How To Invest In Cryptocurrencies?
We’ve all heard the insane amount of buzz going on about ‘Bitcoin’ and ‘Blockchain’. Supposedly this new technology that will usher in a new age of decentralized currency, freeing us all from the tyranny of banking control.
Of course, some of us heard the buzz and figured it was just that – buzz. It wasn’t until we started hearing about the skyrocketing values of bitcoin and the huge amount of imitators hitting the market that we realized we missed a golden opportunity.
Now you want in on this new information. You’ve googled around a bit and it all seems so confusing, so where do we start when we want to find out how to capitalize on new technology like this?
What is Crypto Currency?
Cryptocurrency is a sort of digital currency which employs cryptography to track and verify transactions.
The encryption also secures creation of new units. This means that every aspect of the currency’s management is handled by a heavy cryptography which is verified through distributed consensus (more on that in a moment), and thus require no centralized bank or authoritative entity to manage or evaluate them.
These currencies employ a system known as a blockchain. The blockchain is a series of encrypted ‘blocks’, or transaction records, which contain encrypted information linking that block to the previous block in the chain.
Every new transaction creates new blocks in the chain, allowing the currency to be traceable back to its origin without the cooperation of a financial authority or bank.
So this all sounds really cool, so how does it work?
Basics of Crypto Currencies
The most basic component of this system is cryptography itself. Cryptography is the art of encoding information using a mathematical process which is difficult to decipher without proper knowledge.
Cryptography allows for information to be recorded in a secure manner, that outside entities may find difficult to steal. The idea is that even if they sat there with a super computer trying every possible option, it would still take too much effort to be profitable or efficient.
The other central concept of a blockchain is decentralization. The financial records held within a blockchain are distributed across vast networks of duplicate information. Since the financial records exist in many areas at the same time, they cannot be altered by a single entity, such as a bank, or a malicious hacker.
Both of these principles make up the backbone of blockchain; a robust, decentralized system of recording and verifying encrypted financial records for the purpose of creating a digital medium of exchange.
Applying cryptography to digital financial transactions allows blockchain to exist. Blocks in a chain contain a hash (a kind of small map of larger data) of the previous block in the chain. This allows each transaction to be tied to the one before it, all the way back to the original (or ‘genesis’) block.
Blockchain transactions are exceptionally cheap to audit, and become more secure the larger the network becomes. After all, the more people are using your blockchain system, the more redundant financial records are required for consensus.
Once the kinks in the system were ironed out a bit, people started really seeing the value of this new technology. This is amazing! This could replace money!
But there are still a lot of gray areas with cryptocurrencies and blockchain. Many people still refer to the technology as a fad, and the volatility of certain brands of coin is very well known in the industry.
So we’ve got a handle on the basics, let’s take a look at the brands.
Yes, Brands. The explosion of ‘Bitcoin’ caused a wave of imitations, each with their own branding and marketing twists on the technology. Some brands, such as Dogecoin or Ethereum, are well-known and followed by droves of currency speculators.
There are also smaller brands just starting out, or others that want to specialize in private business transactions and so-forth. Zcash, Litecoin, Execoin, there are so many popping up with so much news happening that the prices are almost impossible to track!
So how do we start investing in such an intimidating prospect?
Well as always, the first step is to inform yourself. Once you’re comfortable with the conceptual basics and the lingo behind cryptocurrencies, you’ll be ready to start evaluating the different crypto brands to see which one might be right for you!
Start by looking at news. Which brand is valued the highest? Which brand has the most search-engine interest? Are there any lawsuits or controversies going on with any brands? Banks and governments sometimes show interest in crypto, which can make the prices of certain brands skyrocket.
The value of the cryptocurrency you choose to invest in is going to be the central factor in your decision. Remember that all the typical investment logic applies. Buy low, sell high. Stay informed on the different factors which affect the value of your investment, and invest accordingly.
We’ll talk more about the market values and how they are affected in a moment. First, we should look a little bit at the methodology behind buying and trading cryptocurrencies.
Buying, Selling and Exchanging
Before we get too far into how to evaluate your crypto investment, let’s take a look at how most of these transactions take place.
Bitcoin, Dogecoin, and all major cryptocurrency brands are exchanged on digital marketplaces. There are dozens of proprietary software marketplaces provided by a myriad of third-party companies.
All of these exchanges have their advantages and disadvantages. Some only take certain payment types, others only offer certain brands of coin. It’s just a matter of researching the different exchanges and how their capabilities are suited to your needs.
