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Cryptocurrency - How To Invest - Part 2

By Will Sun


Overview:


You may have heard the story of Laszlo Hanyecz. Around 12 years ago, Hanyecz made news by conducting the first real-world transaction using cryptocurrency. In an almost comical manner, Hanyecz sold a whopping 10,000 bitcoin, which was only equal to around 41 dollars at the time, for 2 whole pizzas. If he had kept the bitcoin, Hanyecz would have a tremendous$199,378,000s today!


With seemingly random developments such as these, it may seem daunting to start the process of investing in bitcoin, ether, and other cryptocurrencies. Yet, if done correctly, these types of investments could be extremely beneficial in the future.


Why should I invest in crypto?


With stories of theft, hacking, scams, bugs, and other risks that cost huge investor losses in crypto, you may be wondering: why even invest in such a novel market that has such high risks?


The decentralized and anonymous nature of crypto makes it a revolutionary development. These unique features of crypto make it some of the most stable, valuable, and secure forms of investments if done correctly. Here are some distinct aspects of crypto that make it so profitable:


  • Decentralized and free from governmental interference: Since cryptocurrency is not controlled by one central authority, people have much greater freedom and stability in their investments. Without direct governmental control, there is very little chance for any freezing of assets, inflation, or taxation of one’s crypto, granting users much greater autonomy over their currency. Moreover, this decentralization prevents a total collapse of the market. Take, for example, the economic recession of 2008- this crisis was triggered by the failure of just one large bank that led to multiple global collapses. With the decentralization of crypto, the possibility of a total collapse is very little.

  • More direct transactions: Cryptocurrency’s digital format and organizations null the requirement of third-party, such as banks or credit card companies. This allows two parties to be able to directly transfer funds. Not only does this increase the speed and efficiency of transactions, allowing more investments, but it also promotes a user’s anonymity. While banks and other third parties require substantial personal information, crypto does not- promoting user privacy.

  • Long-term Value: One unique feature of most cryptocurrencies is that they have a cap on the number of such coins or tokens, dictated by mathematical algorithms. While this supply cap may increase the volatility and instability of such investments, it creates extremely high return potentials, meaning that one can make huge profits off investing in crypto. For instance, while Bitcoin was only valued at $975.70 in March, in only a few months, its value skyrocketed to $20,089 in December. Furthermore, since the supply cap limits the amount of coins circulating the market, the long-term value of Bitcoin is most likely predicted to increase.

  • Accessibility/Liquidity: Since cryptocurrency is entirely digital, it is accessible to many people all over the world. This feature allows people to conduct transactions with someone on the opposite side of the globe in a matter of minutes. Through this global network, new markets, products, and services all open up due to the versatile nature of cryptocurrency. With so many different types of cryptocurrency appealing to people’s own needs, such as Ethereum specifically focusing on having no third-party interference, cryptocurrency is extremely multifaceted. Allowing such quick transactions, selling, and buying of crypto on blockchains also contributes to its liquidity.


How to Invest in Cryptocurrency?


While the process of getting into such a diverse market may seem overwhelming, there are several key steps to safely and efficiently begin investing in crypto.


  1. Choose a source of Crypto: To even begin buying cryptocurrency, you must choose a broker or crypto exchange. For more detailed information on what crypto exchange is, check out this article on the basics of cryptocurrency. But for a quick recap, a crypto exchange is a platform by which people can exchange, sell, and buy crypto. However, with multiple complex interfaces and detailed performance charts, this can prove to be daunting for beginners. An alternative option would be to hire a cryptocurrency broker who can handle the nitty-gritty of setting up your crypto investments. While these can prove to be convenient and helpful for beginners, brokers may create additional restrictions on crypto (not being able to move crypto out of your account, etc.) and incur more fees.

  2. Create an account: Once you have chosen your method of investment, you must create an account. Depending on your type of investment, you may have to input some sort of personal information, such as a driver's license, to verify your identity and prevent fraud.

  3. Invest!: The big moment- finally depositing money down in your account! There exist multiple ways of depositing money into your crypto account, from linking it with your bank account or simply making a direct payment with a credit card. One thing to look out for is that depositing money using a credit card can be both costly and risky. Not only do credit card companies have higher interest rates unique to cryptocurrency, but there are additional cash advance fees. When added all together, you may even lose 10% of your crypto value to fees!

  4. Choose your type of cryptocurrency: Once enough money has been deposited into your account, you must choose the type of cryptocurrency you would like to invest in. Depending on your financial situation and goals, it may be better to choose between tokens or coins. For more information on these two types of cryptocurrency, check out this article!

  5. Choose how to store it: Finally, after having secured your cryptocurrency, you must choose a way of storing it. Since crypto isn’t regulated by the government, your investments are at greater risk of hacking or theft. Even something as simple as forgetting the codes to access your crypto could be detrimental. Thus, choosing the right storage is one of the most critical steps of this process. Multiple options exist for storage:

    1. Exchange- Simply leaving your crypto on the exchange platform allows your crypto to be held in a crypto wallet. Although convenient, moving the crypto off of the exchange website provides even greater security.

    2. Hot Wallet- This type of storage is a wallet stored online through internet-connected devices. Although these are the most direct type of storage, they also pose the greatest risk since your crypto is still connected to the internet.

    3. Cold Wallet- Since they aren’t linked to the Internet, cold wallets provide the greatest security for your crypto. MAnifested in external objects, such as a USB stick or hard drive, cold wallets still pose a risk if you lose the key code for your device or the device is simply broken or lost.


What to watch out for


Considering the volatility and associated risks of cryptocurrency, there are some key mistakes and red flags to be on the lookout for when first beginning to invest in cryptocurrency.


Rushing into investing: One of the biggest pitfalls is rushing. Without taking the time to plan out your investments, research platforms, and analyze projections, you may lose tremendous amounts of money very quickly. Instead of pouring in huge amounts of money at once, carefully making small trades and experimenting with different types of currency will allow you to make better-informed choices. Moreover, carefully choosing the right investment platform is also key. Consider the user interface, the fees, the trading features, and the security of a platform before investing in it.


Choosing the wrong type of cryptocurrency: The best and most stable type of cryptocurrency will be those that have a unique function, diverse community, a reputable group of developers, well-written code, and a clear plan for future development. For a cryptocurrency to succeed and have long-term value, it must bring something new into the marketplace, whether it be a new function or an improvement on currently existing technology.


Following flash trends: With misinformation being a major issue in today’s digital world, one of the biggest mistakes is listening to social media advice and following major trends. Believing such hype trends and advice could lead to a significant loss of profits. Always make sure to do thorough research before investing!


Limiting your portfolio: As with any type of investment, creating a diversified portfolio of crypto investments is always beneficial in boosting both profits and risk tolerance. Generally, having both larger and stable cryptos along with a mix of medium and smaller-sized carrots is best. Moreover, following the 80/20 rule, with 80% of crypto having a large cap and 20% had a small cap will further minimize any risk issues.

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