Although cryptocurrencies have only been around for a short time, they have grown into a vast, complex realm that may be difficult for outsiders to comprehend. But with Bitcoin and other cryptocurrencies seeing huge price changes, there is a possibility for large rewards if you are willing to accept the associated risk. Digital platforms such as Coinbase and Robinhood have greatly simplified the process of investing in popular cryptocurrencies such as Bitcoin. Nonetheless, the procedure is slightly more complicated than getting regular cash. A financial adviser can help you develop a financial strategy to achieve your cryptocurrency investing objectives.
What Exactly Is Cryptocurrency?
There are dozens of distinct cryptocurrencies accessible today, making it difficult to define them all with a single term. In general, though, a cryptocurrency is an encrypted and frequently decentralized digital money. Bitcoin, by far the first and most well-known cryptocurrency, is built on blockchain technology, a decentralized, permanent record system.
Although Bitcoin is the most popular and valuable cryptocurrency, it has inspired the development of dozens of alternatives, or altcoins. There are several types of altcoins. Some are close Bitcoin variants, such as Bitcoin Cash and Bitcoin Diamond. Others, like as Monero and ZCash, are focused on privacy. Some are named after ancient Greek deities (Apollo Currency), reptiles (Komodo), or even internet memes (Dogecoin). It is a strange and crazy world.
The majority of individuals are solely interested in owning Bitcoin or another popular money, such as Ethereum. Still, there are some speculators who seek to purchase obscure cryptocurrencies at a discount and sell them for a profit. The objective is to get wealthy quickly by investing in the next Bitcoin early.
Regardless of the currency in which you invest, volatility is a constant. Any cryptocurrency is only valuable so long as people consider it to be valuable. While this is theoretically true of all currencies, it is especially relevant to cryptocurrencies because they are not backed by a government or precious metal (such as gold). Many investors and speculators have learnt the hard way that this makes it a considerably riskier investment.
What About NFTs?
Because NFTs, an abbreviation for non-fungible tokens, have value, they are sometimes considered a form of cryptocurrency. Despite the fact that both NFTs and cryptocurrencies are digital assets that are exchanged using blockchain technology, they are not interchangeable. Non-fungible assets have no trading counterpart; each NFT is unique and has its own worth. This separates them from fungible cryptocurrencies, such as Bitcoin, whose value is identical to that of any other Bitcoin.
Tokenized NFTs can be digital communications, audio files, virtual real estate, photos, and videos, as well as real-world assets. Jack Dorsey’s first tweet and a digital art collage by artist Beeple are two of the most noteworthy non-fungible tokens that have recently sold for millions of dollars.
Steps of Crypto Investment
In the investment community, cryptocurrencies have become a hot topic. The credibility of India’s highest court and the latest Elon Musk incident have given it a much-needed boost.
Investing in Cryptocurrencies may sound gloomy, but one may begin investing by setting just a few minutes. Here is an exhaustive guide on investing in cryptocurrencies.
Step 1: Understand and allocate the investment
An investor must comprehend the asset class and the necessity for investing in that asset class before making any investment. One must recognize that the cryptocurrency market is quite volatile.
And only a tiny portion of the portfolio shall be committed to these high-risk investing options.
Experts in the field recommend that an investor invest no more than 5 to 10 percent of their assets in digital tokens. Investing in cryptocurrencies is comparable to investing in stocks, but not identical. Investors must understand that cryptocurrencies function as a means of exchange.
Numerous cryptocurrencies that arrived on the market during the previous decade have either stagnated or vanished. This implies that every investment you make might lose its whole value.
Step 2: Choose the Cryptocurrency
It is the greatest obstacle for any cryptocurrency trader. One must have heard of Bitcoin, Ethereum, Dogecoin, and a few more prominent cryptocurrencies. Surprisingly, the world of digital tokens has almost 5,300 digital tokens. It makes the decision more difficult.
The history of cryptocurrencies spans only a decade. Due to its volume and value, Bitcoin is the most traded cryptocurrency. Many investors consider it to be synonymous with cryptocurrencies. Nonetheless, numerous other cryptocurrencies have done significantly better than the most popular one.
Stage 3: Comprehend Cryptocurrency
In the same way as any other asset type, digital tokens has fundamentals. Industry experts recommend focusing on their blockchain technology, accessibility, mining process, community address, and intrinsic worth, since these are the most important factors to consider.
Step 4: Select the Platform to Purchase
Banks and financial businesses do not offer cryptocurrency purchases. These digital tokens can only be acquired through cryptocurrency-specific exchanges. Everyone who trades in the most popular cryptocurrencies, and you can anticipate to pay a charge when purchasing and selling.
One can purchase cryptocurrencies either directly from an exchange or from a peer who is selling their holdings. However, investors must be aware that trading cryptocurrencies is completely anonymous.
