Do you understand cryptocurrency investments?
This question is often greeted as commercial, with inexperienced investors thinking of terms like a scam, pump and dump, and ‘magic internet money’. At just over ten years old, the cryptocurrency market has found great appeal with web-savvy users, for whom a digitally native currency seems both familiar and obvious. While the cryptocurrency sector is a complex amalgam of computer science, cryptography, law, economics, and governance, new users are generally ‘red-pilled’ via the vast, curious exploration that is offered. So let’s start with the basics, join us as we take you through a basic introduction to cryptocurrencies, and the Digi-world that they inhabit.
What is cryptocurrency?
Unlike traditional currencies, cryptocurrencies are a digital asset, commonly used like government-issued money, that leverage a shared ledger, visible to all, and protected by a vast network of decentralized computers. Most cryptocurrencies are networks built on blockchain technology or, a ledger through which transactions are bundled, verified, and lock in permanence for the entire network to view at any time.
Many cryptocurrencies take their decentralized ethos one step further by making their technology ‘open-sourced’, meaning that anyone can contribute to the code.
In terms of security, advanced cryptography is used for securing cryptocurrencies, making it almost impossible to counterfeit, double-spend, or hack- and most financial losses are due to human error around the custody of such assets (proper digital hygiene is fundamental to keeping your cryptos safe!). What makes cryptocurrencies unique is that in most cases there is no central body like banks, governments, or financial institutions to issue them, instead, they rely on cold, hard, math, or code. This theoretically safeguards them from manipulation or interference outside of their governance structure but also means their value is not backed by any government or asset, unlike the U.S. dollar which is backed by the credit of the United States or the U.S. dollar before the Nixon Administration when the U.S. dollar was backed by precious metal reserves. New users should realize that there are risks in owning cryptocurrency, primarily related to custody (where you store your coins). Use a very secure, unique password, and never share it with anyone.
As digital currencies, cryptocurrencies are used as means of payment for goods and services, and an increasing number of merchants and stores all over the world are accepting cryptocurrencies as a means of payment.
How does crypto work?
There are many types of cryptocurrencies with various functions. But does that mean they all work in a different way? No, they don’t. Despite the function of each digital currency, they are supported by a blockchain, which is a decentralized peer-to-peer (P2P) network. Blockchain technology’s function is also to ensure that the coins are kept track of - both the ones that are stored in a digital wallet as well as those used for trading purposes.
Blockchain’s infrastructure makes it difficult to cheat the system.
Take Bitcoin for example - one of the first blockchains to leverage a system that requires both the sender and the receiver of funds to sign off on payments via a ‘digital signature’. To make this digital signature possible, each participant has a private and public encryption key that they leverage to verify their ownership of the wallet and sign to complete the transaction. The system is transparent and fully open for anyone who wishes to audit each transaction in real-time.
The main underlying system of each cryptocurrency is the blockchain ledger where all transactions on the network are made public so that they are visible to everyone. Thanks to the ledger, everyone is forced to play fair and it also eliminates any potential risk of duplicate transactions. The ledger cannot be edited by anyone without fulfilling specific conditions.
Transactions on the digital currency networks are approved by “miners” or “validators.” Miners verify and approve the transactions and add them to the public ledger. To verify and add transactions to the blockchain, miners use powerful computers to solve complex arithmetic problems that are crucial to the verification process. Since cryptocurrency mining is open source, anyone can confirm a transaction once a problem has been solved. The miner adds a block to the ledger and is rewarded with fees for the effort.
At the moment, there are over 5,500 cryptocurrencies in existence, which shows the massive growth potential of the sector. Excluding digital securities, we can simplify all these cryptocurrencies into three main categories:
Bitcoin is the first digital currency to come into existence, and it is still the benchmark for the entire industry. Bitcoin accounts for $179 billion of the total $276 billion market cap of the entire cryptocurrency sector, as of July 2020, giving it an entrenched position as the market leader. Thus, it is clear to see why Bitcoin remains the most attractive cryptocurrency to both retail users, who leverage its censorship and inflationary resistance for payments, as well as institutional investors who believe in its future value accrual.
