The crypto ecosystem is barely 15 years young, and the total market cap is equivalent to the 22nd largest global economy. Since its inception, crypto has had its fair share of bulls and bears, but there’s no doubt that it’s here to stay. From Bitcoin to smart contracts to NFTs, the potentials of the blockchain are unlimited. And cryptocurrencies (native tokens of blockchain projects) are assets with some of the highest price movements to trade.
If you’re new to cryptocurrency and interested in learning the ropes, you’re in the right place! This guide covers the nitty-gritty of cryptocurrency investing for dummies. And by the end of this article, you’ll know the steps to take to become a successful crypto investor.
- Cryptocurrencies are virtual currencies with monetary value. You can use crypto to purchase items wherever they are accepted
- Cryptocurrency investment isn’t a get-rich-quick scheme. It requires sound strategy and a sense of purpose to make the most of your investment portfolio
- There are over 12,000 types of crypto coins. The most popular are Bitcoin, Ethereum, Binance coin, Cardano, USDT, USDC, etc.
- Blockchain is different from Bitcoin. Bitcoin is a cryptocurrency built on blockchain technology
- To succeed as a crypto investor, go after the right knowledge and learn from investors with proofs
What is Cryptocurrency? A Simple Definition
Cryptocurrencies are virtual or digital currencies built on decentralized blockchain technology.
They’re created by solving complex mathematical problems to validate the new currency and add it to the blockchain. This process is called mining.
Cryptocurrencies are tokens used to pay for contributions made to a blockchain network and serve as a medium of exchange, facilitating peer-to-peer transactions without intermediaries. It unlocks newer ways of conducting financial transactions by mitigating fraud and giving users control over their funds.
How Does It Work?
Cryptocurrency is coined from two words: “crypto” and “currency.” Cryptography is a method of encryption to secure communications from third parties. It is built on a decentralized and distributed technology called the blockchain.
Decentralization removes the need for a third-party or intermediary and allows people to share data without the need for a central authority like financial institutions or regulators. These features make cryptocurrency secure and easy to perform transactions nationally and internationally.
Bitcoin was the first cryptocurrency created by Satoshi Nakamoto. Though no one has heard from him (or them) since he released the bitcoin white paper, other developers leveraged this technology to develop other exciting projects, like Ethereum. Owners of cryptocurrencies can either use them for daily transactions like regular currencies or as a form of investment.
Common Terms Used In Cryptocurrency
Here are a few terminologies used by crypto traders:
- P2P: this is also known as peer-to-peer network. It simply means the communication between two computers or individuals without a third-party
- HODL: This is an acronym for Hold On for Dear Life. It’s primarily used as advice for long-term investments. It means not selling no matter the fluctuations in the market
- FUD: this means Fear, Uncertainty and Doubt. It is used to communicate people’s perception about a specific crypto coin
- FOMO: this implies Fear Of Missing Out. It describes the sense of urgency to buy a coin based on hype or popularity
- Altcoins: All other coins created after Bitcoin are called altcoins. Examples are Ethereum, Dogecoin, Sola, etc.
- Stablecoins: stablecoins are coins whose value is tied to that of other assets, for example, Gold or currencies like USD. Examples of stablecoins are USDC and USDT (tied to the USD)
- Shitcoins: this refers to coins of no monetary value.
- Bullish: this refers to a prolonged increase in the market value of a coin. Its mainly caused by decreased supply and increased demand
- Bearish: this refers to a prolonged decrease in the market value of a coin. As opposed to bullish, it is caused by increased supply and decreased demand
- DYOR: this is also called Do Your Own Research. It is used to advise crypto enthusiasts or newbies to conduct research before investing in any coin
- Crypto whale: this term is used to describe big investors in the crypto market. They’re market drivers and can influence the price of the coins
Learn more about the popular acronyms and terms used in cryptocurrency.
Different Types of Cryptocurrencies
As highlighted above, there are thousands of cryptocurrencies, but here are the top ten:
- Bitcoin (BTC): This is an open-source digital currency operating on peer-to-peer technology. Its primary purpose is to create a system for electronic transactions without relying on third-parties.
- Ethereum (ETH): This is another popular cryptocurrency, second to bitcoin in market value. It’s a decentralized and open-source technology used to create dApps and cryptocurrency, ether.