Typically, though, you will want to use the exchange with the highest traffic that offers the widest variety of service and brand support. At time of writing, the Coinbull exchange is currently rated the best by traders. They offer a wide range of coins and support payment by credit-card.
Here’s a list of alternative exchanges you could look into:
- Offers Bitcoin and Ethereum.
- Offers Bitcoin and Ethereum.
- Offers Bitcoin, Bitcoin Cash, Dash, Ethereum, Ethereum Classic, IOATA, and NEM
- Offers Bitcoin, and Bitcoin Cash.
- Offers Bitcoin, Bitcoin Cash, Ethereum, IOATA, and Litecoin.
As you have probably noticed, the list of possible exchanges is basically endless. Do your research and find the one that is right for you. It’s always a good idea to stay up to date on the different markets as well, since there could be some news which affects the price of your invested currency!
Now that we know where to go for our investments, let’s take a closer look at evaluating the market values.
Evaluating your Investment
So now you have a pretty good idea of what cryptocurrencies are, how they affect the economic landscape, and the basics of how they are traded. Utilizing this information for practical market evaluation is the next step, but how do we go about doing that?
The simplest place to start is to keep the basic principles behind investment. Buy low, sell high. Research the different companies and see if there’s any news that might affect the value of their coins.
Stay up to date on crypto news, different coins or exchanges being outlawed or hacked contribute quite a bit to the volatility of the cryptocurrency market.
There’s a handy website called Coinmarketcap.com which lists all the crypto exchanges sorted by trade volume. You can sort by different periods of time to ensure you’re looking at the most pertinent data.
Using resources like this will ensure you’re always up to date on information pertinent to your investments. Remember that cryptocurrencies are a highly volatile market, so investment can be risky.
When you’re getting started you mostly want to minimize risk, so what are a few ways we can do this with cryptocurrencies?
- Buying Bitcoin can be a very good idea. Compared to ‘altcoin’ brands, Bitcoin is the dominant currency on the crypto market.
- Diversifying your portfolio will ensure that you aren’t bankrupted if a single currency crashes. Making sure you don’t have all your eggs in one basket is an essential step to making sure your portfolio can survive a hit.
- Thoroughly researching your options is the best way to minimize losses. Certain coins have different features which make them suited to different types of exchanges, and making sure you know what options you and other investors have will make sure you stay on top of the market.
When considering coins other than bitcoin, there are a few rules of thumb that will keep you on track and ensure that you aren’t wandering into a lion’s den unprepared.
First of all, good altcoins have a transparent vision. If a company’s mission statement is convoluted and confusing, its likely that they don’t have a concrete vision in mind for their currency. This means that their currency will probably not progress and grow as much as one by a company that is transparent and enthusiastic about their message.
Because crypto is such a huge topic of interest, and the technology is so new and exciting, mane cryptocurrencies have thriving communities focused on their investment and development. If a cryptocurrency has a healthy community contributing to the software, marketing, and philosophy, it’s a sign that its a good investment.
By contrast, bad cryptocurrencies will have very little documentation or community activity. Some might even have bad press, which is a sure-fire red flag. Remember that this is a volatile niche, so keeping your wits about you is going to be your greatest asset going forward.
Some of the worst offenders for bad coins are the ones where companies set up a multi-level-marketing scheme to swindle their investors. These will promise things like ‘becoming the next Bitcoin’, without explaining exactly how they intend to do that. Reading up on how blockchain can be used in predatory plans like this can help mitigate the risk of being taken for a ride.
These kinds of schemes target those of us who are less tech-savvy, and so more likely to fall for scams like this. The best defense against the worst of coins is, again, to stay informed. Always read what others are saying about a coin before investing.
For actually buying coins, I mentioned earlier the different exchanges online which offer coins other than bitcoin. Just like with the coins themselves, the exchanges have different advantages and disadvantages. Always do your own research.
Different markets target different areas of the world, and thus offer variant prices and features. Finding the one which is right for you is essential to evaluating your crypto investment potential.
For buying Bitcoin specifically, here are some good options based on region. It’s always good to make sure you’re buying from an exchange based in your own region due to foreign currency exchange rates and laws:
Once you’ve found the right coins for your portfolio as well as the right markets in which to acquire them, you can start examining the trading data to see what your investment strategy should look like.
Strategies for Investment in Cryptocurrencies
As with all speculative currency trading, you make money in cryptocurrencies when you sell them at a higher price than you bought them. For crypto, this can be tricky, since the markets are quite a bit more volatile than any other investment type.
