Bitcoin, Ethereum, Ripple, Litecoin and Bitcoin Cash are just some of the cryptocurrencies that exist today. They’re all digital currencies that use cryptography to secure transactions and verify ownership. Cryptocurrencies like bitcoin aren’t controlled by banks or governments; rather, they’re decentralized systems based on peer-to-peer technology.
When you send cryptocurrency over the internet, it travels across a virtual network “p2p,” meaning there isn’t one central server storing transaction records. Instead, each computer stores a copy of the ledger, called a blockchain. In addition, each computer has access to a shared public database of every transaction ever conducted within the system.
The technology behind cryptocurrencies is growing increasingly sophisticated, and companies around the world are racing to develop innovative applications for it. Some businesses are already experimenting with ways to leverage the underlying technology to disrupt traditional industries.
5 steps for investing in cryptocurrency
1. Understand what you’re investing in
The cryptocurrency market is a wild west, filled with scams, pump-and-dump schemes and outright fraud. There are hundreds of different coins out there, some of which are completely worthless, while others are worth millions of dollars. But even among those that are legitimate, you still need to know how to evaluate them. “There are lots of people who invest in crypto because they think it’s like real estate,” says David Einhorn, founder of hedge fund Greenlight Capital. “But it’s not.”
For starters, you need to know how much money you can afford to lose. Then, you’ll want to look into whether the coin has a track record — did it perform well in the past? And finally, you’ll want to make sure the coin isn’t just another iteration of something else already existing. “If I’m looking at Bitcoin, I don’t care about the history of Litecoin,” says Einhorn. “I want to know what the value proposition is.”
You also need to understand the investment thesis behind each coin. Some are designed to serve specific purposes, such as providing a way to transfer funds across borders without fees. Others are designed to provide a store of value, similar to gold. Still others are simply a vehicle for speculation, hoping that the price rises dramatically over time.
Once you’ve figured out the purpose of the coin, you’ll want to learn about the team behind it. Is the CEO trustworthy? Does he have experience running a successful business? What does his background tell us about the viability of the project? These questions go beyond the obvious: how long has the person been working on the project? How many developers are involved? Do they have prior success building software?
Finally, you’ll want to examine the technical aspects of the coin itself. Are the transactions fast enough? Can you move large amounts of money quickly and cheaply? How easy is it to use the currency? For example, is it possible to buy coffee with it? Or pay rent?
These factors are equally important when evaluating a stock. When choosing a mutual fund, you’d want to consider things like expense ratios, manager turnover rates, and the size of the portfolio. Similarly, when considering a cryptocurrency, you’ll want to ask yourself the same kinds of questions.
2. Remember, the past is past
The stock market is one of those things that people love to talk about, but few actually understand. When you hear someone say something like “I invested $1 million in Apple,” you know they’re talking about the past. They’re saying they bought shares in Apple when it was trading at a price of $200 per share, and they sold them when it reached $700 per share. But there’s no guarantee that the same thing won’t happen again.
That’s because stocks are driven by expectations, rather than history. If everyone expects Apple to trade at $500 per share next week, it’ll probably do so. And if everyone thinks it will fall to $100 per share, it will likely go down that far too. So don’t invest based on what happened in the past; look to what will happen in the future.
3. Watch that volatility
Cryptocurrencies have been experiencing wild price swings lately. Bitcoin dropped nearly $1,000 in just three days earlier this month alone. And while some people see those fluctuations as opportunities to buy low and sell high, others see them as dangerous risks.
Bitcoin, Ethereum, Litecoin, Ripple and Dash are among the most popular digital currencies. Each one is different; each one offers something unique. But they’re all based on blockchain technology, which enables transactions to happen almost instantly across international borders.
The problem is, there’s no central authority like a bank or government to regulate cryptocurrency trading. Instead, cryptocurrency exchanges operate independently, meaning you’ll find many different prices for the same coin.
And since every transaction is logged publicly on the blockchain, there’s no way to hide anything. If someone tries to scam you, you can always check the record yourself.
4. Manage your risk
As a newer trader, it’s important to manage your risks — whether you are buying or selling. But what does “managing risk” mean? Well, there are many different ways to do that, depending on your goals and strategy. For example:
– Long-term investors might simply want to avoid losing money altogether; therefore, they don’t care about the price of an asset, just that it doesn’t fall too much over time.
– Short-term traders, on the other hand, must carefully consider the price of an asset before deciding to buy or sell. They need to know exactly when to take profits and cut losses.
– As a beginner, it’s good to start out small, learning how to properly manage risk. You can always increase your exposure later if you see fit.
5. Don’t invest more than you can afford to lose
The stock market isn’t like a casino where you can win big every time. In fact, the odds are against you. So, if you plan to invest part of your savings in the stock market, you’d better make sure that you don’t risk losing everything. This includes investing too much money in one place.
As long as you keep your investments within reasonable limits, you’ll be able to sleep soundly knowing that you won’t lose your entire nest egg. But what about the possibility of losing some of it?
If you’ve got $100,000 sitting around waiting to go toward your retirement goals, you might want to think twice before putting it into the stock market. After all, there’s no guarantee that you’ll come out ahead.
You could end up losing most or even all of your investment. Even worse, you could lose your job and find yourself unable to meet your financial obligations.
And while the potential losses aren’t huge, they’re still significant enough to give you pause.
So, how do you know whether or not you can afford to take the plunge? Here are five things to consider.
1. How Much Are Your Investments Worth?
Before you decide to put any money into the stock market, you should figure out how much you stand to gain or lose.