- Litecoin (LTC): Created in 2017, this cryptocurrency operates on bitcoin protocol but performs transactions faster, hence solving the bitcoin scalability hassles. Like ETH and BTC, it’s a decentralized peer-to-peer cryptocurrency
- Cardano (ADA): This is another decentralized open-source blockchain platform used to create smart contracts and dApps. It facilitates p2p transactions with its cryptocurrency, ADA
- Polygon (Matic): This open-source decentralized Ethereum token powers the Polygon Network. It is used to create multi-chain blockchain projects compatible with Ethereum
- Dogecoin (DOGE): This coin gained massive traction when the world’s richest man Elon Musk made an amusing statement about it on Twitter. It was first created as a meme coin, hence attracting a huge fan base. It’s also a decentralized and open-source cryptocurrency
- Tether (USDT): This token has a similar value to the physical USD. Most people invest in it to evade the volatility of the crypto market
Why Do People Invest in Crypto?
People mainly invest in cryptocurrency because it has the potential for high returns. In fact, statistics proved this to be true as;
- 63% of crypto owners are investing because of profit
- 44% of users in the same research only invest in diversifying their portfolio
- The remaining 23% said they believe in the long-term potential of cryptocurrency.
Crypto may have shortcomings as a new technology, but it undoubtedly makes transacting easier and spearheads newer innovations, such as building dApps on Ethereum.
Pros and Cons of Investing in Crypto
- Cryptocurrency removes the need for third-party financial institutions like banks and gives users complete control over their money. You can make cross-border payments almost instantly without worries about transaction or exchange fees
- The decentralized system of cryptocurrencies makes it less vulnerable to cyber-attacks compared to the traditional digital system. The cryptographic keys are far more secure than passwords or fingerprints, and this is also backed up with end-to-end encryption for higher security
- Cryptocurrencies are disinflationary, like Gold in its physical state and only a fixed amount of units can be minted. For example, only 21 million units of bitcoin can be created. This affects the market supply and increases the purchasing power in the long haul
- Cryptocurrencies are independent of changes made by financial regulators, and no central monetary authority cannot manipulate their value. Because of this, the market value tends to increase over time
- Cryptocurrency is perfect for investors who desire privacy. Although this can be a disadvantage, as unscrupulous people can take advantage of it to perform illicit transactions
- Crypto has a low-entry barrier, unlike financial assets that require high amounts of investment capital. This means people with small funds can easily become crypto investors
- Because of the high level of anonymity, hackers can take advantage of crypto to perform illegal transactions. It makes it even more challenging to trace the source
- The crypto market is highly volatile, hence unpredictable. To make profits, you must carefully analyze the market before investing
- Cryptocurrencies mining requires lots of power and electricity to operate. Bitcoin, for example, uses the Proof-of-Work consensus mechanism, which demands more energy. Although coins like Ethereum require less energy to mine
- The crypto market isn’t fully regulated, restricting its adoption in some areas. Most merchants are skeptical of introducing it as a payment method because of this
5 Things To Consider Before Investing in Crypto
Before investing in crypto, the first thing to do is get the right knowledge. This will help you know what steps to take and what pitfalls to avoid. Let’s explore this in detail:
Start with the right knowledge
Investing in the right knowledge before starting your journey as a crypto investor is undisputable. Don’t purchase coins based on recommendations or feelings. Instead, invest quality time in understanding crypto terms, the foundation of cryptocurrency (blockchain), how it works, and potential use cases.
To begin with, ask yourself the following questions:
- Does the cryptocurrency have a comparative advantage over other coins? Cryptocurrencies like Bitcoin and Ethereum have been around for a long while and typically hold more value than other altcoins. The more comparative value a coin has, the more stable and profitable it is
- What problem does the coin propose to solve, and how will it solve this problem? Crypto coins are created for a purpose, and it’s better to know why and how it will solve the problem. This determines the duration of the coin in the market and prevents you from investing in a shitcoin. Read whitepapers on the coin to gather information on its history, mission, and team behind its creation
- Is it accepted as a form of payment? One-third of US small businesses accept cryptocurrencies as payment, with BTC and ETH topping the charts as the most accepted cryptocurrencies. Remember that crypto is virtual money and holds no value if it’s not accepted as a medium of payment
- What is driving its growth? Now, this is where most newbies fail. Don’t invest in a coin because it’s getting a lot of hype on social media. Some crypto founders pay influencers to promote their coins, leading to a sudden increase in the market value. If the coin offers are too good to be true, it probably is.
