Small Cryptocurrencies: Where To Invest And How To Start

Cryptocurrencies are digital currencies that can be used for online money transfers, purchases, and a few rare offline purchases. Bitcoin is the most famous cryptocurrency, but there are over 2,000 others to choose from. These include Ethereum, Litecoin, Monero, Ripple, YbCoin, Dogecoin, and Cardano, to name a few.

Cryptocurrencies are mined by large networks of computers that run 24/7, completing complex equations. As they are not backed by a major government or asset, their value is based on others' willingness to use and trade them. This makes them incredibly risky and highly volatile investments.

If you're thinking of investing in small cryptocurrencies, it's important to do your research and understand the risks involved.

Understand the risks of investing in small cryptocurrencies

Investing in small cryptocurrencies, or any cryptocurrencies, comes with significant risks that you should understand before taking the plunge. Here are some key risks to consider:

Market Volatility and Risk

Cryptocurrency prices can fluctuate dramatically and are highly volatile, even more so than the stock market. If you're not comfortable with market risks and sharp price swings, cryptocurrencies may not be the right investment for you. The crypto market can be a wild rollercoaster, and you need to be prepared for the potential of significant losses as well as gains.

Unclear Valuation and Long-Term Prospects

Unlike stocks, cryptocurrencies lack concrete financial metrics, making their valuation ambiguous. It can be challenging to predict the long-term prospects of a cryptocurrency. The lack of a financial framework for proper market analysis adds to the uncertainty. Crypto critics often compare these assets to the tulip bulb mania or the dot-com bubble, questioning the sustainability of their value.

Cybersecurity Threats and Scams

Cryptocurrency exchanges and wallets face cybersecurity threats, and scams are prevalent in the crypto space. It's crucial to choose platforms with top-notch security, such as Coinbase, Binance, and Kraken. Be cautious of unsolicited offers and "get rich quick" schemes, as crypto is not regulated or protected like traditional investments. Always do your due diligence and only invest what you can afford to lose.

Regulatory Risk

The regulatory landscape for cryptocurrencies is still evolving, and it varies across the world. Governments and regulatory bodies are working to track transactions, strip encryption protections, and implement new regulations. These changes could affect the value and costs of holding crypto assets. Additionally, unlike traditional investments, crypto trades are not protected by law, and there are no dispute processes to reverse transactions.

Limited Liquidity

Limited liquidity is a concern, especially for smaller cryptocurrencies. Investors may find it challenging to exit their positions if they invest in a cryptocurrency with low trading volume. It's important to consider the trading volume and liquidity of a crypto asset before investing.

Business Risk

Business risk can also be a factor in the performance of a cryptocurrency. If a blockchain-related company issues a cryptocurrency, that coin will inherit the internal risks of the issuer. For example, if the company faces financial issues due to poor budgeting or insufficient capital, the value of its cryptocurrency will likely be impacted.

Lost Crypto Wallet Keys

Another risk to consider is the potential loss of your crypto wallet keys or passwords. Recovering your digital assets can be difficult or even impossible if you lose access to your wallet. Computers and online platforms may not provide the same level of assistance as a human banker in traditional finance.

Research the best platforms for buying small cryptocurrencies

When researching the best platforms for buying small cryptocurrencies, there are several factors to consider. Firstly, it is important to understand the different types of platforms available, such as centralized exchanges (CEX) and decentralized exchanges (DEX). CEXes are managed by a single organization and allow users to convert fiat currency directly into crypto. On the other hand, DEXes distribute responsibility for facilitating and verifying trades among a network of users, similar to the way cryptocurrency blockchains work. Another factor to consider is the range of cryptocurrencies offered by the platform. While some platforms offer a wide variety of coins, others may only support a few specific cryptocurrencies. It is also crucial to evaluate the fees charged by the platform, including trading fees, withdrawal fees, and any additional transaction fees. Additionally, the platform's security measures, regulatory compliance, and customer service options should be considered. It is also worth noting that some platforms provide educational resources and tools for users who are new to cryptocurrency investing. When making a decision, it is important to weigh these factors based on individual needs and preferences.

