With stories of seemingly overnight cryptocurrency millionaires going around, it’s no wonder many people have a keen interest in learning how to invest in cryptocurrency. Today’s article shows investors how to do it.
In this article:
- Is Cryptocurrency a High-Risk Investment?
- How to Invest in Cryptocurrency
- Where to Buy Cryptocurrency
- How to Safely Store Your Cryptocurrency Investment
- The Best Cryptocurrencies to Invest In
- Managing Cryptocurrency Investment Risks
How to Invest in Cryptocurrency: Things You Need to Know Now
Is Cryptocurrency a High-Risk Investment?
Cryptocurrency investing is a high-risk investment strategy because of the nature and relatively young age of this type of financial investment asset. Why is cryptocurrency investing a high-risk financial activity?
First of all, cryptocurrencies have complete regulatory autonomy. Crypto investors have no legal recourse in case something goes wrong.
What is Regulatory Autonomy? It means freedom from regulatory supervision by government regulatory agencies like the Federal Reserve and the Securities and Exchange Commission.
Second, cryptocurrencies are purely digital assets. They have no physical or actual assets backing them up.
The value of cryptocurrency investment is mostly speculative. They’re based purely on potential and how crypto investors feel about the cryptocurrency at any given moment.
The speculative nature of cryptocurrency investment values leads to the third reason for its high investment risk: high volatility.
What is Volatility? Volatility refers to how big and fast changes to the price of a security, such as a cryptocurrency, are. The higher the volatility, the greater and faster the price changes, which means a higher risk for losses, too.
With higher risk comes the potential for huge trading profits, too. This is why many popular cryptocurrency investments – like the Bitcoin cryptocurrency – have been able to turn thousand dollar investments into million-dollar ones.
Cryptocurrency trading is neither for the faint of heart nor investment rookies. For those who are brave and know how to manage investment risks, investing in cryptocurrencies can provide great returns.
How to Invest in Cryptocurrency
Here are some ways you can invest in cryptocurrency:
1. Sell products and have customers pay with Bitcoin or another popular cryptocurrency.
2. Engage in cryptocurrency “mining.” Cryptocurrency “miners” use their computers to validate cryptocurrency transactions and lodge them under a cryptocurrency’s blockchain or digital ledger. In exchange for their services, cryptocurrency miners receive units of digital currency, usually the ones they’re mining.
3. Buy them at a low price. This is the cryptocurrency investment strategy most crypto investors use.
One thing those interested in learning how to invest in cryptocurrency need to know is the mode of payment.
Generally speaking, investors can’t buy altcoins using fiat currencies, as of now. They need to buy Bitcoins or some other major cryptocurrencies first and use those to buy altcoins.
What are Altcoins? Altcoins refers to all cryptocurrencies other than Bitcoin. Altcoins is a combination of the words “alternative” and “coins.”
What are Fiat Currencies? These refer to physical money that’s considered a legal tender (can buy goods and services anywhere they’re recognized). Examples of fiat currencies are the U.S. Dollar, the British Pound, the Euro, and Japanese Yen, among others.
Where to Buy Cryptocurrency
Those who want to buy cryptocurrencies can do so through cryptocurrency exchanges. These trading platforms are similar to the New York Stock Exchange and Nasdaq for stock market investing.
Investors may buy and sell cryptocurrency directly from others outside of the exchange, but these have consequences:
- First, transactions can take much longer compared to trading on an established cryptocurrency trading platform or exchange.
- Second, those who are keen on investing in cryptocurrencies can’t verify if what they want to buy is legitimate. To reduce the risks of fraud, it best to invest via an established platform or exchange.
Cryptocurrency exchanges charge fees for facilitating transactions, of course. Without charging fees, no cryptocurrency trading platform can continue operations.
Another buying cryptocurrency option, particularly for buying Bitcoin, is a Bitcoin ATM. The investors can use to buy and send Bitcoin to their cryptocurrency wallets. As of writing, there are already over 4,000 of these ATMs in 76 countries.
How to Safely Store Your Cryptocurrency Investment
Crypto investors store their cryptocurrencies in digital wallets called cryptocurrency wallets. They come in two variants:
- Software wallets
- Hardware wallets
While hardware wallets are safer for storing cryptocurrencies, both wallets are needed because buying and selling from cryptocurrency exchanges requires using software wallets.