What is your purpose for investing?
The cliche, ”Failing to plan is planning to fail”, is an astute truism regarding crypto investment. Investment clarity starts with creating a portfolio, knowing how much you want to invest, and how to manage your investments. This is why planning is important.
Time-bound investment goals help you know your risk tolerance. It also enables you to control your investment and avoid coins that do not have value. Conclusively, before making any decision, ascertain the following:
- Are you investing to make profits or support a cause?
- Do you want to use your investments as your retirement plan?
- Will you opt for coins with the possibility of long-term profitability?
- How much are you capable of risking for your investment?
This brings us to the next step:
Invest in what you can afford to lose
The cryptocurrency market is inherently volatile. Therefore, it’s only advisable that you invest in what you can afford to lose. Don’t be swayed by the crypto portfolios you see online. Investing in cryptocurrency isn’t a fast means to wealth. So avoid putting savings, or other vital funds into crypto.
In addition, cryptocurrency is a new technology. This implies high uncertainty and risk compared to other assets, like real estate. Terra Luna is an example of a crypto coin that went from a multi-billion dollar project (one other the top 10 largest coins in the world) to zero in a few days. The investors had not predicted this, and they lost a lot of money. To tread safely, invest 1% to 5% of your net worth.
Prepare for volatility
Volatility in cryptocurrency refers to the changes in the price of a crypto asset over time. It’s no news that the crypto market is highly volatile and popularly known for its constant price fluctuations.
As a newbie, it’s essential to understand the factors that drive volatility in the cryptocurrency market. This can help you anticipate market movements and make strategic decisions to avoid financial losses. For example, news events, demand and supply, market sentiment, and government regulations are significant drivers of volatility.
Other ways to prepare for crypto volatility
- Don’t put all your eggs in one basket. Diversify your portfolio to weather the risks
- Monitor the market and stay updated with the latest crypto trends
- Consider long-term investments
- Invest in stable coins like USDT, Binance USD (BNB), USDC, etc
- Don’t fall for FOMO and FUD trends. Emotional decision-making during investment can be costly
Read more about how to manage crypto volatility like a pro.
Learn how to manage risk
How would you react if your crypto investment declines? Everyone has high-risk tolerance when the market is rising. But only a few can withstand the dips. This is why evaluating your risk tolerance before investing in cryptocurrency is essential. Risk tolerance is the degree of risk you’re willing to take on as an investor, depending on the volatility of an asset.
Typically, the more profitable a coin is, the higher the risk involved. So before you start:
- Examine how much risk you can handle
- Develop a risk strategy to inform your investment strategies and minimize losses.
For instance, if you’re investing long-term, your risk strategy can be HODL, no matter the state of the market. And if you’re investing short-term, it can be setting a stop-loss when the market falls to a certain level.
Crypto Investing for Dummies – A Complete 5-Step Guide
Here’s the most exciting part. To start your journey as a crypto investor, follow these steps:
Step 1: Access your financial capabilities
Firstly, assess your financial health. This includes factoring in how much you’re willing to invest, your investment goals, transaction costs, and tax obligations in your country (if any). Undoubtedly, the crypto market is highly profitable. But remember, only invest what you can afford to lose.
Here’s how billionaire investor and businessman Kelvin O’Leary puts it “Start small,” he says, “…put in two hundred bucks. You’ll lose it, but you’ll figure out how and why they hacked you. Everyone loses money at the beginning.”
Step 2: Choose the cryptocurrency to invest in
There are over 21,000 cryptocurrencies with varying prices and potentials. This includes authentic coins and shitcoins. Some coins, for instance, Bitcoin, are for long-term investments. Some others are for transactional purposes, like Ethereum. Before investing, research the ones you’re interested in and examine their growth potential.
Who’s the team behind it? What are the project goals? Do they have an active community? All of these are essential questions to ask before opting in. To choose the right coin, follow these few steps:
- Avoid coins heavily promoted on social media platforms. DYOR to evade pump-and-dump schemes
- Read the developer’s documentation to know how the coin works
- Access the coin’s community and marketing campaigns. An authentic coin should have an active community on almost all major social media platforms
- Read the audit report or white paper to know what you’re getting into
Step 3: Start with a reliable crypto exchange platform
Crypto exchange platform FTX was allegedly hacked in Nov. 2022, and millions worth of tokens were stolen. A series of charges were filed against the CEO, Sam Bankman-Fried, including mishandling customer funds worth billions of dollars. This explains why choosing the right crypto exchange platform is crucial to your success as a crypto investor.
