The advent of the internet has brought forth one of its most incredible breakthroughs in the form of cryptocurrency. Its arrival has reshaped business and investment and has changed the game for markets worldwide. In the past decade alone, the worth of cryptocurrency has significantly skyrocketed, and now everyone wants to get in on the action.
But before you start making any investments, you must understand how cryptocurrency works and how to invest in it. This guide will help you learn the basics to decide if investing is the right choice for you.
What is cryptocurrency?
Simply put, cryptocurrency is a type of digital money. While essentially it can gain or lose value similar to bonds and stocks, it differs from traditional money. One significant difference is that no central authority can verify transactions or track new units, so cryptocurrency is decentralized. For instance, in the United States, the Federal Reserve exists to manage interest rates and monitor the overall money supply across the country’s economy. However, no such authority oversees cryptocurrency. All transactions made using cryptocurrency are highly encrypted and backed up by blockchain technology which makes the entire system secure. Additionally, there is no physical token or bills that represent the currency. Instead, you can buy a virtual “coin” or unit from a company
that deals with digital currencies to sell, buy, or trade with other crypto-owners.
While Bitcoin is the most well-known digital money, many others already exist and are quickly becoming popular investment assets. Although several companies sell cryptocurrencies, knowing how to buy bitcoin online from a secure platform can aid you in making a wise decision.
How does cryptocurrency work?
The value of most financial assets is dependent on various market factors. For example, in the real estate business, a property will be worth more if it’s in an ideal location or has luxurious features. Similarly, the price of a stock depends on its company’s success. But when you buy a cryptocurrency, you don’t own anything tangible. So, you might be wondering how to determine its value and what it’s worth.
Cryptocurrencies are also affected by the market, although it’s different from other assets. Instead of tying its worth to corporate profits, the value of cryptocurrency depends on whether people want to buy it or not. Therefore, consumer interest is the core driving force that influences the value of crypto. This digital currency works when an individual making a transaction transfers a particular balance from one account to another using digital wallet software. Through cryptography and encryption, each transaction is made secure and gets added to a public ledger. Every cryptocurrency owner has access to this ledger, so everyone can also be its bookkeeper. Each payment you make using digital money gets linked to a unique set of keys. Therefore, the cryptocurrency you own depends on how much “money” is associated with those keys.
How to invest in cryptocurrency?
Figuring out how to purchase your first cryptocurrency may seem a little daunting and confusing. But following these five easy steps can have you start investing in no time.
1. Understand your investment
Before investing in any resource, you must first understand its asset class and how wise it is to invest in it. Cryptocurrency investments are no different, except their market is highly volatile. Experts recommend investing 5-10% of your total digital tokens instead of making massive exchanges. Since no regulatory industry oversees each transaction, you must be prepared to handle potential risks and losses.
2. Pick your cryptocurrency Some popular cryptocurrencies are Bitcoin, Dogecoin, Ethereum, and Litecoin. However, more than 18,000 digital tokens exist, making choosing one even more complicated. When investing, do your research to see
which of these currencies is performing best and pick one with greater chances of faring well into the future.
3. Understand the technology
Cryptocurrency investments are unlike any other asset class you’ve invested in before. New and emerging blockchain technology, mining techniques, accessibility, algorithms, and several other features back up their systems. Understanding each of these and how they can affect the value of crypto can help you make wise investment decisions.
4. Choose where to buy from
When it comes to other financial assets, you’d typically go to a bank or brokerage firm to invest in a particular resource. However, you can only purchase digital money from certain cryptocurrency exchange companies or other people selling their digital tokens. Although all transactions are secure and encrypted, they are anonymous and therefore offer no traceability. Pick a broker or crypto exchange company that is well-known and minimizes the risk of your investment.
5. Store the cryptocurrency
Just like you store cash or credit cards in your physical wallet, cryptocurrencies can also be kept in digital wallets. There are two types of digital wallets—hot and cold. Since a hot wallet connects via the internet, it allows you access anytime and anywhere. In contrast, a cold wallet is an offline software that can receive funds at all times but doesn’t permit transferring them out. Therefore, cold wallets are more secure. But depending on your needs and convenience, pick an option that best works for you.
The Pros and Cons of Investing in Cryptocurrency
Investing in cryptocurrency has its pros and cons. Knowing these can better help you do a risk assessment when making your investment.
- Greater accessibility and liquidity
One of the most significant reasons cryptocurrency gained sudden popularity is its wide-range accessibility and use as a versatile currency. It takes only a few minutes to transfer funds and allows worldwide transactions with little to no additional fees.
- Offers anonymity and transparency
While traditional bank security can sometimes get breached, blockchain technology keeps transactions secure and encrypted. Since there is no public tracing, your personal information can’t get leaked, increasing user privacy.
- High return potential
With more people starting to see the investment potential in cryptocurrency, investors can expect a higher return potential.
The scarcity of specific cryptocurrencies like Bitcoin makes them more valuable. But to ensure demand, these prices may vary; therefore, you can’t predict how stable the market will remain a few years from now.
- No regulations
Without a decentralized authority, cryptocurrencies don’t offer legal protection and may become susceptible to scams.
Payments made through cryptocurrency are irreversible and final. You can’t reverse the transaction if you accidentally send an amount to the wrong recipient.
Although cryptocurrency may seem like a tough market, it offers excellent opportunities for investment. If you choose to invest in it, first ensure to do thorough research, and read on potential risks and best practices before getting on the bandwagon.