How to Start Investing in Cryptocurrencies?

02/06/2016 Written by Gregory Shriver
cryptocurrency

Over the past few years, cryptocurrencies have become so popular that the words “bitcoin,” “ether,” or “mining” can be heard from people far removed from the world of cloud technology. Investors are also actively entering the digital money market, preferring it to traditional stocks, securities and deposits. Let’s find out how to invest in cryptocurrencies and which projects to choose in this article.

What a beginner should know before investing in cryptocurrencies

Many people are interested in the topic of cryptocurrencies mainly in terms of investment and the opportunity to earn “easy money”. But when investing in digital currencies, you can lose much more than in other markets.

If you’re just starting to look at cryptocurrencies as an investment asset, you should know the main things about this market:

The rate of most cryptocurrencies depends mainly on the demand for bitcoins because of Bitcoin’s dominance (62% of the market) among other blockchain projects. For example, Ethereum is only 16% of the total market and XRP is 1.5%.

Investing in cryptocurrencies involves high risk, which the investor must take into account. Exchange rates fluctuate from hundredths to hundreds of percent within a few months.

Investing money in crypto requires an investment plan. You need to be clear about how quickly you want to make a profit, how much you are willing to invest, and what asset to use.

The most important rule for a beginning investor is to invest exactly as much as you are prepared to lose if the investment project fails, and to do your own research on the cryptocurrency market.

Fundamentals of investing in cryptocurrencies

Starting to invest in a completely unfamiliar market means wasting your money. A competent investor always starts with studying the investment market and assets. In order to study the virtual money market, fundamental and technical analysis is applied, just like in traditional trading.

Fundamental Analysis

The fundamental method of analysis is most often used to assess the state of a particular cryptocurrency project by checking its:

  • reliability;
  • financial capabilities;
  • prospects of development;
  • clients/users.

If you are going to invest in new cryptocurrencies or tokens, about which not too much is known, but they have growth potential, you first need to check the following components of the crypto-project:

  • The White Paper or the project’s operating plan. You need to check if there is a technical document for the development of the cryptocurrency, platform or other asset that is being offered for investment.
  • Team. Here you should pay attention to who is behind this or that project, analyze the experience of the team and the resources that the project has. There are cases when the entire project is a sham and the “team” are nonexistent people.
  • Roadmap. It is important that the project has a development plan and that it describes what and in what period the developers plan to implement, what actions to perform to increase the value of their own or cryptocurrency tokens.

Be careful of false information spread on the network by bots or advertisers. These types of projects promise high profits in the form of dividends, but are often just pyramids and exist for a very short time, bringing profits only to their owners.

When looking for investment opportunities, you will most likely have to choose between two types of assets:

  • Cryptocurrency. Crypto-currency is a ready-made working project, applicable in the digital space. Here you should pay attention to what it offers: advanced smart contracts, anonymity in transactions or other features that promise the development of the project.
  • Token. Such units of account are not cryptocurrencies, but are needed to represent a digital balance in some asset. Tokens are usually issued in two forms:
  • ICO (initial coin offering) – a fundraiser similar to crowdfunding in which developers place a certain number of tokens for sale to initial investors.
  • IEO (Initial Exchange Offering) – a collection similar to an ICO, but the tokens are issued on an exchange that vets the project according to its guidelines, which is less risky than an ICO because there is an intermediary.

When choosing a crypto-asset investment, it is also worth paying attention to the technical specification of the project, in particular:

  • Consensus algorithm – transactions can be validated in several ways: Proof of Work (PoW), such as Bitcoin, Proof of Stake (PoS), such as Cardano.
  • Inflation – some cryptocurrencies have a predetermined finite amount, such as the bitcoin limit of 21,000,000 units, while others can be created indefinitely, like Tether, which has a new pool from time to time.

Before investing in a particular cryptocurrency, it is worth checking whether the project is based on blockchain or DLT technology. For example, Binance Coin was created as an ERC-20 standard token on the Ethereum platform, but the developers plan to switch to their own blockchain, which means that BNB will increase several times in the near future. Another example is the fork on Ethereum, the interest in which will increase, because the owners of ETH coins will receive the same amount of new cryptocurrency on the day of creation of the new project.

Technical Analysis

Technical analysis is mostly based on the study of price charts of cryptocurrencies over different time periods. It uses various methods to predict prices, such as Elliott waves, Japanese candlesticks or Fibonacci levels. Technical analysis is mostly used in fairly “stable” markets, which have been around for about a dozen years. Cryptocurrency/token rates are volatile and using this analysis can be very risky.