Types of crypto exchange Platforms
There are three types of crypto exchange:
- Centralized exchanges (CEXs): In this type of exchange, the platform acts as a bridge between crypto buyers and sellers, like traditional stock exchange platforms. There’s a central authority handling your funds. Here, you can trade fiat currencies for crypto like Coinbase or crypto for crypto like Binance.
- Decentralized exchanges (DEXs): This type of platform facilitates peer-to-peer exchanges. Popular exchanges in this space are Steller DEX, Bisq DEX, etc.
- Hybrid exchanges: Hybrid exchanges support decentralized and centralized exchanges. It solves the scalability issues of DEXs backed up with the flexibility of CEXs. Most opt for hybrid exchanges because of their low transaction and gas fees. A perfect example is the Qurrex hybrid exchange.
How to identify the quality crypto exchange
The right crypto exchange must be reputable, with many positive reviews from other users. Also, the platform should have robust security features that prevent fraud and an intuitive user interface. Other things to consider are:
- Most exchange platforms support popular coins like Bitcoin and Ethereum and stablecoins. So ensure your choice token is available for purchase or exchange
- Check the volume of trading allowed, and minimum investment requirements for each coin
- Check the accepted payment options
- Quality customer support
Step 4: Select your preferable wallet
A cryptocurrency digital wallet that allows you to store, send and receive crypto after buying it. It’s similar to your bank account. Just like you save dollars in the bank, you save cryptocurrency in your crypto wallet too. It stores the keys (private and public keys) that unlock your account to access your funds.
Types of crypto wallet
There are three types of wallets. Choose the best fit for your needs and provides high-level security that guarantees the safety of your investments:
- Hardware wallet: Here, your keys are stored in a physical device like a USB drive. To send finds, users must plug the USB into a computer or mobile phone, enter a PIN number and send the coins.
- Software wallet: This wallet is accessible online through a computer or mobile device. They are often free to use
- Paper wallet: This is a physical copy of your public and private keys, which can be accessed online and printed in a secured location.
Step 5: Manage your investment
Lastly, monitor and manage your investment. This includes staying updated with the market trends, watching the performance of your investment, and adjusting your portfolio accordingly. This will help you ascertain whether you’ve invested in the right coins and are in line with your investment goals.
Alternate Ways to Invest in Crypto
There are other interesting ways of investing in cryptocurrency indirectly. This is a risk-proof approach and here are the common types:
- Crypto funds:
Crypto funds or crypto mutual funds are designed to give investors access to crypto assets. They also give exposure to the crypto market. Popular examples are Greyscale, Pantera Capital, BitWise, etc.
- Crypto exchange stock:
Another alternative to crypto investment is buying a crypto exchange stock from a company investing or involved in cryptocurrency. These investments are less volatile and well regulated — for example, PayPal, Coinbase, Visa Inc., etc.
- Crypto futures:
Crypto futures allow investors to buy cryptocurrency at a specific price. Consider two traders, A and B. A wants to sell Bitcoin at a particular price in the future. B agrees to buy it at that price, hoping to sell it at a higher price later. It allows investors to benefit from the price fluctuations or market volatility. But the downside is that the investor will bear the losses if the market moves in an unfavorable direction.
- Blockchain ETFs:
Blockchain ETFs allow you to own stocks from companies that invest or are involved with the blockchain technology. This may include companies that own, exchange, or mine cryptocurrency, like Tesla, financial firms like HSBC, and tech companies like VMWare. Learn more about the best blockchain ETFs.
There’s no better time to invest in cryptocurrency than now. Whether you’re a doctor, mechanical engineer, or teacher, you can also make impressive profits as a crypto investor. Yes, the market is volatile and highly unpredictable. But with the right knowledge and skills, you can master what it takes to be successful as a crypto investor. Remember, don’t invest what you cannot lose. Start small and grow accordingly.
Next Steps – What Now?
- Choose a crypto to invest in
- Get started with a crypto exchange
- For business owners, choose a web host that accepts crypto payments
- Store and secure your crypto wallets
- Manage your crypto portfolio effectively to maximize returns
- Stay ahead of market trends using third-party sites like CoinMarketCap