These are known as alternative cryptocurrencies. Every cryptocurrency besides Bitcoin is colloquially called an altcoin. Most altcoins are cryptocurrencies that operate on a blockchain that is not Bitcoin and serve various purposes such as payments, smart networks, cross-border remittance services, and more. Some of the leading altcoins include:
- Ethereum (ETH): second-largest crypto with a $27 billion market cap
- Tether (USDT): third largest with $9 billion market cap
- XRP: fourth largest with $8 billion market cap
- Algorand: a newer competitor valued at $200 million market cap
*Prices from July, 2020
The other leading altcoins include Litecoin (LTC), Binance Coin (BNB), EOS, Cardano, Tezos, and more.
The third major category of crypto assets are tokens. Unlike the first two categories, tokens don’t operate on their own blockchain. Instead, they serve as the coins of decentralized applications (dApps) which are built on smart contract blockchains. Blockchains like Ethereum permit the easy issuance of tokens so that any developer can create their own applications on top of the Ethereum blockchain. While the value of Ethereum based tokens does differ from the value of Ethereum itself, the token prices tend to reflect the utility and active user base of the Dapps that they represent. Many altcoins started out as tokens built on Ethereum prior to launching their mainnet and achieving alt-coin status. Examples of such blockchains include EOS, Neo, and Tron.
What to do when investing in cryptocurrencies
As with every investment, you should take some preliminary cautionary steps before investing in any cryptocurrency project in order to manage your risk. Cryptocurrencies and digital tokens represent technical products and can be rather complex in their goals. Here are a few wise steps to take before you dive into cryptocurrency investing:
Carry out thorough research
This is a universal rule for any investment, not just cryptocurrencies. Asking some simple questions upfront will save you a lot of time later. What is the nature of the project? Does it solve a real-world problem? Who are the founding members of the management team, and what is their previous track record, from the point of view of management experience, growing a company, and understanding of crypto? Is the team transparent about its goals and how it intends to achieve them? What are the latest team achievements and what other projects are they working on? These are just a few of the questions you should be seeking answers to before investing in any cryptocurrency.
Don’t invest based on hype
The crypto market is filled with “pump and dump” projects. These are projects that are hyped so the price can skyrocket. The initial investors cash out when the price surges and then leave the new investors with worthless coins.
Take your time to ensure that your cryptocurrency investing isn’t based on hype.
Invest in cryptocurrency because of the strength of its management team, its performance to date, and its long-term prospects. Failure to carry out this basic assessment could lead to massive losses. Remember also that cryptocurrencies are highly volatile, so it is important that when you’re trading, it’s not based on emotions. That’s why it’s always wise to work with facts, data, and statistics before making any investment decision.
Understand your risk threshold
As an investor, you should understand what level of risk you can tolerate before making any final investment decision.
Be aware of your risk tolerance level, define exactly how much you are willing to invest, and lay out how long you can wait in order to gain a return on your crypto investment.
As with many investments, remember that cryptocurrency investment is a long-term game, and you have to plan towards that. If you prefer to participate in the daily trading of the assets, then you should be a day-trader instead.
Protect your cryptocurrencies
Cryptocurrency exchanges are susceptible to hacks and other cyber-attacks due to their centralized nature. Hence, it is recommended that you store your cryptocurrency stash on hardware wallets. This category of wallet (types of wallets are explained below) provides maximum security to your coins. Ensure that the private keys to your wallet are secure and backed up somewhere, either on a paper document or on your computer).
Where to buy cryptocurrencies
The crypto sector has grown tremendously over the last decade, with an increasing number of companies such as Robinhood, eToro, and others now offering buying, trading, and other services. As such, you can purchase cryptocurrencies from various platforms like Binance, Coinbase, and more- however, it is important to note that some exchanges are licensed, though few offer any guarantee against losses.
The popular places to purchase cryptocurrencies are on exchange platforms, which allow people to buy, sell, and trade various digital coins. The virtual currencies are traded against each other or some popular fiat (regular) currencies including the US Dollar, the GBP, and the EUR. You can purchase cryptos from these platforms using sources like credit cards, bank wire, and other payment methods. Some of the most-used digital currency exchanges include Binance, Coinbase, Bitfinex, Bittrex, Poloniex, and others. While the major exchanges tend to be licensed, and seek full compliance with the law, others remain on far corners of the internet that are skirting rules, and often experience hacks or other nefarious events- so be careful where you trade!