There are a few basic strategies which can be applied easily to crypto investment, though, so let’s take a look at some techniques we should be trying to understand and employ in our investment strategies.
- Trading with a margin, short-term. This is when you flip your currencies over a short period of time for a quick profit. If you keep up on the news, you should be able to predict up or down-swings in different coin values. This can be good to get some quick capital out of your investment, but remember that the volatility of the market makes this rather difficult to predict.
- Long-term holding. If you think that a coin is likely to appreciate in value over time, with minimal risk of it dropping, it might be a good idea to make a long-term investment strategy for the coin in which you’re investing. If you choose to go this route, be aware that it can take significantly more research and attention to make sure you aren’t shooting yourself in the foot.
- Mining coins. For those of us who simply want something predictable, a good option is mining your own coins. This involves setting up a mining rig and investing the electricity to run it. This is only an option for coins with the Proof of Work It’s a little bit labor-intensive at first, but becomes a good way to passively generate income once set up.
- Like mining, staking involves setting up a rig and investing the energy, but it works with Proof of Stake coins. In general, it’s less involved than mining coins.
- As in all speculative currency trading, it is possible to buy coins from one market and sell them to another for a profit. This takes a significant amount of research and attention paid to the different markets and what they offer, but can be very profitable. Just remember to factor in fees and foreign currency exchange rates when making your judgments.
There are other aspects of investment strategy which will come in handy later on as well. It’s a good idea to pick up some basic economics if you haven’t already. This will allow you to do things like interpret trade ‘envelopes’ and other skills indispensable to investment strategy.
If you have an interest in cryptocurrencies, there’s a possibility that you already have a background in economics and investment. If this is true you’re probably already thinking of different investment strategies and how they might apply to cryptocurrencies.
But since we know that so many young investors are showing interest in this technology, we know that a lot of the people reading this will be beginners as well. It’s important to keep yourself in a well-informed mindset.
It’s easy (especially for young investors like me) to get overzealous over the pretty graphs we see associated with Bitcoin gains. It cannot be overstated that just like with any investment, the key is research, and careful planning. Educating yourself in economics and investment basics is going to be key to skipping a lot of the trial and error you may suffer starting out.
And take it slow. Remember, this is a volatile speculative investment. Losing $500 dollars feels like a learning experience. Losing $5000 feels like a reason to call it quits. There’s no reason you can’t expand your investments later once you’ve taken your knocks with safer wagers.
The Future of Cryptocurrencies
We’ve spent a lot of time now discussing how we want to invest in this exciting new technology. The only problem is that all of our strategies involve speculating for the long term. So, how does the future look for cryptocurrencies?
Some speculation is definitely positive, with Forbes reporting in August of 2018 that a high percentage of US students are invested in bitcoin compared to the national average. Apparently, around 18% of US students reported owning or having owned cryptocurrency.
This could mean that there’s about to be an upswing in the crypto market as these students start getting into the investment world as they mature and accrue investment capital.
This was paralleled back in the 1980’s with the emergence of the internet. It was clear to researchers early on that a high percentage of student interest in computers would translate into a much healthier market for the internet once those students reached maturity.
That being said, Coinbase’s chief executive still claims that ‘commercial bitcoin adoption for payments could take quite some time’.
So it’s really not so much a question of if cryptocurrencies will be the next big thing. It’s actually more likely to be a function of when and which cryptocurrency will emerge as the predominant breakout currency.
As always, staying informed in these areas will help make sure you aren’t blindsided by sudden downturns. That being said, I think we have every reason to believe that cryptocurrencies aren’t going anywhere!
There are a myriad of uses that crypto could use to expand well into the future. Although it’s a volatile speculative industry at the moment, there are a number of exciting prospects made possible by the blockchain technology.
Remember that blockchain allows for distributed cryptographic verification. Decentralizing areas such as identification and even tax administration can have a multitude of advantages. Here are some industries that have promising prospects for crypto technology:
- Intellectual property distribution such as with music, books, and movies suffers greatly at the moment from excessive piracy. The emergence of internet downloads and streaming services have kneecapped the traditional business models of these industries. Blockchain can be used to link a song, book, or movie directly to the purchaser, re-establishing concrete intellectual property enforcement.
- Identity Theft Protection. Identity theft is a devastating misfortune which is befalling a growing number of people every year. Relying on secret numbers and specially marked cards to secure our identities is an aging science, but blockchain would allow for the same distributed verification used to verify bitcoins to verify personal identification. This would potentially help replace centralized identification records that can be hacked or destroyed easily.
