Even before the first real-world purchase made using Bitcoin (and it was for pizza), speculators have seen cryptocurrencies as an alternative to traditional currencies. Right now when everyone around you is talking about crypto investing, it is easy to make poor decisions to hastily invest in a cryptocurrency you read about on some online forum. DON’T! You can consider this article on Cryptocurrency investing for Dummies as a base to save your hard-earned money.
I know it can be hard to stay real after reading about young crypto millionaires and FOMO is a real pain, you have to understand the nuances of crypto investing before you start putting your hard-earned money in cryptocurrencies.
North American Securities Administrators Association cited crypto-and-digital assets-related investments as top threats to investors in 2022.
In this guide on cryptocurrency investing for dummies, I have covered the basic nuances of crypto-investing, green flags to look for, what not to, and much more. But before we get into that, I want to cover why to invest and why not to invest in cryptocurrencies to set the expectations right.
1. Why Invest in Cryptocurrencies?
1. The Technology
The blockchain technology behind cryptocurrencies has proven itself in a diverse range of verticals. It’s secure, reliable, decentralized (more on this later), and exciting. If you are someone who loves new technologies, there are many (reliable) cryptocurrencies like Bitcoin and Ethereum that you can invest in.
2. Decentralization of it all
The ethos behind cryptocurrency offers a decentralized alternative to conventional currencies. Irrespective of the country, conventional currencies are issued, maintained, and regulated by one central entity – banks. Cryptocurrencies, on the other hand, are controlled by end-users. There is no specific authority controlling cryptocurrency.
3. Portfolio Diversification
If you ignore a few scams with newer ones, cryptocurrencies now have huge social proof and billions of users. Different industries are slowly, but steadily, adopting them. So, if you are looking to diversify your investment portfolio, you should start investing in cryptocurrencies – especially in the big ones like mentioned earlier Bitcoin, Ethereum, etc.
Besides, cryptocurrency prices are nowhere correlated to stock market fluctuations.
4. Pre-defined Market Supply
There are processes in place that regulate cryptocurrencies. For instance, only 21 million Bitcoins can ever be mined. So, there will be a time when no more Bitcoins can be mined. It’s easier to get your hands on Bitcoin now than it will be in a couple of years.
5. Validation of cryptocurrency
When we talk about the fact that no central authority controls cryptocurrency. The first thought that comes to mind is if something goes wrong. A classic example of this is if you make a payment for a purchase and the vendor denies the receipt. Well, that is where validation of cryptocurrencies comes into force.
All the cryptocurrencies have a validation & consensus mechanism a.k.a proof mechanism. There are different types of proof to reach consensus like Proof of Work (used by Bitcoin), Proof of Stake (used by Ethereum 2.0) and so on. I have compiled an article about it here.
What happens is that a set of people validate the transaction using complex calculations (Proof of Work) to confirm if the transaction is genuine. So, your transaction of payment to the vendor above is confirmed by independent miners on the blockchain. Hence, no one can deny the receipt of the amount. Further, all these payments can be viewed on the Blockchain as they are all public.
2. Where can I buy Cryptocurrency from?
There are many Exchanges both Centralized & Decentralized exchanges from where you can buy your cryptocurrencies. Centralized Exchanges are easier to use as they have good user interface and easier procedures. Decentralized Exchanges are safer but are comparatively difficult to use. Most investors and traders prefer Centralized Exchanges and they amount for over 99% of the transactions.
You can read more about Centralized Exchanges Vs Decentralized Exchanges here.
Some of the popular Centralized Exchanges are:
3. Why not Invest in Crypto?
If you are investing in cryptocurrencies for all the wrong reasons, you shouldn’t. Crypto investing is not a get-rich-quick scheme. Some cryptocurrencies have seen a growth of 1000x in a short span and have plummeted even faster at times.
The first rule of cryptocurrency investing for dummies is if you are entering into cryptocurrency just to make some quick buck, I’d advise against it. Cryptocurrencies are highly volatile as we have quite often seen so follow the rule of not putting all your eggs in one basket; a high-risk one like cryptocurrency even.
Now that the expectations are set right, here are a few tips on cryptocurrency investing for dummies to keep in mind when investing in cryptocurrencies.
4. Do Your Own Research – DYOR
DYOR is a popular term in the cryptocurrency community to encourage new investors to filter through the misinformation and biased articles about a particular token or crypto asset.
Just like any other investment, it’s important to understand the cryptocurrency you’re investing in, its real-life applications, and such other things. This becomes especially difficult because there are hundreds and thousands of cryptocurrencies out there.
Let’s take stock investments, for example. You, as an investor, look at things like the vision, financial statements, and future plans (among many other things) before you buy a company’s stock. You will profit from your investment when the company grows and multiples its profits.