For example, let’s say you have $100,000 in cash sitting around right now. And let’s also assume that you expect this amount to grow by 10% per year. That means after two years, you’ll have $110,000.
Now, let’s say you decide to invest half of that money in stocks. That would mean you’d have $55,000 invested in stocks.
After another two years, you’d have $59,500.
But what happens if the value of your portfolio drops by 20%?
In that case, you’d only have $45,000 left.
2. What Would Happen If You Lost All Of It?
It’s easy to get caught up in daydreams about winning the lottery or hitting it big at the casino. But if you really want to retire early, you shouldn’t spend your life playing games with numbers.
Instead, you should focus on building a solid foundation for your future.
That means saving as much money as possible so that you don’t run out of money during your golden years.
3. Do You Have A Plan For Retirement?
If you haven’t already done so, you should sit down and write out a detailed plan for your retirement.
This will help you determine how much money you’ll need to save each month, as well as how many years you’ll need to work until you reach retirement age.
4. Can You Afford To Lose The Money?
While it may seem tempting to try your luck in the stock market, it’s important to remember that you can never predict which way the market is going to move.
Even if you had a crystal ball, you wouldn’t be able to tell when the market was headed upward or downward.
So, if you were to invest all of your savings in stocks, you’d be gambling that you’d be able to turn a profit.
5. Will You Be Able To Pay Off Your Debt?
The last thing you want to worry about is having to pay off debt.
But if you’re planning to retire early, you’ll probably have to deal with debts such as credit cards, student loans, car payments and mortgages.
If you’re struggling to make ends meet, you won’t have the luxury of being able to devote extra money to paying off debt.
All told, these are just some of the questions you should ask yourself before investing in the stock market.
Other ways to invest in cryptocurrency
While investing directly in cryptocurrency may still be the most popular way, there are many different ways to get into the game. Some of these include:
– Futures: Futures are one way to wager on price movements in cryptocurrencies, and futures allow you to leverage the power of leverage to generate massive gains or losses.
– Funds: Crypto funds are similar to mutual funds, except that they focus exclusively on digital assets like bitcoin and ethereum. They offer exposure to both long and short positions, allowing investors to bet on whether prices go up or down.
– ICOs: Initial coin offerings are essentially crowdfunding campaigns where entrepreneurs sell off their newly minted coins in exchange for fiat currency. This allows early adopters to purchase tokens at a discount.
– So they are an easy way to enter the world of crypto without having to deal with the technicalities involved with trading directly.
Cryptocurrency investing FAQs
How much does it cost to start investing in cryptocurrency today? In theory it takes only just a few dollars to invest. But there are many factors that determine how much you’ll actually spend, including whether you want to buy cryptocurrencies directly or use an online brokerage like Coinbase.
In addition to buying cryptocurrencies, you could also consider investing in Initial Coin Offerings (ICOs). These are companies that issue tokens — digital currencies similar to Bitcoin — in return for capital contributions. You can find out more about ICOs here.
Most crypto exchanges, for example have a minimum trade that’s worth around $5 or $10, depending on what type of coin you’re trying to purchase. Some crypto trading apps might have minimums that are even lower.
However, it’s important to remember that some trading platforms will charge you a large percentage of your investment as a “fee.” So it’s important to choose a broker or exchange that charges minimal fees.
How does a blockchain work?
Cryptocurrencies use blockchain technology to verify transactions. A blockchain is a kind of database. In a traditional database, you might store information about people and places. With a blockchain, you could store information about financial transactions. You’d still store information about people and things, but now you’d store information about financial transactions too.
In a traditional database, each record is stored in one place; in a blockchain, each transaction is recorded in multiple locations. Each location keeps track of the previous transaction, making sure no one tries to fake a transaction. If someone tried to fake a transaction, there would be evidence of fraud. This makes cryptocurrencies much harder to counterfeit.
The best way to think of blockchain is like a running record of transactions. Think of it like a ledger book where everyone gets a copy. Everyone knows what happened in the past because everyone has access to the same book.
When a blockchain database powers cryptocurrency such as bitcoin, it records and verifys transactions in the currency, ensuring the currency’s movements and ownership.
Many crypto blockchain databases are run on decentralized computer networks. That is, many redundant machines operate the database, checking the transactions to make sure they’re accurate.
That’s why it takes so long to confirm a transaction. There are lots of copies of the data being checked against one another.
How do you mine cryptocurrency?
Some people are turning to computers to generate money. They use specialized hardware known as ASICs to help them solve complicated math problems. These machines are expensive and require lots of electricity. But it pays off because they are rewarded with bitcoin, which is worth billions of dollars. Mining is how most of the world gets access to the virtual currency.
How can I invest in Bitcoin?
If you want to invest in Bitcoin, it helps to know where to start. There are several different ways to buy cryptocurrency — whether you choose to go through an exchange, broker, or app — and each one offers advantages over another. Here’s how to decide which option works best for you.
What are altcoins?
The term altcoin refers to cryptocurrencies other than Bitcoin. Traditionally, altcoins are considered inferior because they lack the features and functionality of Bitcoin. They’re slower to process transactions, have fewer coins per unit of currency, and don’t offer some of the privacy benefits of Bitcoin. However, many of these same limitations apply to traditional fiat currencies too.
In fact, many people consider Bitcoin to be an altcoin because it doesn’t fit the definition of what we think of as “cryptocurrency.” In reality, it’s just a digital version of cash. But, since it became the biggest coin around, everything else had to be compared against it.