- Electoral Fraud Protection. The robust and reliable nature of blockchain verification has exciting implications for the world of politics and elective administration, as well. Ethical applications such as preventing electoral fraud using blockchain are a widely varied avenue for expansion. Companies such as Democracy Earth are working on apps which seek to combine the voting process with the decentralized verification power of blockchain.
These are just a few examples of ways in which crypto is expanding to meet the needs of our current market. By now, you’re probably fairly acquainted with the advantages of blockchain verification, and so you’re probably excited to start your foray into this new frontier.
That being said, there are a variety of pitfalls associated with cryptocurrency investment. As a beginner, you’re going to want to make sure you’re as informed as possible about these possibilities.
Words of Warning
We’ve talked a little bit about how volatile cryptocurrency values can be. Markets and coins can be ruled illegal in different areas, or certain types of coins could turn out to be a scam. Since the industry is so fast-paced and expanding so quickly, it’s easy to get caught up in speculation and find yourself bogged-down by bad investments, or worse.
Outside of the regular risk-reduction strategies we’ve employed while evaluating and investing, there are plenty of things we can be on the lookout for which will hopefully give us a heads-up on whether or not an investment is going to end up hurting us.
The first thing we can do is be aware of the different volatility factors which might seem less obvious to some readers. What makes the currency so volatile?
- Investor Reactivity. Everybody invested in or developing these currencies probably keeps careful tabs on whats going on in the industry, as well as the socioeconomic climate of the world in general. Whenever something bad happens, you can expect every tom, dick, and harry to dump their coins in knee-jerk fashion. This kind of reactivity on your part will keep you from falling prey to sudden changes in value if engaged properly, but it is one of the main contributors to the volatility of the currency.
- Legal Provisions. If bitcoin, or altcoins, or certain types of blockchain software become illegal, it will cause extreme fluctuations in the market value of the coins. One coin becoming outlawed could cause another to skyrocket in price, or many new clones to sprout up to imitate it. Keeping your basic economic principles in mind helps with this.
- Backing by financial institutions. Because the technology and its potential applications are so varied and exciting, some financial institutions have shown an interest in cryptocurrency investment, or even developing their own coins! While this is exciting from a future expansion standpoint, being backed by a bank or other institution will cause huge ripples in the crypto market. They could even politicize the way that crypto development progresses in their country!
All of these are major factors in what makes the prices of these coins jump around all the time. Understanding these relationships and how they are connected to the possible applications of blockchain technology will give you a definitive leg-up in the awareness department compared to your fellow investors.
Still, there are a few more specific examples of bad bitcoin investment that we can take a look at now to illustrate the kind of specific pitfalls you can expect to encounter. Most of these horror stories can be mitigated with proper investment strategy and risk calculation:
- Computer glitches can make little errors into devastating financial disasters. If your software bugs out and you accidentally buy a thousand coins just before their value tanks, you won’t have anybody to blame but yourself. Glitches in crypto development and software can make certain markets defective compared to others, as well.
- Deliberate malicious activity is the famous example of Bitcoin’s fallibility. Even though the decentralized verification system is difficult to hack, people have still been able to figure out how to screw over entire investment bases by hacking the coins they bought. Always verifying the trustworthiness of your coin and marketplace is the essential step to curbing this contingency.
- Dropping all your coins right before the value skyrockets is another classic crypto horror story. While this won’t really bankrupt you, it can be a major hit to your morale if you miss out on a huge gain. Worse yet is that many of these currencies have been shown to spike in value more than once, and buying back in after you’ve dumped your investment can become more difficult as time goes on.
- Losing your key is another famous example of a Bitcoin horror story. The popular example is when IT worker James Howells lost 7,500 bitcoins (worth 127 million at the time) when he disposed of an old hard disk which contained his private key. Since the city wouldn’t allow a search to be conducted, the story became an effective warning to all who would invest in Bitcoin.
These are just a few examples, but they illustrate the kind of hidden horrors you might encounter when proceeding along your investment adventure. These situations aren’t all that scary if you keep your wits about you and always find as much information as possible before making any decisions.
So now that we’ve gotten the horror stories and warnings out of the way, you’re probably finally ready to start researching and getting invested in some crypto. Just before you do, though, I think there are a few terms and ideas which I may have mentioned or touched on here which may be useful to you going forward.
I’ve mentioned a large number of buzzwords and economic concepts throughout this article, and its possible you aren’t acquainted with all of them. Other concepts, as well, are relevant to what you’ve learned here today but didn’t have enough relevance to be included properly in the article.
