Crypto Investing: A Beginner's Guide To Getting Started

Investing in cryptocurrencies is a risky business, but it can also be rewarding. If you're thinking of investing in crypto, it's important to do your research and understand the basics. Cryptocurrencies are digital currencies that are secured by cryptography, making it nearly impossible to counterfeit or double-spend. Bitcoin is the most widely used cryptocurrency, but there are thousands of others to choose from. When investing in crypto, it's crucial to consider your risk tolerance, do your due diligence, and only invest what you can afford to lose. It's also important to be aware of the fees and spreads associated with different crypto exchanges and wallets. Finally, remember that the crypto market is highly volatile, and prices can fluctuate wildly.

Understand the risks and volatility

Before investing in cryptocurrency, it is important to understand the risks and volatility associated with this type of investment. Cryptocurrencies are highly speculative and volatile, and there is no intrinsic value underlying most of them. This means that the value of your investment can fluctuate drastically, and you may lose a significant portion of your investment or even your entire investment.

When investing in cryptocurrency, it is crucial to only invest what you can afford to lose. This is not a traditional investment like stocks or bonds, which typically have more stable returns. Cryptocurrencies are subject to sharp price plunges and high volatility, as seen with Bitcoin's 57% drop from its all-time high. Therefore, it is recommended to invest no more than 2% to 5% of your liquid portfolio in cryptocurrencies, ensuring that you have a diverse range of investments to minimise risk.

Another risk to consider is the lack of consumer protection and regulations in the crypto space. Direct ownership and transactions of crypto assets are mostly unregulated, leaving investors vulnerable to fraud, scams and abuse. Additionally, the rules for reporting and paying taxes on crypto assets are still being developed, adding complexity to the investment process.

The crypto market is also heavily influenced by news and events, such as regulatory changes and crackdowns, which can affect prices in unpredictable ways. For example, the cryptocurrency exchange FTX faced liquidity issues in 2022, causing a market-wide crash and highlighting the fragile nature of the industry.

Lastly, it is important to remember that cryptocurrencies are still in their early stages of adoption. While they have gained mainstream attention and produced impressive returns for some investors, they may not fulfil their original mission as units of exchange anytime soon. Most businesses still do not accept crypto as a payment method, and investors are more inclined to hold onto their crypto assets due to their high returns compared to traditional investments.

In summary, investing in cryptocurrency comes with significant risks and volatility. It is crucial to understand these risks before investing, only investing what you can afford to lose, diversifying your portfolio, and staying informed about regulatory changes and market events that can impact your investment.

Research blockchain technology

Blockchain technology is a decentralized ledger of all transactions across a peer-to-peer network. It enables the existence of cryptocurrency. Using this technology, participants can confirm transactions without needing a central clearing authority.

Blockchain technology has many potential applications, including:

• Enterprise blockchain applications
• Sustainability
• Tokenization
• Fund transfers
• Supply chain tracking

It's important to understand blockchain technology and its potential applications if you want to learn about crypto investing. Blockchain is the underlying technology that makes cryptocurrencies like Bitcoin possible.

• Read books about blockchain: Books can offer an in-depth understanding of blockchain technology and its applications. Some popular books on the subject include "Cryptoassets," "Blockchain Revolution," "The Book of Satoshi," "The Basics of Bitcoins and Blockchains," and "The Blockchain Developer."
• Online resources: There are many online resources, such as articles, videos, and tutorials, that can help you understand blockchain technology. Websites like Investopedia and NerdWallet offer a wealth of information about blockchain.
• White papers: White papers are documents published by cryptocurrency projects that outline the specifics of the project, including its goals, technology, and roadmap. Reading white papers can give you a deeper understanding of the blockchain technology underlying a particular cryptocurrency.
• Online communities: Joining online communities of cryptocurrency investors and enthusiasts, such as subreddits, can be a great way to learn about blockchain technology. You can discuss and learn from others in the community.
• Crypto exchanges: Crypto exchanges, such as Coinbase or Binance, often provide educational resources and tutorials about blockchain technology and cryptocurrencies.
• Courses and tutorials: There are also many online courses and tutorials available that can teach you about blockchain technology and its applications. These can be a great way to get a structured education on the subject.

