Cryptocurrency Investing: What You Need To Know

Cryptocurrency is a digital asset that operates on a blockchain, a peer-to-peer medium of exchange without a central authority. It is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. While it has been touted as the new new when it comes to building wealth, investing in cryptocurrency is fraught with risk and volatility. Before investing, it is important to do your research, understand the different types of cryptocurrencies and the technology behind them, and be aware of the risks involved.

Volatility and risk

Cryptocurrency is a highly volatile and speculative investment. Its value can fluctuate wildly with little notice, and it is prone to a certain level of hacking. For example, Bitcoin has experienced hacking over 40 times.

The crypto market is open 24/7 all year round, and there is no regulation, meaning its value can swing up and down every day. This makes timing your investments crucial.

Cryptocurrency is also not accepted as legal tender anywhere, except in El Salvador, which has adopted Bitcoin as a national currency alongside the US dollar.

The extreme volatility of cryptocurrencies means that, for every overnight Bitcoin millionaire, many other investors have poured money into the virtual token realm only to see their investments disappear.

As a result, it is important to only invest what you can afford to lose. It is recommended that no more than 2-5% of your liquid portfolio should be dedicated to cryptocurrencies.

Additionally, the crypto market is seen as a way to earn quick profits, with part-timers hoping to make fast gains. This recurring involvement and withdrawal contribute to the volatility of digital coins.

Finally, it is worth noting that the rules and regulations around cryptocurrency are likely to increase in the foreseeable future, which could affect prices positively or negatively.

Scams and fraud

• Be wary of social media hype: Social media platforms may promote investment strategies that promise huge returns from obscure crypto assets or make exaggerated claims about Bitcoin's price surge. Remember, if something seems too good to be true, it probably is.
• Understand the risks of direct ownership: Direct ownership and transactions with crypto assets are mostly unregulated and provide little consumer protection. The SEC Chairman, Gary Gensler, has highlighted the lack of investor protection in crypto finance, issuance, trading, and lending, likening it to the "Wild West."
• Be cautious of initial coin offerings (ICOs): While ICOs were popular in 2017, allowing companies to create and sell new cryptocurrencies, they are extremely risky. If you're considering an ICO, thoroughly read the white papers, examine the business's actual need for blockchain technology, and proceed with caution.
• Safeguard your private keys: Your private key is like a super-secure password that grants access to your cryptocurrency wallet. Keep it secure and never share it with anyone. Losing your private key could result in losing access to your crypto assets forever.
• Choose a secure crypto wallet: Your crypto assets are only as safe as the wallet you store them in. Opt for trusted, secure, and easy-to-access digital wallets from reputable providers like Coinbase, BlockFi, or Paypal.
• Stay informed: Scammers often prey on people's fear of missing out (FOMO). Educate yourself about the cryptocurrency market, perform your due diligence, and make informed investment decisions.

Investment strategies

Before investing in cryptocurrency, it is important to do your research and understand the risks involved. Cryptocurrencies are highly volatile and speculative investments, and there is no intrinsic value underlying most of them. As such, it is crucial to only invest what you can afford to lose. Here are some key considerations for investing in cryptocurrency:

• Diversification: It is important to have broad diversification in your investment portfolio before considering cryptocurrency. This helps to balance the risks associated with investing in volatile assets.
• Risk Assessment: Evaluate your personal risk appetite and investment goals. Cryptocurrencies are high-risk investments, and it is important to understand how much risk you are comfortable with.
• Research: Take the time to learn about the different currencies and blockchain technology. Understand the differences between various cryptocurrencies and their underlying technologies.
• Hot and Cold Wallets: Consider investing in both hot and cold wallets. Hot wallets are connected to the internet and are convenient for frequent trading and spending, but they are more vulnerable to hacking and theft. Cold wallets, on the other hand, are not connected to the internet and offer higher security but less convenience.
• Staking and Trading: Cryptocurrencies can be bought and held for the long term, or actively traded to capitalize on price fluctuations. Staking allows investors to earn passive income by participating in the validation of transactions on the blockchain.
• Initial Coin Offerings (ICOs): Investing in ICOs can be extremely risky, but there may be some investment opportunities. It is crucial to read white papers thoroughly and examine if the business has a genuine need for blockchain technology.
• Regulation: Keep an eye on the regulatory environment for cryptocurrencies. While some countries are adopting cryptocurrencies, others are placing restrictions or bans.
• Fees: When choosing a crypto exchange or brokerage firm, consider the transaction fees and spreads. Lower fees will help protect more of your capital for investments.
• Due Diligence: Always do your due diligence before investing in any cryptocurrency or crypto-related product. Be cautious of scams and only invest through reputable and regulated platforms.

Blockchain technology

Each node has its own copy of the chain, which gets updated as fresh blocks are added. This means that anyone can track a given transaction, as the history of the blockchain is transparent and viewable by anyone.

The Bitcoin blockchain, for example, is decentralised, meaning no single person or group has control. Instead, all users collectively retain control. Decentralised blockchains are immutable, meaning the data entered is irreversible.

The main benefits of blockchain technology are:

• Improved accuracy by removing human involvement in verification
• Cost reductions by eliminating third-party verification
• Decentralisation, which makes it harder to tamper with
• Secure, private, and efficient transactions
• Transparency
• A banking alternative and a way to secure personal information for citizens of countries with unstable or underdeveloped governments

However, there are also some drawbacks to blockchain technology:

• Significant technology costs associated with some blockchains
• Low transactions per second
• A history of use in illicit activities, such as on the dark web
• Varying regulation across jurisdictions
• Data storage limitations

Crypto wallets

Types of Crypto Wallets:

• Hot Wallets: Hot wallets are always connected to the internet, making them easily accessible. They can be in the form of user-friendly apps or software solutions. While hot wallets offer convenience, they are more susceptible to cyberattacks. Examples include online wallets, mobile wallets, and desktop wallets.
• Cold Wallets: Cold wallets, on the other hand, are offline storage solutions. They provide an extra layer of security by keeping your private keys away from an internet connection. Cold wallets can be in the form of hardware wallets, such as USB drives, or paper wallets, where keys are written on a physical medium like paper.

Choosing a Crypto Wallet:

When choosing a crypto wallet, consider factors such as security, ease of use, compatibility, and cost. Look for wallets with strong security features like two-factor authentication and support for multiple crypto assets. Additionally, consider your trading frequency and the types of crypto you want to trade. If you're an active trader, a hot wallet might be more suitable, while a cold wallet could serve as a secure long-term storage option.

Setting up a Crypto Wallet:

Setting up a crypto wallet typically involves downloading the necessary software, creating an account, and setting up security features. For hot wallets, you may need to go through a verification process. For cold wallets, you'll need to purchase the physical hardware and then install the required software before transferring your crypto assets.

Best Practices:

To protect your crypto investments, follow these best practices:

• Use a strong, unique password for your wallet.
• Enable all available security features, such as two-factor authentication.
• Stay vigilant against suspicious activity and phishing attempts.
• Consider storing larger amounts of crypto in offline hardware wallets for added security.
• Regularly back up your private keys and seed phrases to prevent loss of access.

Frequently asked questions