governments. It relies on cryptography to secure transactions and prevent counterfeiting. The blockchain, a decentralised network of computers, verifies and records transactions.
• Evaluate the market: Cryptocurrency prices fluctuate due to supply and demand. Research the factors influencing supply and demand for a particular cryptocurrency. Read white papers, roadmaps, and project details to understand the investment thesis and consensus mechanism. Consider the team's skills and the community's sentiment.
• Analyse the risks: Cryptocurrency investing is risky due to its volatility and limited regulations. Prices can swing wildly, and there may be no recourse if your investment is lost due to hacking or scams. Understand your risk tolerance and ensure you don't invest more than you can afford to lose.
• Compare different cryptocurrencies: There are thousands of cryptocurrencies available, each with unique features. Compare established cryptocurrencies like Bitcoin and Ethereum with newer ones based on factors like technology, demand, transaction speed, fees, and security.
• Consider investment vehicles: You can invest in cryptocurrencies directly or indirectly. Direct investments include buying and holding coins, while indirect options include investing in cryptocurrency companies, funds, or exchange-traded funds (ETFs).
• Stay informed: The cryptocurrency market is evolving rapidly. Stay updated on new developments, regulatory changes, and tax consequences to make informed investment decisions.

Choose a broker or exchange

There are two ways to purchase Bitcoin and other cryptocurrencies: either via a broker or a cryptocurrency exchange.

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

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

When selecting an exchange, you may want to consider security, fees, trading volume, minimum investment requirements, and the types of cryptocurrency available for purchase.

Set up an account

Setting up an account is the second step to investing in cryptocurrency for beginners. 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 who you are. This process is known as Know Your Customer (KYC) protocols. You will need to enter information from your driver's license or passport, and sometimes a photo of yourself or a form of identification may be required.

The exchange will serve as a portal between the fiat world and the crypto world. Centralized exchanges help you buy cryptocurrencies in exchange for fiat money (US or Canadian dollars, British pounds, etc). Coinbase is a perfect example of this kind of exchange.

It is important to note that the process of signing up and verifying your identity can be lengthy and arduous. This is due to the various Know Your Customer (KYC) and Anti-Money Laundering (AML) laws that centralized exchanges are legally obligated to comply with.

Add funds to your account

Before you can start investing in crypto, you must ensure that funds are available in your account. You can add money to your account through various methods, including connecting it to your bank, initiating a wire transfer, or using a debit or credit card for payment. The time it takes for funds to become available in your account varies depending on the deposit method and the cryptocurrency broker or exchange chosen.

While some exchanges allow credit card deposits, these come with risks and additional costs. Credit card companies often categorise crypto purchases as cash advances, leading to higher interest rates and extra fees. Coupled with fees from both the credit card and the exchange, you could lose up to 10% of your crypto purchase.

Therefore, it is important to look for a broker or exchange that minimises your fees. Many so-called "free" brokers embed fees – called spread mark-ups – in the price you pay for your cryptocurrency.

Frequently asked questions