Unlike stock investments, you can only profit from crypto investment if someone else is willing to pay more than what you initially did. This depends on how popular or applicable a crypto token/asset is, how optimistic investors are, and the features that the crypto offers. These days we many new Decentralized Finance cryptocurrencies that offer attractive interest, staking rewards, farming, mining for holding your currencies.
An essential part of DYOR before any crypto investment is to read the project’s whitepaper. Understand what that particular cryptocurrency is aiming to solve, how sustainable is its mining process, how it functions, etc. It will give an overview of what you’re getting into.
5. Invest What You Can Afford to Lose
Cryptocurrencies are more volatile than almost any other asset out there. Even a widespread, baseless rumor can set off their prices by thousands. So, unless you’re investing in cryptocurrencies with a strong foothold, such as Bitcoin & Ethereum, you must invest only as much as you can afford to lose.
For instance, the prices of Dogecoin (a meme coin that became super popular) allegedly soared up or went down when Elon Musk tweeted positively or negatively about it.
There is a popular saying with stock investments “buy low and sell high” which can miserably fail with crypto investments. High ticket crypto investors with a solid understanding of the technology and an ability to quickly execute trades, however, can profit from this volatility.
You, as a new crypto investor, should be cautious with your hard-earned money and invest only as much as you understand a crypto project & the technology behind it.
6. Past Data Is Not Always Reliable With Crypto Investing
Unlike conventional investments, you shouldn’t judge a cryptocurrency by looking at its past data. The past performance of a crypto asset, in no way, can control or can be used to predict its performance in the future.
While it is true that some cryptocurrencies have grown by 10000x over time, it doesn’t necessarily mean that they will grow in the future as well.
You need to understand the future aspects of a cryptocurrency and its technology. Once you do, invest only if you see a future for a cryptocurrency and stick to your investments even when it goes under.
If you are investing in a newer cryptocurrency, it is advisable to sell it when it goes 10% under so you do not lose a lot of capital. Though, this is a rule of thumb only and No scientific
7. Don’t Fall Prey to Scams
Crypto scams are on the rise. And you, as a new crypto investor, should be super cautious about where to & where not to invest your money. According to the Federal Trade Commission (FTC) Consumer Sentinel, nearly 7,000 people reported losses of $80+ million in crypto-related scams from Oct 2020 to March 2021.
There are a few tell-tale signs that you can use to tell if a cryptocurrency is a part of one large scam.
As a general rule of thumb, don’t invest if anything about the cryptocurrency sounds too good to be true. For instance, if a cryptocurrency mentions “guaranteed returns” anywhere, run away from it.
Another common way scammers use is fake mobile apps/websites, announcing Initial Coin Offerings (over emails), tweets, social media messages, etc. Always remember DYOR before you invest in any cryptocurrency.
I thought I should share a recent one with you. This scam is about a meme token “Squid Games”. The prices of the token soared to $2800 in few days and suddenly collapsed in few minutes. The founders sold their entire stock in 5 minutes thereby dropping the prices to almost zero and are now untraceable.
8. Backed by A Strong Community
One way to earn profits through crypto investments is when someone else is willing to pay for it more than what you initially did. So, if more and more people are willing to buy a crypto asset, you stand to earn more profits by investing in it.
Look for the size and quality of a crypto asset’s community before investing in it. Most cryptocurrencies are validated using miners (with vested interest in them) and the larger its community is, the more stable it is.
So, it is important to take into consideration the backing of a crypto’s community, before investing in it. If you look at the communities of popular cryptocurrencies such as FileCoin, Bitcoin, Ethereum, and others with high market caps, you’ll be able to relate what I am talking about and why backing of a strong community is a good sign for a new crypto investor.
Over to You!
Cryptocurrencies and other crypto-assets like NFTs are in a craze right now, but you cannot ignore the volatility and speculation behind them. If you’re getting into cryptocurrencies with the right expectations, you can stand to gain good profits over a longer duration.
Another thing is your choice of exchange without which this guide on cryptocurrency investing for dummies would be incomplete. We have mentioned various Crypto exchanges that you can use above.
Having said that, it is also important to choose the right crypto exchange to invest in cryptocurrencies. Here are a few things to look for while choosing an exchange for investing in cryptocurrencies as a beginner.
- Don’t blindly trust any media article or social media posts you read about an exchange. DYOR to learn more about its history, makers’ credibility, and user reviews.
- Always check/read about the fees of an exchange before you choose it.
- Look for security protocols in place of an exchange. This will assure you of your asset’s security over time.
- As a new crypto investor, ease-of-usage of an exchange is another factor you should take into consideration.
- Different governments have their own regulations for crypto investments and exchanges. Make sure the exchange you choose for regulations issued by your country’s authorities.
I personally believe crypto investments have a long way to go. Choose your crypto assets wisely, DYOR, and don’t click on any suspicious links (no matter how urgent they might sound). The purpose of writing this article on Cryptocurrency investing for dummies was to make sure you don’t fall prey to scams and lose your money.