Peer-to-peer platforms are also excellent avenues for buying crypto. These platforms connect buyers and sellers directly. Some of the popular P2P platforms include LocalBitcoins, Paxful, Bisq, Altcoin.io, and more.
Some brokerage firms are now allowing people to invest in crypto like Bitcoin. However, unlike the crypto exchanges and P2P platforms, investors don’t usually hold the physical coins in their wallets. The top brokers that support cryptocurrency investment include; eToro, IG, Swissquote, Plus 500, AvaTrade, and more.
How to store your crypto
Storing your cryptocurrency is one of the crucial aspects of crypto investment.
If you don’t store it properly, you could lose your crypto stash to hackers and other malicious actors.
Here are the classes of wallets to use for saving your cryptocurrencies.
Cold storage wallets
Also known as hardware wallets, they are distinctive wallets that store the private keys in a safe hardware device that is not connected to the internet. The hardware wallet is the most secure method of storing cryptos, as they require the physical device in order to access funds. Examples of this are Ledger, Trezor, and KeepKey.
Here, your private keys are stored on a server, which is always online but controlled by a third party. Various companies operate in this space and offer varying services and features to users. Coinbase, Circle, Blockchain, Xapo, and Lumi are some examples of web wallets.
These allow you to control your cryptos from your mobile devices. The popular wallets here include; Atomic Wallet, Lumi, Edge, and more.
With this, the public and private keys are kept safe on a document. Users can create a paper wallet from platforms like BitAddress and Bitcoinpaperwallet.
You can download and install these on your personal computer. Private wallet keys are kept safe on your computer hard drive. Popular desktop wallets are Electrum, Exodus, and Copay.
Tips on how to invest in cryptos safely and effectively
- When investing in cryptos, here are some things you should know:
- Do your own research and seek expert advice, this is the internet after all, and trolls and scammers are always on the prowl,.
- Verify the credentials and experience of both the technical and the management teams, and seek those who are complying with proper regulations.
- Be careful of hype, there are many liars that will try to lure you into a poor investment.
- Buy your cryptos from established and regulated platforms like Binance, Coinbase, and others
- Like stocks, longer time preferences are safer than quick trades, and save you on taxes!
- Learn about storage options and self-custody. Store your coins in secure wallets (the best are cold storage wallets)
- Stay up to date on current events in the crypto world and learn how they can affect the prices of your assets.
How much do I invest in cryptocurrency?
The sum you invest in cryptocurrency is for you to decide. You can buy cryptos with as much spare money as you desire, however it is recommended that you only invest an amount that you are comfortable losing.
How to determine what cryptocurrencies to invest in?
To know which crypto to buy, always carry out in-depth research into the crypto and its development team. Know every detail of the crypto project and how they are solving real-world problems.
Is it safe to invest in crypto?
Investing in cryptocurrencies comes with a variety of risks, from hacks, to entering incorrect addresses when sending. To ensure peak safety it is recommended to purchase from a trusted provider, and store them in an offline hardware wallet. Cryptos have been around for over a decade now, and they are gaining traction in the mainstream financial world. With more regulations, cryptocurrencies are becoming safer for people all over the world.
From this post, we have learned that:
- Cryptocurrencies are decentralized, digital currencies that continue to gain widespread use around the world.
- Blockchain tech helps ensure that cryptocurrencies operate safely and securely as it eliminates double-spending and counterfeiting.
- There are three major categories of cryptos; Bitcoin, altcoins, and tokens.
- Before you buy any crypto, ensure that you carry out in-depth research and understand certain aspects of investment.
- You can buy crypto coins from crypto exchanges, P2P platforms, and brokers.
- You can store the coins on various types of wallets, including desktop, mobile, cold storage, and paper wallets.
Are you ready to start your cryptocurrency investment journey? Great. You now have all the knowledge you need to make an informed decision.
This educational article is provided by Republic to help its users understand this area of the market, it should not be construed as investment advice as it is impersonal, disinterested and was produced by Republic for Republic’s users, without remuneration received or expected.