How to Invest in Cryptocurrencies: A Beginner's Guide
Over the past few years, electronic currencies have become the subject of intense discussion. How many times have we heard the stories of people who became millionaires overnight, and at the same time the stories of people who lost hundreds of thousands of rubles in the hope of making money quickly?
So, if you want to invest safely in crypto, then this guide is for you. The purpose of this guide is to educate investors as much as possible and reduce speculation in the market.
How to invest in cryptocurrencies
The fact that you are reading this guide shows us that you are interested in investing in cryptocurrencies. These immutable and exchangeable cryptographic tokens promise to be hard and unmanipulable money for the world. Their supporters see a future in which Bitcoin or other virtual coins will replace the ruble, euro, dollar, etc. and create the first free and hard world currency.
There are three main good reasons to invest in cryptocurrencies.
First, because you want to insure your net worth against the fall of the dollar empire, which many people think will inevitably happen. Secondly, because you support the social vision of cryptocurrency - the idea of free and hard money for the whole world. Third, because you understand and love the technology behind it.
However, there are also very bad reasons to invest in e-currencies. Many people fall prey to the hype around every cryptocurrency bubble. There is always someone, captured by the fear of missing out, buying in bulk at the peak of the bubble, just hoping to make a quick buck without understanding cryptocurrencies at all. This is a bad reason. Do not do that. Learn before you invest.
Early-stage investors in Bitcoin and Ethereum made millions of dollars in net profits. If you see the following graph, you will understand exactly what we mean.
In a year from December 2016 to December 2017, Bitcoin went from $750 to an amazing $10,000! This means that anyone who invested $10,000 in December 2016 will receive a staggering $133,333 in exactly 365 days. In fact, the total market capitalization of the cryptocurrency reached $500 billion by the end of 2017.
Stories like these have flooded the internet, with more and more people joining crypto to get a piece of that crypto pie. However, as more and more speculators flooded the market, this was inevitable.
The market fell a lot.
Due to the fall of Bitcoin, all other currencies fell and many people lost their savings.
In this guide, we'll show you how you can learn how to make smart investments. Let's start with our first lesson.
Take calculated risks
Because the volatility of cryptocurrencies vastly exceeds the volatility of any other investment product, they are not ordinary investments. The important thing here is to be aware of the risk and only invest as much money as you can afford to lose. As Vance Casares, CEO of Xapo, sums it up in an AMA at bitcoin.com: “I always tell my family that the second dumbest thing they could do right now is have an amount of bitcoin they can’t afford. lose, and the dumbest thing they could do is not have a single bitcoin.”
Remember there are other coins
Up until the end of 2016, Bitcoin was the main cryptocurrency, and there were few others besides it. If you wanted to invest in cryptocurrencies, you bought Bitcoin. Other cryptocurrencies - the so-called "altcoins" - are just small change in the shady online markets, mainly used to keep the miner's processors running, pumping prices and dumping coins.
But the situation has changed. Although Bitcoin is still the dominant cryptocurrency, in 2017 its share of the entire cryptocurrency quickly fell from 90 percent to 40 percent, and as of September 2018, it stands at about 50%.
There are several reasons for this. While Bitcoin remains the undisputed king of electronics, many people question its future utility. Firstly, new crypto coins have appeared, secondly, Bitcoin is suffering from serious performance problems, and it seems that the Bitcoin community is not close to solving this problem. So the question is, which coins can you invest in?
Well, for that you will go to coinmarketcap.com.
This site lists cryptocurrencies in descending order of market capitalization. Market capitalization means the value of all available tokens. This is not a perfect metric, but probably the best one to help you see the value of a cryptocurrency.
Here's the reason why coinmarketcap is a useful tool to keep handy.
So, have you decided on the coin you would like to invest in? Great job. However, this is where the real work begins.
Buying a cryptocurrency: two types of exchange
The exchange performs one of the most important functions in the crypto ecosystem. Basically, it acts as a portal between the world of fiat and cryptocurrency. There are usually two types of exchanges:
- Fiat to Crypto.
- Crypto to Crypto.
Fiat to Crypto
Fiat to crypto exchanges will help you buy cryptocurrencies in exchange for money. The Coinbase exchange is an example of this kind of exchange. Coinbase will help you buy BTC, BCH, LTC and ETH in exchange for fiat currency.
Crypto in Crypto
Then we have a crypto-to-crypto exchange. These exchanges help you exchange certain cryptocurrencies such as BTC, ETH, BCH, etc. for other cryptocurrencies. The Binance exchange is a great example of a crypto exchange.
While they do offer some pretty valuable services, the problem is that they are all centralized, which makes them vulnerable. This is an extremely risky proposition given the sheer amount of money these exchanges deal with every day.
When it comes to buying cryptocurrencies from the exchanges themselves, it really isn't that difficult.