Step 5. Storing your Cryptocurrency
Hot or cold cryptocurrency wallets are used to store cryptocurrencies. The hot wallets are online, whereas the cold ones are not. It is a complex and unusual procedure. This wallet is a software tool meant to hold bitcoins, not a real wallet.
It contains the private and public keys that connect the user’s cryptocurrency holdings to the blockchain. They do not store the cryptocurrencies themselves, but they facilitate access to them via public and private keys on the blockchain. Both are required for a user to execute a transaction. They are referred to as “keys” since they decrypt the coins on the blockchain.
Desktop Wallets, Online Wallets, Mobile Wallets, and Hardware Wallets are examples of the various types of digital wallets. The wallet one chooses should strike a balance between security and convenience. Some exchanges provide customers with digital wallets.
Step 6: Protect your cryptocurrency wallet
Protecting your bitcoin is an essential part. It gets more significant if you are purchasing goods with cryptocurrencies or if you have a hot wallet. Therefore, while the cryptocurrency is online, one must ensure its security. Typically, VPNs (Virtual Private Networks) are preferred for securing and encrypting online transactions.
Encryption ensures that no one can view the online transactions of users. It is an additional layer of security that assures the total anonymity of user data and cryptocurrency transactions. It makes it more difficult for outsiders to break into accounts, particularly for individuals with a large amount of cryptocurrency.
Step 7: Hold and sell in order to record a profit
Cryptocurrencies are a long-term investment due to their underlying characteristics and the communities they support. Their utilization is distinct and well beyond the access we are aware of at this time. Therefore, they should not be viewed as a quick-money scam. Investors that purchase cryptocurrencies should have an investing horizon and frequently record profits.
Additionally, one should be aware that the crypto market is quite immature compared to other investing opportunities. So, fresh coins will join the market, generate excitement, and then the euphoria will subside. Therefore, investors must be careful of such swindle schemes. Record your gains promptly.
Investment Advantages of Cryptocurrency
So far, we’ve examined some of the most important factors that investors must take into account, but there are also reasons in favor of cryptocurrencies as an investment.
1. New asset category
As cryptocurrencies, such as Bitcoin and Ethereum, mature and evolve, we observe the birth of a new asset class. Undoubtedly, huge professional fund managers have created funds that invest only in Bitcoin and other cryptocurrencies.
2. Diversification
The aforementioned institutional investors seek to diversify their risks by holding investments that respond differently under identical economic conditions. Some contend that cryptocurrencies have favorable diversification effects, particularly against inflationary pressures.
In addition, new financial tools have been developed that capture the upside of certain cryptocurrencies, such as options and futures on Bitcoin and Ethereum, as well as specific investment funds that manage cryptocurrencies on behalf of investors.
3. Upside potential
Last but not least, the sector is very young, and as such, there may be future developments that make cryptocurrency investments even more lucrative. Stablecoins, which are cryptocurrencies tied to the value of a fiat currency, and assets used to support the digital currency are examples.
Crypto ETFs Until recently, crypto or Bitcoin exchange-traded funds (ETFs) were unavailable to would-be crypto investors who are intimidated by exchanges or buying and holding actual coins.
After tremendous anticipation, the first Bitcoin-related financial product, the BITCO Bitcoin ETF, was introduced in October. Numerous organizations, including the cryptocurrency exchange Gemini and the venerable investing institution Fidelity, have sought to provide Bitcoin ETFs. All other U.S. plans, however, have either been rejected or remain under examination by the Securities and Exchange Commission.
BITO is tied to Bitcoin, although it is not a fund that owns Bitcoin directly; rather, it holds Bitcoin-futures contracts. While BITO is a significant step in integrating bitcoin to traditional U.S. investing portfolios, many fans desire an ETF that directly owns cryptocurrencies.
Private trusts that store cryptocurrencies, such as Grayscale Bitcoin Trust and Osprey Bitcoin Trust, are the only comparable investment option available to U.S. investors today. These funds permit accredited investors to purchase shares directly at market value, although anybody can purchase secondary market shares through a brokerage account with a regular business, such as Fidelity. Keep in mind that there are management costs connected with the trusts (2% for Grayscale and 0.49% for Osprey), which can make this way of Bitcoin investment more expensive than a commission-free blockchain ETF or purchasing cryptocurrency directly from an exchange.
Bottom Line
You may expose your portfolio to cryptocurrencies without actually acquiring coins, but you should approach with caution and do the same due diligence you would with any other risky investment.
There is no assurance that any of these stocks or specialty ETFs will rise, and they may face greater volatility akin to that of crypto markets. As with any cryptocurrency investment, you must be ready to accept the inherent risks. If you cannot, it is usually best to stick to mutual funds or index funds.