Around 16% of Americans have tried cryptocurrency investing. It can be a rollercoaster ride. But if you’re thinking about joining them, you probably have a million questions. Cryptocurrency investing is still relatively new, so knowing where to start can feel intimidating.
That’s where this article comes in. We’ll break down cryptocurrency investing in simple terms. We’ll explore the basics, the potential upside, and yes, the very real risks. By the time you’re done reading, you’ll have a much better grasp of this exciting, sometimes confusing, world.
Understanding Cryptocurrency Investing
Before jumping into cryptocurrency investing, it’s essential to understand what it is. A cryptocurrency is a digital form of money that uses cryptography for security. Because it is decentralized, no government or financial institution controls it.
This freedom from traditional banking systems can be appealing. However, this also brings challenges and risks.
How Does Cryptocurrency Work?
Cryptocurrencies run on a technology called blockchain. This is essentially a public digital ledger of transactions. It’s like a giant, open book where every transaction is recorded permanently and is publicly viewable.
Each “page” in this ledger is a block, and each new block links back to the previous one, forming a chain, hence the name “blockchain.”
This system is maintained by a decentralized network of computers (known as “nodes”) across the globe. When you make a cryptocurrency transaction, this network verifies and records it on the blockchain. This makes it nearly impossible to tamper with. The entire system relies on cryptography (hence “cryptocurrency”) to keep things secure, with each user having a private “key” to access their digital assets.
Why is Cryptocurrency So Volatile?
If you’ve even glanced at cryptocurrency charts, you’ve witnessed the price swings. It’s enough to make even seasoned investors sweat. What causes this wild price action?
Several things influence the cryptocurrency market:
- Supply and Demand: Like any market, prices are driven by supply and demand. However, due to the limited supply of most cryptocurrencies (e.g. only 21 million Bitcoin will ever exist), price fluctuations are often amplified.
- Regulation: The lack of consistent regulations across different countries, plus regulatory crackdowns like we’ve seen in India in January on certain crypto platforms, create uncertainty for the markets and investor sentiment.
- Market Sentiment: Public perception, social media trends, influencer opinions, and overall market sentiment can trigger massive sell-offs or sudden buying frenzies, creating a lot of those volatile swings we discussed.
- Adoption: The rate at which mainstream companies, merchants, and institutions adopt cryptocurrency for everyday use also plays a huge role. Imagine what a wave of adoption, like Binance’s return to India this year after adhering to anti-money laundering regulations, could do for the market. More news like that is sure to influence price action.
- Technological Developments: Innovations in the underlying blockchain technology can also impact market prices.
The Pros and Cons of Cryptocurrency Investing
Now you have a better understanding of cryptocurrency. It’s time to look at the good and the not-so-good. Just like any other investment, it all comes down to your financial goals, risk tolerance, and goals.
Benefits of Cryptocurrency Investing
- Potential for High Returns: Cryptocurrency is capable of rapid appreciation. There are stories of people making life-changing gains with crypto.
- 24/7 Accessibility: Unlike the stock market, crypto exchanges never sleep. This accessibility makes it attractive to many. You can buy or sell anytime, anywhere. This feature is handy, especially when market-moving events happen after hours.
- Decentralization: That absence of government control and reliance on a distributed network offers potential advantages. Cryptocurrency transactions can sometimes be faster and have lower fees compared to international wire transfers through your local bank. This benefit varies depending on the specific cryptocurrency and transaction details.
- Portfolio Diversification: Charles Schwab, one of the most respected financial firms, states on its website that cryptocurrency could add diversification to a portfolio if it keeps performing in a way that doesn’t correlate with traditional investments.
Risks of Cryptocurrency Investing
- Volatility: Crypto’s reputation for crazy price swings isn’t exaggerated. Even Bitcoin is still very much susceptible to major fluctuations. Just look at how much the potential token distributions from Mt Gox affected the price just recently in 2024 — a decline of almost 4%.
- Scams: The Wild West days of cryptocurrency are fading, but scammers are still lurking. The Federal Trade Commission (FTC) warns about bogus investment and mining opportunities designed to rip off unsuspecting investors. The spot markets are largely unregulated which contributes to this being an issue. There are other red flags to watch out for such as; promises of unrealistic returns, suspicious or pressuring marketing tactics, requests for personal information, and unfamiliar exchanges.