- First, you open an account on an exchange
- Then you verify your identity - this is required by anti-money laundering regulations in most jurisdictions
- Top up your account in dollars, euros or whatever paper money you use. On some exchanges, such as Bitcoin.de, you do not need to fund your account, but trade directly with other users.
Which exchange to use depends largely on where you live. It is always better to use an exchange that is physically close to you. If it is in the same jurisdiction as you, you are more likely to receive money legally if something bad happens. If there are no exchanges in your jurisdiction, it is better to use exchanges in stable countries with a good legal system.
Another factor that decides which exchange you use is the coins you want to buy and your patience. If you want to get large sums of bitcoins quickly, you need to use one of the major exchanges that provides ample liquidity. If you only want to buy a small amount of coins and are not in a hurry, you can buy them from online wallets. If your order is completed, you will most likely get better prices than on major exchanges.
Is there a good time to buy?
There is no general rule when to buy cryptocurrencies. It's usually not a good idea to buy at the top of a bubble, and it's usually not a good idea to buy when the price is down either. Never catch a falling knife, as the trader's wisdom says. The best time may be when the price is stable at a relatively low level.
The art of trading is to decide when a cryptocurrency is in bubble mode and when it bottoms out after a dip. What is easy to assess in retrospect is a difficult question in the present, which can never be answered with absolute correctness. Sometimes the coin starts to rise, and after it passes the mark where everyone thinks it should be the top of the bubble, the real rally just begins.
For example, many people didn't buy $1,000 Bitcoin or $100 Ether because it seemed insanely expensive. But after a month, those prices already seemed like a good place to start.
There are only two pieces of advice we can give about timing. First, don't compare crypto bubbles to traditional financial bubbles. A 10 percent gain is not a bubble, it could be daily volatility. 100 percent can be a bubble, but often that's just the beginning. Usually 1000 percent growth can be a bubble, but there is no guarantee that it will burst.
Second, take the time to look closely. Don't buy because there was a drop. There may be something else. And do not buy because you are afraid that tomorrow it will explode. Watch, learn, buy when you think the time is right. And perhaps most importantly, don't be a weak hand. Don't sell too early. Hold. The monetary revolution has just begun.
How to store cryptocurrencies?
So, you bought your cryptocurrencies, where exactly should you store them? Well, first of all...
Keep them away from the exchange!
There is a long history of hacks and bankruptcies in the cryptocurrency markets, the most famous being the Mt. Gox that sucked hundreds of millions of dollars of customers.
Having said that, not all exchange wallets are risky.
If you really want to keep your crypto coins, then you should take matters into your own hands and store them yourself. So this is the place where you should learn about cryptocurrencies.
Hot wallets vs. cold wallets
Let's understand the main difference between the two real life examples. Hot storage is like wallets that you carry around in your pocket. Cold storage is basically like your savings bank account. Keep this distinction in mind as we move forward. Basically, if you want to use your currency frequently, you should use hot storage. On the other hand, if you want to store your money for a long time, you should use cold storage.
Hot Wallet / Storage
To put it simply, hot storage is when you store your cryptocurrency on a device that is directly connected to the internet. This connection makes the device "hot".
You should consider exchange wallets, desktop clients and mobile wallets (any wallet that exists on a device that will ever connect to the internet) as a hot wallet. It's easy to access hot wallet funds, and if you live somewhere that accepts cryptocurrencies for micropayments, there's nothing wrong with using them for everyday expenses. Think of it like a fiat (government-issued) currency. You can walk around with some of your wealth in your wallet for convenience, but you keep the main funds away. Your hot wallet should behave just like a real wallet. You use it to store a small amount of money for ease of access. That's it.
Pros of hot storage
- Fast access to funds.
- Wide range of options and multi-device support
- User-friendly user interfaces make it easy to send and receive.
Cons of hot storage
- Vulnerable to cybercrime. Sophisticated hackers, ransomware and other intruders are a constant threat
- You can still lose/damage/steal recovery details.
Different types of hot storage wallets you can use:
- Online wallets or cloud wallet
- Mobile wallets
Cold Wallets / Storage
For those looking for the most secure form of storage, cold wallets are the way to go. They are best for long-term holders who do not need access to their coins for months or years.
They are not without their own set of risks, but if you follow the instructions correctly and take every possible precaution, they will be minimized. Given the amount of attention the cryptocurrency has received over the past few years, this is unfortunately piqued by attackers. In light of this, a much safer option is to use cold storage to store your money.
Mutbi bitcoin wallet and exchange service holds 77% of its coin holdings in cold wallets. Let's look at the pros and cons of cold storage:
Pros of cold storage:
- A great place to store large amounts of coins for a long period of time.
- Provides protection from hackers and people with malicious intent as it is completely disabled.
Cons of cold storage
- Still susceptible to external damage, theft and general human inattention.
- It's not ideal for quick and daily transactions.
- The setup can be a little intimidating for beginners.
Enjoy investing in cryptocurrencies.