Investing in cryptocurrencies will diversify your portfolio and potentially lead to high appreciation, so let’s review how to get started with investing in cryptocurrency. While cryptocurrencies have been volatile since their inception, the revolutionary digital asset has rewarded long-term investors. Cryptocurrency investing can feel like a new world compared to stocks, precious metals, and real estate investments. It’s intangible, and investors can let a broker handle everything or be responsible for their storage. You may have heard about private keys, crypto wallets, and some investors losing access to their fortunes. We’ll address crypto’s potential, the risks, and how to enter this space safely.
How Cryptocurrencies Work: The Basics
Cryptocurrencies are decentralized assets that operate on the blockchain. Blockchain technology authenticates each transaction instead of relying on a central authority. The decentralized nature comes with fewer fees and more control for the coin holders. The Federal Reserve put the economy in a challenging spot by printing more money and subsequently increasing interest rates to fight inflation. Crypto investors don’t have to worry about central banks manipulating the supply of their digital money. This dynamic has led some investors to view Bitcoin as a hedge against inflation.
Can You Make Money by Investing in Cryptocurrency?
You can make a lot of money by investing in cryptocurrency. Early adopters saw Bitcoin rise from $0.0008 in 2010 to roughly $30,000. Mainstream cryptos like Bitcoin and Ethereum can still provide positive returns for investors, but investors seeking moonshot returns put their money into different cryptocurrencies. Altcoins are cryptocurrencies with smaller market caps that can significantly rally if they generate enough demand.
Some investors prefer to trade crypto to make a profit. Traders like volatility because it gives them more price fluctuations throughout the day. Bitcoin’s market price moves several percentage points on most days, giving traders ample opportunities to make a profit. This approach follows a buy low, sell high mentality. You can set stop-loss orders to limit your losses and limit orders to sell once a cryptocurrency hits a satisfactory price above your cost basis. The cost basis is the price you buy crypto. For example, if you purchased an asset at $100 and sold it at $102, you made a $2 profit on your $100 cost basis.
Risks Of Investing in Cryptocurrency
Cryptocurrencies come with many risks, just like any asset. We’ll cover some common concerns below.
Limited Regulation
The decentralized nature of cryptocurrencies makes them attractive to many investors. While decentralization has many advantages, it’s also turned crypto into the Wild West. Cryptocurrencies don’t have FDIC backing. You aren’t covered if you lose your crypto because of a hacker stealing your funds or a broker going bankrupt. Some brokers invest in insurance to provide coverage, but you’ll have to check with each broker. You’re also on your own with cryptocurrency exchanges. If someone steals your crypto, it’s gone. Scammers have more flexibility in the crypto space. You’ll have to be careful if you enter this space. You should be fine if you keep your crypto safe in your own crypto wallet or work with a reliable broker.
High Volatility
Traders love assets with high volatility, but sometimes it’s a bit much for long-term investors. Seeing your money swing from $1,000 to $1,200 and back down to $800 can take you to many emotional highs and lows. Long-term investors view dips as buying opportunities and use low prices to reduce your cost basis. Long-term investors should only invest money they will not need for several years. If you invest every dollar into assets, you may have to sell some at low prices to keep up with emergency expenses and a rising cost of living.
Irreversibility
Bitcoin transactions are irreversible. If you overpay for a meal at the restaurant with Bitcoin, you can’t cancel the order. You would have to ask the receiving party to refund your purchase in good faith. Credit cards give you more control over canceling transactions and requesting refunds. This disadvantage won’t affect most investors, but no central authority provides fewer paths to receiving a refund or getting a do-over.
Benefits of Investing in Cryptocurrency
Cryptocurrencies have their risks, but the benefits attract many investors. We have covered some of the key perks below.
Diversification
Portfolio diversification helps you capitalize on more opportunities and reduce the impact of a declining market. It’s a staple for any investor who wants to invest with peace of mind. Investing in cryptocurrencies deploys more of your money into different asset classes. You don’t have to only invest in Bitcoin and Ethereum. Some cryptocurrency investors pour their money across several altcoins, hoping at least one of them will provide incredible returns.
Huge Return Potential
The huge return potential of cryptocurrencies is no secret, especially when viewing past performance. During any crypto-mania, the media rushes to publish headlines about how some people quickly made millions from their crypto. Any asset with that potential attracts speculators and long-term investors alike. Investing a small percentage of your funds into crypto reduces downside risk while giving you incredible runway potential.
Accessibility and Liquidity
Cryptocurrencies are readily accessible, and large markets enable quick transactions. You can buy a position in your favorite cryptocurrency and exit the same day. Traders enjoy this level of liquidity because it allows them to profit from more Bitcoin price movements. Unfortunately, not all assets provide this amount of liquidity. It can take several months to liquidate real estate and find the right buyer.
User Anonymity and Transparency
Anonymity makes it more difficult for hackers to target you by identity. Financial institutions list your name under your account, making your financials more searchable. Cryptocurrencies avoid this problem by removing your name from the transaction. Even with this level of anonymity, cryptocurrencies also provide transparency due to their open-sourced nature. All transactions are public on the blockchain. You can see if a crypto whale decides to buy or sell a large swath of Bitcoin.
The lack of transparency in the stock market has led to big banks and politicians deceiving retail investors for decades. U.S. politicians have to report stock transactions within 45 days. This gap gives them enough time to take advantage of policies without giving retail investors the inside scoop as it happens. Publishing real-time transactions creates more fairness in the markets. You can’t tell who’s buying and selling crypto, but you can see each order on the blockchain.
Additional Utility
Merchants are warming up to cryptocurrencies and letting customers use them to buy goods and services. This additional utility gives cryptocurrencies staying power in the economy. Not every cryptocurrency has received this treatment. However, the proof of concept suggests more cryptocurrencies can gain this utility in the future.
How To Start Investing in Cryptocurrency
Want to enter the exciting world of crypto? We’ll share how you can start investing in cryptocurrency, also known as digital currencies.
1. Choose a Cryptocurrency Broker or Crypto Exchange
The first step to a crypto account is assessing your choices. Next, you’ll have to review several different exchanges and brokers to find the right one for you. Check their core features and other perks and bonuses they’re offering. Also, review their fees and read reviews about others’ customer experience.
2. Create Your Account
Once you select a broker or exchange, follow their prompts and create an account. You’ll have to provide some details, such as your name and email, to get started.
3. Fund Your Account
Connect a bank account and start moving money to your account. Most platforms help you create bank accounts on their app and connect them to your crypto account. Set weekly or monthly funding targets so your portfolio grows consistently. The best way to grow your portfolio is to increase how much you contribute to it each month.
4. Choose and Purchase Your Cryptocurrency
Crypto investors can choose from many cryptocurrencies, not just Bitcoin and Ethereum. So, before you start investing in cryptocurrency, understand how you can spread your funds across several altcoins to increase your crypto exposure. An altcoin has a lower market capitalization, which can lead to higher long-term returns.
5. Store, Trade, and Invest
After you’ve decided on your crypto, it’s time to put your money to work. Brokers will take care of storage for you, but you’ll have to review cold storage options if you opt for an exchange. You will learn more about crypto as you trade and invest. Each day, you’ll become a smarter investor who spots new opportunities and learns from mistakes.