Obviously since blockchain technology is expanding so quickly and spiritedly,
I’ve made a little list with summaries of different ideas you could expand upon by reading a bit further on your own:
- Any of the major coins I mentioned are worth reading about, because they all have their own unique advantages and disadvantages associated with them. Any new coins that are developed or receive major attention, as well, may be worth looking into in more detail.
- The functions of money and other basic economics concepts are indispensable. If you haven’t already, look up the very basics of what makes economics and investment function. Even if you feel your expertise has progressed beyond this point, a refresher can never hurt. You be the judge.
- Mining rigs and other hardware focused on blockchain. Reading about the different types of devices and setups you need to mine bitcoin will get you acquainted with the more technical aspects of how cryptocurrencies function. Even if you don’t plan on mining bitcoin yourself educating yourself on the process, its advantages, and its improvements, will provide you with essential information to truly understand your investment potential.
- Order books and other illustrations of fluctuating market value are essential to evaluating your investment. Make sure you’re literate in the world of cryptocurrencies and investment in general. If you see graphs or terms that confuse you while you’re doing research, look into them, ask questions. Remember that understanding your investment is more important than anything else.
- Stop losses and other investment risk-mitigation techniques will help you make sure you don’t lose control of your investments. Look up different lists of investment terminology and make sure you understand the tools at your disposal before continuing.
- Investment Evaluation Techniques. There are a lot of techniques for evaluating investment which I didn’t mention earlier. Average annual return, average payback method, and average percentage return are examples of static evaluation but there are also a number of dynamic evaluation methods as well. There are a lot of different ways you can demonstrate or investigate the viability of an investment. Acquainting yourself with some of the more common ones, as well as expanding your knowledge once you’re comfortable will make it much easier to know where you’re going.
Once you’ve gotten comfortable with all this information, it will become easier and easier to get started investing in cryptocurrencies. You will find that something which seemed so obscure and strange at the beginning now seems not only possible, but attractive!
There’s a lot of information to absorb, and you don’t need to do it all at once. Remember that getting yourself bogged down with information can distract you, and losing money after doing all that reading can be very frustrating.
A good strategy for not getting frustrated with studying all this is to engage with other people in the crypto community. Remember that all the best cryptocurrencies have thriving communities who have a lot to say about the development and viability of their coins.
General communities as well such as on Reddit can be great places to find information in a helpful way that feels less like sitting in a classroom studying. People on here have a lot of great information organized into a very user-friendly interface of links. Investopedia is a good website as well, although it is not limited to cryptocurrency.
There are even conventions and investment summits focused around bringing crypto investors and developers together to develop the industry!
Remember that using these resources can be helpful and comfortable, but extra care must be taken to verify the trustworthiness of the sources. Make sure the sites they link to are reliable, read what other users are saying, make sure the articles you read are being written by professionals, &c.
It’s very easy to become lazy with this information, or to find a comfortable kind of niche within your investment strategy that allows you to stagnate. Remember that the volatility of crypto makes it difficult to profit investing over long periods. Staying on top of the process of keeping yourself informed is the only way you will keep your investment viable.
It may be helpful to make a kind of outline of how you want to progress. For this purpose, I’ve put together a short, plain English list of major points which I’ve gone over in this article. If you feel lost after reading all that, or if it all seems like a kind of blur to you now, this is a good time to go over it all in your head.
So we’ve gone over the basics of crypto and blockchain, we’ve covered the different brands and how to choose between them, and we’ve given ourselves some tools to help evaluate our eventual investment.
We’ve learned about the exchanges that offer the coins, as well as different strategies for using them for investment; taking special care to stay informed on crypto information, legality, and possible volatility.
We took a look at the future of bitcoin and how we can think about our investments as the technology itself grows. And finally we took a look at some of the ways in which the investment can go wrong and how we can mitigate the risk we take on.
So now you’ve got a well-rounded crash course under your belt for cryptocurrency investment. You’ll be much better prepared going forward into this world if you keep in mind the fact that you’re a beginner. Don’t get ahead of yourself. It’s very common to feel like you understand the finer points of something when you’ve actually got some fairly persistent misconceptions.
Especially if you don’t have a background in IT, it will be hard to wrap your head around some of the more technical aspects of the technology. Even still, it’s important to not get discouraged. Keep in mind that the only way this scary new frontier can actually hurt you is if you make a really dumb investment without knowing the risks and being able to mitigate them.
As long as you take it slow and keep your wits about you, you’re sure to get quite a bit out of this investment. Play your cards right, and stay informed.Updated on: October 30, 2018