Know the different types of cryptocurrencies and their unique features

There are thousands of cryptocurrencies, but they can be broadly classified into four types: Payment Cryptocurrencies, Tokens, Stablecoins, and Central Bank Digital Currencies (CBDC).

Payment Cryptocurrencies

Payment cryptocurrencies are designed to be a medium of exchange and peer-to-peer electronic cash to facilitate transactions. They have their own independent blockchain that only supports this purpose, meaning smart contracts and decentralized applications (Dapps) cannot be run on these blockchains. Examples include Bitcoin, Litecoin, Monero, Dogecoin, and Bitcoin Cash.

Tokens

Tokens are cryptographic assets that run on top of another blockchain. They are often used to grant access to or perform specific functions on a blockchain platform. For example, Binance Coin (BNB) gives holders discounted trading fees on the Binance exchange. Tokens can also be used for governance purposes, allowing holders to vote on decisions within a cryptocurrency network.

Stablecoins

Stablecoins are designed to provide a stable store of value and reduce volatility. They are pegged to the value of another asset, typically a fiat currency like the US dollar, meaning their value is expected to remain stable relative to that asset. Tether (USDT) and USD Coin (USDC) are examples of stablecoins.

Central Bank Digital Currencies (CBDC)

CBDCs are a form of cryptocurrency issued and regulated by central banks of various countries. They are still in the early stages of implementation but may become more widely adopted over time. By using blockchain technology, CBDCs can increase payment efficiency and potentially lower transaction costs. However, holders of CBDCs give up the advantages of decentralization and pseudonymity associated with other cryptocurrencies.

Learn about the blockchain technology behind cryptocurrencies

Blockchain is a distributed database or ledger shared among a computer network's nodes. It is best known for its crucial role in maintaining a secure and decentralised record of cryptocurrency transactions. However, blockchain has many other applications beyond cryptocurrencies.

A blockchain consists of programs that conduct tasks such as entering and accessing information and saving and storing it. It is distributed, meaning multiple copies are saved on many machines, and they must all match for it to be valid.

The Bitcoin blockchain, for example, collects transaction information and enters it into a 4MB file called a block. Once it is full, certain information is run through an encryption algorithm, creating a hexadecimal number called the block header hash. This hash is then entered into the following block header and encrypted with other information, creating a chain of blocks.

Each block on the blockchain contains a cryptographic hash of the previous block, a timestamp, and transaction data. Since each block contains information about the previous block, they form a chain. This means that blockchain transactions are irreversible – once recorded, the data in a block cannot be altered without changing all subsequent blocks.

Blockchain technology achieves decentralised security and trust. New blocks are always stored linearly and chronologically, and previous blocks cannot be changed without altering all subsequent blocks. Because of this distribution and the encrypted proof of work done, the information and history are irreversible.

Blockchain can be used to make data in any industry immutable. For example, in the food industry, companies can use blockchain to trace the journey of food products to ensure safety and quickly identify the source of any outbreaks. In the healthcare sector, blockchain can be used to store patients' medical records securely.

Blockchain also has applications in supply chain management, fashion, motor vehicles, domain name services, and more.

Consider the potential future applications of cryptocurrencies

The future of cryptocurrencies is a hotly debated topic. Some economic analysts predict a big change in crypto as institutional money enters the market. There is also the possibility of crypto being floated on the Nasdaq, which would add further credibility to blockchain technology and its uses as an alternative to conventional currencies.

The success of Bitcoin has inspired the creation of alternative cryptocurrencies, such as Ethereum, Litecoin, Ripple, and MintChip. Bitcoin's main benefits of decentralisation and transaction anonymity have also made it a favoured currency for illegal activities, which has attracted the attention of regulatory and government agencies.

The more popular cryptocurrencies become, the more likely they are to attract government regulation, which could deter users who value the decentralisation and anonymity that crypto offers. However, some sources suggest that the future of crypto lies in its underlying blockchain technology, which has the potential to reduce the need for trust in financial systems.

Cryptocurrencies could also play a role in the development of innovative startups focused on data transfer security technologies and fintechs. Additionally, some central banks may issue their own cryptocurrencies in the future.

Overall, the future of cryptocurrencies is uncertain, but their potential applications extend beyond their current use as speculative investments.

Frequently asked questions