As a precaution, investors should immediately transfer their cryptocurrencies from their software wallets to their hardware wallets after trading. They’ll transfer their cryptocurrencies back to their software wallets only when they’re about to sell their cryptocurrencies.
This is because software wallets are “online” wallets, which are vulnerable to hacking. Hardware wallets, on the other hand, are “offline” wallets, which can’t be hacked.
One of the most popular examples of a software wallet for cryptocurrency platform transactions is the Coinbase software wallet. Coinbase is a well-known cryptocurrency investing platform. Those with a Coinbase account automatically get a Coinbase software wallet.
Hardware wallets are USB devices that plug into computers. Investors plug them only when they want to transfer their holdings to and from such wallets, which minimizes hacking risk.
The most popular hardware wallet brands are Trezor and Ledger.
The Best Cryptocurrencies to Invest In
Investors who are looking to give cryptocurrencies a shot should consider the following when choosing their investments:
- Market Capitalization: Cryptocurrencies with the biggest market cap are less likely to fail, making them best for long-term investing
- Underlying Technology
- Liquidity: The higher the number of cryptocurrency exchanges where a cryptocurrency trades, the more liquid it is, which makes it a good investment
- Historic Performance and Current Price Trends
- Price Volatility: Lack of volatility means lower possible returns
Given the abovementioned criteria, here’s a list of the best cryptocurrencies to invest in.
1. Bitcoin (BTC)
The only thing investors should consider when buying Bitcoin for investment is timing.
It’s the granddaddy of cryptocurrencies. As such, it has the biggest market cap, is the most liquid, and has a proven track record of volatility.
2. Ethereum (ETH)
ETH is the alpha of altcoins, having a reputation for pioneering the use of smart contracts in the cryptocurrency industry. It has the second largest market cap of all cryptos, and is also traded in all major cryptocurrency exchanges, giving it very high liquidity and volatility.
3. Ripple (XRP)
Ripple’s claim to cryptocurrency fame lies more in its underlying technology and increasing acceptance in the financial mainstream.
Ripple’s underlying technology allows it to transfer money all over the world with incredible speeds at very low costs. This is something most cryptocurrencies can’t do.
And because of this technology, many top international money transfer companies have partnered with Ripple Labs, XRP’s parent company. More mainstream financial companies partnering with Ripple Lab means even more demand for this altcoin will be generated.
4. Litecoin (LTC)
LTC’s future is bright, given more and more retailers are accepting it as a mode of payment. It also has a history of providing superior long-term investment returns, which at one point has multiplied an investor’s money 20 times over!
In terms of the underlying technology, Litecoin may even have an advantage over Bitcoin. Its unique algorithm gives it greater scalability and faster transaction times compared to Bitcoin.
Given these, Litecoin remains as one of the top 10 cryptocurrencies by trading volume and market capitalization. As such, it is one of the best cryptocurrency investments in the market today.
5. Bitcoin Cash (BCH)
It’s easy to glean from its name that BCH is an offspring of granddaddy Bitcoin. By modifying Bitcoin’s original code, BCH addressed BTC’s scalability and transaction speed issues.
While it’s not as widely accepted as its parent yet, investor enthusiasm for BCH remains high. Proof of this is the fact that it’s already among the top five cryptocurrencies by the size of market capitalization.
Managing Cryptocurrency Investment Risks
The higher the expected returns on investments, the higher the financial risk. Cryptocurrencies, compared to stocks and other established financial investments, are riskier. The reason this type of investment gives them higher potential returns than stocks.
Given its high-risk nature, investors need to proceed with caution, more so with newbie or neophyte investors.
Here are practical tips for managing cryptocurrency risks:
- Investors should only invest money they won’t need soon and are comfortable losing.
- Inexperienced investors should take a long-term approach to cryptocurrency investing. Avoid short-term trading, which is more complicated.
- Investors should diversify, or invest their money in several cryptocurrencies to minimize their cryptocurrency investing risk.
While cryptocurrencies are risky investments, learning how to invest in cryptocurrencies can be worth it. It is important to do enough research and exercise prudence before you invest your money.
Do you have other promising cryptocurrency investments in mind? Let us know in the comments section below!
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