By researching blockchain technology, you can gain a deeper understanding of cryptocurrencies and their potential applications. This knowledge can help you make more informed decisions when investing in crypto.

Learn about hot and cold wallets

When learning about crypto investing, it's crucial to understand the difference between hot and cold wallets, which are the primary means of storing and exchanging cryptocurrencies and tokens.

Hot wallets are always connected to the internet, allowing for easy access and transactions. They are software-based and can be installed on devices like smartphones or laptops. Examples of hot wallets include MetaMask, Coinbase Wallet, and Edge Wallet. While they are convenient, they are more vulnerable to hacking and theft. It's recommended to only keep small amounts of cryptocurrency in hot wallets.

On the other hand, cold wallets are offline and provide a higher level of security. They are often physical devices, such as USB sticks or thumb drives, that store your private keys offline. Examples of cold wallets include Ledger and Trezor. While they offer better security, cold wallets are less convenient for regular transactions as they require additional steps to connect to an online device.

The choice between a hot or cold wallet depends on individual needs. If you frequently transact with cryptocurrencies, a hot wallet may be more suitable due to its convenience. However, if you prioritise security and long-term storage, a cold wallet is the better option. Many people use a combination of both, enjoying the convenience of a hot wallet while benefiting from the security of a cold wallet.

Read crypto white papers

Reading crypto white papers is an essential step in learning about crypto investing. A white paper is a document produced by the developers of a cryptocurrency project that outlines the specifics of the project, including its purpose, timeframe, and technical details. It is important to read and understand the white paper before investing in any cryptocurrency.

When reading a crypto white paper, there are several key things to look for. Firstly, it should be easily accessible. If you cannot easily find the white paper, that could be a red flag. Secondly, the white paper should be detailed and include specific data and technical information about the project. A lack of specifics may indicate fundamental issues with the project. It is also important to look for updates to the white paper, especially regarding the development roadmap. Be wary of projects that frequently miss their deadlines with minimal progress.

By reading the white paper, you can gain a deeper understanding of the cryptocurrency project and assess whether it is a worthwhile investment. It is important to remember that crypto investing is highly speculative and volatile, and there are limited consumer protections in this space. Therefore, doing your own research and due diligence is crucial before investing in any cryptocurrency.

In addition to reading white papers, it is also essential to consider your risk tolerance, perform test transactions, and understand the technology behind cryptocurrencies, such as blockchain. Diversifying your crypto portfolio by investing in multiple cryptocurrencies can also help mitigate some of the risks associated with this volatile asset class.

Perform test transactions

Performing test transactions is a crucial step when you start investing in cryptocurrencies and moving your money around networks. This is because, unlike banks, if you accidentally send money to the wrong place, it may be impossible to recover and you could lose your money forever. Therefore, test transactions are an essential safety net to ensure your transfers are successful.

Test transactions involve sending a small amount of cryptocurrency, such as $1.00, to a test address. This simulates a real transaction without actually sending any funds to another party. This process allows you to test the sending and receiving mechanisms, confirm that your wallet is functioning correctly, and ensure that you have the correct address for the recipient. Once the test transaction has been successfully performed, you can use the same transaction information for larger exchanges, confident in the knowledge that your money will go to the right place.

Test transactions are particularly important in the context of cryptocurrencies due to the volatile nature and unpredictability of digital currencies. Analysts caution investors about the risks of investing in cryptocurrencies, so it is important to do your research and take steps to mitigate these risks where possible. Performing test transactions is one such way to reduce the risk of losing your money through a simple error.

While test transactions may result in higher fees, they are worth considering as an insurance policy against larger errors. Once you have performed a successful test transaction, you can be more confident in sending larger amounts, knowing that your money will reach its intended destination.

Frequently asked questions