Advantages and disadvantages of investing in cryptocurrency

Whether you are new to the world of investing or already a seasoned investor, you may be wondering if there is a place for cryptocurrency in your portfolio. Given the staggering rise in the value of bitcoins and other cryptocurrencies, it’s easy to see why there is so much interest in these forms of investment. Even so, you should proceed with caution. Cryptocurrency may have a place in your investment portfolio, but only after you’ve assessed the major benefits and risks of the instrument.

Advantages:

  • High returns. The value of cryptocurrencies changes constantly and often the difference is hundreds of percent over months or even weeks.
  • Active development of the cryptocurrency market. The crypto market is growing faster than any other financial market and today its total capitalization exceeds $1,100,000,000. Of course, 62% of this volume is the capitalization of Bitcoin, but other projects show growth, which is largely due to the increase in the value of BTC coins.
  • Flexibility of use. Compared to stocks, bonds, mutual funds and precious metals, cryptocurrencies are much more flexible to use. BTC and ETH coins are more than just investment assets, they are a form of virtual money. More and more stores, restaurants, and banks are already accepting cryptocurrency payments, and more acceptance of digital money as a payment instrument is only expected. This provides more flexibility and freedom for the investor, including the ability to turn their assets into goods and services with the click of a mouse.

Disadvantages:

  • Security issues. Cryptocurrency investments are not like stocks and bonds, and the security situation is one of their drawbacks. New investors are often surprised to learn that their assets could disappear if hackers gain access to the accounts, and unlike other investments, there is usually no way to get their money back. Some cryptocurrency investors prefer to keep their coins in cold wallets, insulating them from Internet access and the associated risks.
  • Taxes and regulation. There are real risks in the cryptocurrency market, including the dangers of future taxation and additional regulation.

There are many more nuances to investing in cryptocurrencies, and the challenge for investors is to consider as many of the risks as possible, weighing them against the potential rewards.

Popular cryptocurrencies among investors

Among the variety of cryptocurrencies, there are several most popular today:

  • Ethereum (ETH) – a platform that allows the creation of smart contracts and tokens, the Solidity programming language was created specifically for the project.
  • Ripple (XRP) – a project for the rapid transfer of funds in international trade, it is distributed, not decentralized.
  • Litecoin (LTC) – very similar to Bitcoin, differs only by the faster block confirmation (2.5 minutes), the final number of units (84 000 000) and the encryption method (Scrypt).
  • Polkadot (DOT) is a token that provides control of the Polkadot network and its operations, as well as it is involved in the creation of parachains (parallel chains) by linking.
  • Binance Coin (BNB) – a cryptocurrency created by the Binance exchange, offering discounts related to exchange commissions and other bonuses.
  • Stellar (XLM) – a cryptocurrency that is mainly used for micropayments and also offers the creation of smart contracts.
  • Chainlink (LINK) is a decentralized network for linking smart contracts with data from the real world via “oracles.” DeFi the Chainlink oracles token, is used to pay data node operators.
  • Synthetix (SNX) is an Ethereum derivatives liquidity protocol that allows synthetic assets to be issued and traded. Each synthetic asset is an ERC20 token that tracks the price of an external asset (e.g. shares of various companies).

Ethereum, Litecoin and Binance Coin are particularly promising among the options presented.

Ethereum (ETH)

Among altcoins, the most notable is Etherium (ETH). It is a digital currency that can be successfully used for:

  • investment;
  • money transfer;
  • speculation due to exchange rate fluctuations.

Until recently, the price of Ether (ETH) was thought to be highly dependent on Bitcoin (BTC), but a study published by analytics company Skew shows that in 24 months, out of 14 significant rate changes between BTC and ETH, only in five cases did Ether change following Bitcoin.

Litecoin (LTC)

Litecoin is an open source cryptocurrency under the X11 license that is similar to bitcoin, but has several significant differences. First, the Litecoin network processes a block every 2.5 minutes, while Bitcoin processes a block every 10 minutes, which allows transactions to be confirmed faster. Second, the Litecoin network will produce 84,000,000 coins, four times the number of BTC coins in the Bitcoin network.

Binance Coin (BNB)

Binance Coin is an instrument token owned by one of the largest cryptocurrency exchanges – Binance. The rate of BNB does not correlate with the prices of other digital currencies, which makes it more resistant to value fluctuations. In addition, BNB operates as part of the loyalty program of the Binance platform, gives access to certain services as part of trading on the exchange, in particular a quick exchange for other cryptocurrencies.

Investment Risks

Investing in cryptocurrencies is always a risk. The cryptocurrency market is decentralized, so it has a very high level of volatility: fluctuations in the rate of different coins can vary from 1-2% to 100-300% over a short period of time. In addition, the cryptocurrency is strongly tied to demand. That is, if major market players buy certain coins over a period of time, it moves the market in one direction or another. Volatility and speculation are the main risks of the cryptocurrency market