It has been more than a decade since cryptocurrency became a real investable asset. In that period, the media has been awash with various crypto-related stories. But despite the ebb and flow of the ecosystem, the cryptocurrency ecosystem continues to light up, and investors are lining up to get into action.
Bitcoin and altcoins like Ethereum and others exhibit high volatility levels. However, the most outstanding characteristic is that the coins are not your typical assets. To an extent, they play on the fringe of the investment world. For that reason, your financial advisor may not be helpful if you seek advice in this regard. What to do now? This article attempts to break down the sector so that you and other unsophisticated investors can onboard without much difficulty.
But before we get into the details of investing in cryptocurrencies, let’s learn a bit about the assets.
Cryptocurrency is an encrypted data string hosted on a blockchain network, which denotes a currency unit on that network. In other words, it is a type of digital currency that relies on cryptography to create new units and verify transactions. For example, Bitcoin enables users within the bitcoin blockchain to trade without a central authority.
A cryptocurrency works thanks to blockchain technology. Blockchain technology refers to a system of recording information based on a ledger architecture. The ledger is distributed among peers or nodes in the network to ensure the recorded transactions are unalterable and impossible to duplicate.
While cryptocurrency enjoys the support of ingenious technology, what really is the reason for the explosion onto the global scene? It has to be peer-to-peer transactions. The peer-to-peer or P2P system enables anyone anywhere to receive or send payments. Unlike traditional finance, the cryptocurrency ecosystem does not require intermediaries like banks to ensure trust and security.
Since Bitcoin’s launch in 2009, many other cryptocurrencies have emerged. According to CoinMarketCap, a website that tracks crypto, there were 18,737 cryptos at writing, with a little over $2 trillion market capitalization. However, the most popular coins are a handful, including:
- Bitcoin (BTC)
- Ethereum (ETH)
- Ripple (XRP)
- Litecoin (LTC)
- Tether (USDT)
How to select a cryptocurrency for investment
You cannot possibly invest in all of the over 18,000 cryptos. Even if the list is trimmed to the best ten, it would be impossible to make the right choice if you lack a proper selection mechanism. So, how do you select the best crypto to invest in?
Do exhaustive background research
All that begins from a position of knowledge has a better shot at success. Whether you are a newbie or a veteran investor, the cryptocurrency landscape requires extensive knowledge to grasp how it operates.
For starters, one must know that investing in a cryptocurrency is not similar to equity investment. On the one hand, buying stock gives you a share of ownership of the company. Contrarily, buying crypto merely grants you ownership of a digital asset.
While doing the background research, ensure you understand the factors influencing the cryptocurrency’s price. Is it supply and demand? A typical cryptocurrency has a limited supply. As such, its price goes up when demand increases. So, the most crucial question you should seek answers to is this: how does the crypto’s supply increase?
While at it, also find out the factors that affect the coin’s demand. It means looking for the areas of the coin’s potential. Thankfully, all reputable cryptocurrency projects have whitepapers.
A crypto whitepaper is a document that project developers release at launch. It explains the project’s purpose and vision and the technology supporting it. Additionally, it describes the project’s facts and statistics to potential investors. For example, Bitcoin’s whitepaper proposed the peer-to-peer system underlying today’s decentralized finance (DeFi) ecosystem.
Engage the community of people already investing in the crypto
Beside the whitepaper, the cryptocurrency’s following is another crucial aspect you shouldn’t miss to evaluate. The community’s sentiment is a critical indicator of the coin’s performance.
Most crypto projects with a solid following have subreddits and YouTube channels that convey essential feedback. Since a substandard project can’t create a following of loyal supporters, this should help you weed out wrong bets.
While at it, pay attention to what the followers are saying, particularly on investment. A careful evaluation of the feedback should make it possible to spot and avoid pump-and-dump hype.
Evaluate the team behind the project
Experience has shown that some actors are adept at forging whitepapers and creating fake communities using bots. However, such actors are often unable to get it right when revealing the team of developers and backers.
When researching the coin, ensure you vet each member of the team. Some of the things you could do include:
- Assess the identity of the project’s backers.
- Evaluate their expertise and ensure you trust their integrity.
- Do they have any scams associated with them?
Evaluate the pricing history
It is critical to consider the amount of money that the coin has already attracted. Thankfully, there are plenty of websites, including CoinMarketCap and CoinDesk, where you can find crucial information like market cap and daily trading volume.
Depending on your investment philosophy, the market cap could help decide if the coin is a worthy asset or not. To some, a high market cap could indicate a small potential for further growth, making the coin unattractive.
Furthermore, this is the right time to perform market analysis research. Some issues to consider include:
- Is the coin’s value too volatile?
- Does the coin display resilience in the face of a big dip?
- Where is the coin’s value at present? Is it at an all-time low or high?
These steps are not exhaustive, but they will get you somewhere. Specifically, they will prevent you from falling prey to dubious scams with fancy names and whitepapers.
Investing in cryptocurrencies
Selecting the right coin to invest in is only the beginning of the cryptocurrency investment journey. How do you invest in cryptocurrency? There are two answers to this question.
Firstly, you can invest in cryptocurrency by buying actual coins on a cryptocurrency exchange, storing them in a private crypti wallet, and selling them at a higher price. Secondly, you could take a position in cryptocurrency derivatives, such as contracts for difference (CFDs). The difference here is that you’ll get ownership of actual digital assets with the former, while with the latter, you’ll only get a claim to the assets. The claim is often settled in fiat currency.
Nonetheless, the onboarding process is usually similar whether you wish to buy actual coins or trade crypto derivatives. The following steps describe the typical onboarding process:
Step 1: Select the appropriate platform
Cryptocurrency exchanges like Coinbase and Gemini enable users to buy digital currency with fiat. However, you must open an account first. The typical registration process begins with providing personal information, including full name, email address, telephone number, and residential details.
It is worth mentioning that some crypto exchanges extend their services to crypto derivatives, although there are dedicated cryptocurrency brokers.
Step 2: Fund the account
The account funding process differs depending on the platform. For example, Coinbase accepts major currencies like the US dollar (USD) and the British pound (GBP), and others like Binance accept up to 18 fiat currencies. Additionally, some exchanges and brokers accept Bitcoin and a handful of altcoins.
Also, some platforms allow users to trade directly with credit cards and digital payment service providers, including PayPal and Skrill.
Step 3: Place an order
With your account funded, you can proceed to the marketplace and order your coins. Crypto exchanges operate similar to stock exchanges, where they match buy orders with sell orders at the market price. On order fulfillment, the exchange will hold the coins on your behalf in a custodial crypto wallet, although you are free to transfer them to a private wallet.
For a crypto derivatives trader, the process is different. Once you complete the funding process, the broker will direct you to the trading area, where you will open a position in the market. Unlike buying actual coins, crypto derivative trading allows customers to take positions on both sides of the market – you can open a buy or sell order.
Every investor is unique. For this reason, investors will always follow different patterns and routes when engaging in the cryptocurrency market. Most importantly, it is worth noting that the most crucial factors that should guide an investor are appetite for risk and investment goals.
When evaluating crypto investment opportunities, always take proper precautions to avoid falling into scammers’ hands. For example, ensure you conduct exhaustive background research on the potential digital asset. If you buy coins to store in a private wallet, take great care not to lose your keys or exposure to bad actors. Also, it is helpful to know that the crypto ecosystem is quite volatile, and thus, it is wise to avoid overexposure to a specific asset. Try investing in multiple coins to spread risk.