- Security: If you’re investing directly, protecting your crypto requires understanding wallet security and staying ahead of evolving security threats. If you lose the keys to your digital wallet, there’s no customer service line to call to get them back.
Ways to Invest in Cryptocurrency
Cryptocurrency investing is more than just buying Bitcoin on an exchange. You have several options, each with its own level of risk and involvement.
Direct Investing (Spot Market)
This is the most common approach. It’s similar to buying stocks through your brokerage account, except with cryptocurrency you’re buying and selling on specialized exchanges.
Some of the biggest and most trusted crypto exchanges include:
- Coinbase
- Kraken
- Gemini
Make sure to research different platforms and compare factors like fees, security measures, reputation, and the selection of cryptocurrencies they offer.
Indirect Investing: Diversifying Your Approach
This route offers less hands-on involvement. This method is a viable option for people new to cryptocurrency investing or those who just don’t have the time or desire to directly trade.
Crypto ETFs and Trusts: Traditional Market Meets Crypto
Cryptocurrency exchange-traded funds (ETFs) are a simple way to get some skin in the game. They allow you to gain exposure to the price of cryptocurrencies through the traditional stock market, similar to investing in regular index funds or sector ETFs. With cryptocurrency trusts, you’re essentially buying shares in a trust that holds a particular cryptocurrency.
Bitcoin Futures: Navigating the Futures Market
Offered through major futures exchanges, like the CME Group, bitcoin futures contracts allow traders to speculate on future price movements without actually holding Bitcoin itself. However, this method is not recommended for the average investor.
Crypto-Related Stocks: Investing in the Ecosystem
You can gain indirect exposure to crypto through publicly traded companies involved in blockchain technology, cryptocurrency mining, or exchange platforms.
Investing Responsibly
Jumping into cryptocurrency investing headfirst is incredibly easy. It is easy to lose your shirt just as quickly, though. To mitigate those risks and make informed decisions, these guidelines might be helpful:
- Thorough Research: Too many investors rely on social media tips, friends, or family for advice. There are more than 20,000 cryptocurrencies, all with varying risks, utilities, and technologies driving them. Learn how to evaluate a project’s white paper, team, use case, community, and market cap.
- Understanding Security: Securely store your cryptocurrencies offline in hardware wallets. Use reputable exchanges with strong security measures, be cautious of phishing attempts, and protect your private keys like you protect your passwords.
- Investing Gradually: Think of this like you would a retirement portfolio. You wouldn’t dump your life savings all in at once, right? Instead, you might invest over time to smooth out risk. Do the same with cryptocurrency. A good practice is “dollar-cost averaging.” It’s a fancy way of saying you consistently invest small amounts at regular intervals, no matter the current price.
- Tax Implications: Don’t forget about taxes. Consult a qualified tax professional for assistance. Taxes related to cryptocurrency can vary and they tend to change often based on new regulations and legal decisions. This means staying on top of current rules is incredibly important.
- Seeking Expert Advice: Financial advisors can be a great resource for investors.
FAQs about Cryptocurrency Investing
Is crypto a good investment?
There’s no simple answer. While crypto offers the potential for big returns, it’s incredibly risky. Those returns come with massive volatility, scams, security concerns, regulatory changes, and evolving technologies. For those reasons alone, cryptocurrency is probably not suitable for everyone.
How should a beginner invest in cryptocurrency?
If you’re starting out, stick to well-established cryptocurrencies. Start by getting a reputable exchange account set up. Do extensive research on the projects that most interest you. Educate yourself about wallet security, the risks, tax implications, and dollar-cost averaging. Starting small is always recommended for new investors.
Can you make $100 a day with crypto?
While people do manage to make $100 per day, there is absolutely no guarantee that will happen. A much safer approach is to focus on responsible investing for longer-term gains, instead of trying to “get rich quick.” The quick money ideas tend to be the very scams that the FTC warned about earlier.
What is the best crypto to invest in?
Every investment should be tied to research and risk management, in line with individual investor goals. In other words, there is no “best crypto.” One person’s “best” might turn out to be another’s biggest nightmare.
Conclusion
Cryptocurrency investing is like stepping into uncharted territory. With incredible innovation, technology, potential gains, and yes, high risk, cryptocurrency has gained a permanent place in global markets. Just make sure you understand what you are getting into. Having a solid game plan will go a long way in achieving any investing goals you might have.
