The idea of “cryptocurrency” is so mysterious, isn’t it? Many people find it hard to understand how cryptocurrency works, let alone how it can be used as an investment. In the past ten years, the value of the cryptocurrency has gone through the roof, far beyond what many investors expected. We want to explain investing in cryptocurrency.
This beginner guide will show you how to invest in cryptocurrency and how it works if you decide that’s what you want to do.
What Is Cryptocurrency
In theory, cryptocurrency is a type of online currency held and passed around through the internet. In reality, it’s a digital asset that can go up or down in value like stocks and bonds.
In a cash currency, bills and coins are made of paper and metal, but a cryptocurrency uses a “coin,” “token,” or “unit” that is made of code. You can buy a coin, token, or unit from any company that helps people buy and sell cryptocurrency. You can also trade, buy, or sell with other people who own cryptocurrency, which is similar to how people buy and sell stocks in corporate America.
Cryptocurrency is different from regular money because it is “decentralized.” There is no physical cash, so this is the main difference. There is no one person or group in charge of the currency.
How Does It Work
Market mechanisms influence most assets’ value. Consider the housing market. What affects property value? A property may be valued higher if it’s in the desired location, is luxury, or is in an up-and-coming community.
Investing? Success determines the stock value (or the impending success of the company). Profits and dividends rise with stock prices.
In a separate sense, cryptocurrency prices are related to the market. No local asset is tangible. Not connected to corporate profits. A cryptocurrency unit’s value depends on demand.
Cryptocurrency’s value is depending on user demand. Buying crypto will raise its value. Buying cryptocurrency will decrease its value. This confuses new and seasoned investors. High-risk investors who trade volatile assets may not think so. A “volatile asset” may change value quickly and dramatically. Penny stocks are a frequent (and “accepted”) volatile asset. They’re too risky for the typical investor, but Wall Street wolves who research the market can make big money.
Similarly, bitcoin investors might profit from market booms.
Cryptocurrency Market: 3 Things You Need to Know Before Making an Investment
- Cryptocurrency is still a high-risk investment with a lot of volatility
Cryptocurrencies have a lot of ups and downs. Bitcoin is a good example because its price can drop by 30 percent one week and then jump to all-time highs the next.
Compared to when it first became popular, Bitcoin may be doing well, but the returns are neither stable nor guaranteed. Those who bought BTCUSD at the end of 2017 and sold before October 2020 lost money.
If you do decide to buy crypto, you should only put a small amount of your portfolio into it at first.
- The FDIC doesn’t cover cryptocurrency holdings
If your bank goes out of business, your checking and savings accounts are protected for up to $250,000. But you’re pretty much out of luck if your crypto exchange goes out of business, gets hacked, or just shuts down without warning.
- Taxes Apply to Cryptocurrency
Gains from cryptocurrencies are taxed. In 2014, the IRS decided to start taxing crypto gains as capital gains. Since then, at least 24,000 warnings have been sent to people who use crypto.
How to Buy Cryptocurrency
If you’ve decided to take a chance on cryptocurrency, you might be wondering, “How do I invest in cryptocurrency?”
Every cryptocurrency is a little different, but if you want to buy to make money, here are the steps you need to take to start investing in Bitcoin and Litecoin:
- Choose a place to trade cryptocurrencies.
- Start purchasing cryptocurrency
- In a “wallet”, you can store your cryptocurrency
Click here to learn more about the 9 Best Play to Earn Crypto NFT Games of 2022.
1. Choose a Place to Trade Cryptocurrencies
First, you have to choose an exchange to buy from. This is like picking a stock broker. After choosing which exchange you want to start investing in cryptocurrency with, you will be able to make an account with them. You have a lot of choices, but the most popular places to buy and sell crypto are:
- Coinbase
- Binance
- Kraken
- Gemini
- GDAx
- Bitfinex
2. Start Purchasing Cryptocurrency
You can use your debit card to buy crypto on these exchanges. Usually, you can choose from different types of cryptocurrency, such as Bitcoin and Ethereum. One coin could be worth tens of thousands of dollars. Most exchanges, though, let you buy a fraction of a coin, which is much easier for first-time investors to afford. Like a stockbroker, an exchange will charge you a fee for every transaction you make.
3. In a “Wallet”, You Can Store Your Cryptocurrency
After buying crypto, it’s added to your “wallet.” You’ll get a virtual wallet when you establish an exchange account. The wallet contains your bitcoin codes.
Software and hardware wallets exist. A software wallet holds crypto. You’ll receive one when you create an exchange account for active trading.
A hardware wallet stores crypto. It’s more secure than a software wallet but not essential unless you’re purchasing a lot of bitcoin.
What Is Blockchain
Why is cryptocurrency an asset? How can something without a body be worth money?
First gold, then silver supported American money. Every dollar or coin would be connected to gold or silver, giving it actually worth. The U.S. government gives value to every bill and coin. You can print your own dollars at home, but they’re worthless without official approval. (Pro-tip: Don’t print your own dollars and use them; that’s “counterfeiting.”)
How can anything online have value? That’s the challenge bitcoin attempts to answer. The government prints and values $1 bills. It’s unique. Yours.
Complex digital assets. Consider a digital picture. Computer code creates digital photos. You sent a buddy a digital picture. Your computer sends the code to a pal online. Now the same code is on both computers. Duplicated code is worthless. You or your friend? Uncertain.
A cryptocurrency unit’s value and ownership are assigned via “blockchain” coding.
Blockchain breaks a code into several codes stored on numerous computers.
Say a crypto unit’s code was 13BD22.
Computer A stores “13.”
Computer B stores “BD.”
Computer C stores “22.”
To copy the code, a hacker must hack all three machines. Real blockchains would have far longer codes scattered over thousands of machines.
Every machine that carries code is a “node,” and collectively they form the “public ledger.” The public ledger verifies bitcoin data. When data changes, computers compare their records. It prevents hacking.
To make lawful modifications to the data (like if you sold your crypto unit), utilize a cryptographic key, such as a password. Blockchain simply allows adding data to code. Can’t delete data. This preserves the ownership history.
What Are the Advantages and Disadvantages of Crypto Investments
Advantages:
- Massive potential gains: Bitcoin, the most successful investable asset of the last ten years, is a kind of cryptocurrency. It may crash, or it might keep moving upward.
- Support an emerging technology: Your investment in cryptocurrencies is helping industries that are impacted by blockchain technology, including the public, financial, and medical sectors.
- You can work for some “free” money: You can’t “mine” stocks, and you can’t get free real estate by watching quick movies, but you can get free cryptocurrency by doing either!
Disadvantages:
- High risk and volatility: Traditional financial consultants advise restricting your portfolio exposure to no more than 10%, if at all, since cryptocurrency is still too unpredictable to bet the farm on.
- Theft, fraud, and scams: Squid is the most recent cryptocurrency fraud in which the creators stole $3.38 million from investors. Most of the victims of the Mt. Gox attack in 2014, in which 850,000 Bitcoin was taken, have yet to get a single coin back.
Bottom Line:
It has never been simpler to purchase and invest in cryptocurrencies. In many respects, cryptocurrency is still the Wild West. Regulatory control is lacking in this frantic gold rush, but that may soon change thanks to President Biden’s crypto executive order.
If you decide to invest in cryptocurrencies, be sure to educate yourself about the dangers, recommended procedures, and industry developments. Don’t forget to pay your taxes to Uncle Sam as well!
