Cryptocurrencies have gained immense popularity as a new form of investment and method of payment. They are characterized by decentralization, security, and anonymity, which attracts more and more people interested in the digital financial market.
In this article, you will learn how to start your adventure with cryptocurrencies, getting to know their basics and the first steps in investing. We will introduce you to key concepts, tools and strategies that will help you understand the world of cryptocurrencies and enable safe investing.
What are cryptocurrencies?
Cryptocurrency is a virtual currency that we manage and exchange online. It is a type of digital asset that, similar to stocks or bonds, can increase or decrease in value. Unlike traditional currency in the form of banknotes and coins, cryptocurrencies take the form of virtual “coins,” “tokens,” or “units.” Such a “coin” can be acquired through companies that deal with cryptocurrency exchange, and then traded, bought, or sold to others who also own crypto – similar to trading stocks.
What sets cryptocurrencies apart from traditional currencies is “decentralisation”. There is no central authority governing this currency. For example, in the United States, the Federal Reserve System manages the national currency, influencing prices, interest rates, and the total money supply in the economy. Cryptocurrencies are not under such control.
Despite the lack of a central governing body, the “system” is responsible for managing the cryptocurrency. This system, run by a cryptocurrency company, monitors all cryptocurrency units and their owners. It also determines when new crypto units can be created.
Although it may resemble the actions of the Federal Reserve System, cryptocurrency systems do not have a central location or server to store units. There are no virtual banks. Bitcoin is by far the largest and most well-known cryptocurrency system in the world. In fact, some financial experts refer to any cryptocurrency that is not Bitcoin as an “altcoin”.
What are the types of cryptocurrencies?
Currently, there are over 26,000 different cryptocurrencies. What started with Bitcoin, the pioneer among digital currencies, has quickly grown into a vast number of alternatives known as altcoins. Despite many years on the market, Bitcoin still maintains its position as a leader and is the most recognisable cryptocurrency worldwide. Its uniqueness and pioneering character attract investors, despite the emergence of many other options.
In recent years, several cryptocurrencies have gained importance, creating strong brands with high market capitalization. Ethereum, Tether, XRP, and Dogecoin attract investors looking for stability and innovation.
Investing in cryptocurrencies, however, comes with certain risks. This market is extremely volatile, as demonstrated best by the year 2022, when after significant growth in the previous year, the value of most cryptocurrencies dropped. Therefore, it is important to carefully research each digital currency before investing funds and understand the risks involved. The final decision on investment should depend on an individual assessment of potential gains and losses.
How does digital currency work?
Cryptocurrencies operate on the basis of supply and demand in the market, not directly tied to physical assets or corporate profits. The value of a unit of cryptocurrency depends solely on whether and how much people want to buy it. This means that if many people decide to purchase a cryptocurrency, its price rises. On the other hand, when interest wanes and people stop buying, the value of the cryptocurrency decreases. This valuation model may seem unconventional, especially compared to more traditional assets. Where value often relies on more tangible indicators, such as property location or company financial results.
In the world of investments, where many people seek stability and predictability, the volatility of cryptocurrencies presents both a challenge and an opportunity. Investors accustomed to trading stocks or real estate may feel disoriented by assets whose value can rapidly rise and fall based solely on market interest. However, for those willing to take on greater risk, such a dynamic environment offers the chance for quick profits, provided they can effectively predict market fluctuations.
Comparing cryptocurrencies to other volatile assets, such as low-value stocks known as penny stocks, one can observe certain similarities in the approach to investing. Both of these asset classes attract investors willing to take on high risks in exchange for potentially large profits. The key to success in both cases is a deep understanding of the market and the ability to quickly react to its changes.
What should you pay attention to before investing in cryptocurrencies?
Investing in cryptocurrencies can be like riding a rollercoaster – values can rise and fall sharply in a short period of time. If you don’t like risk, this volatility may be a reason for you to reconsider. It’s worth remembering that anyone can create their own cryptocurrency, and regulations in this area are constantly changing. Therefore, it is crucial to carefully analyze potential investments to avoid scams.
Before investing, it is also worth considering why you want to invest in crypto. Do you want to follow a trend and profit from it, or do you have a well-thought-out strategy? It is important to remember that there is no easy way to make a large sum of money quickly without risk. Therefore, do not invest in something believing that there is no possibility of losing. Approach investments cautiously, with clear intentions and expectations. Consider investing in cryptocurrencies only if you believe in their long-term prospects and are willing to accept significant price fluctuations.
When investing, it is extremely important to adopt a long-term perspective, especially when dealing with volatile assets such as cryptocurrencies. They can quickly gain or lose value, which can easily lead to emotional decisions, such as buying out of fear of missing out when prices rise, or selling when prices fall. Decisions made under the influence of emotions usually do not bode well for your investments.
The best cryptocurrencies for beginner investors
Before starting to invest in cryptocurrencies, it is important to know the available types. Bitcoin is often called the grandfather of all cryptocurrencies. It has been on the market for over 10 years. It is the largest cryptocurrency system in the world by market capitalization. It is an excellent starting point for any novice investor. Every currency exchange supports Bitcoin, making it easier to understand what you are investing in. Bitcoin serves as digital cash, enabling currency and value exchange, giving it a competitive edge.
Ether is another cryptocurrency that focuses on purchasing applications without the need to pay a middleman, thus bypassing stores like Apple Store. This is an important feature for those seeking ways to become independent from traditional distribution platforms. On the other hand, Cardano is mainly used for storing private data. As an alternative to Ethereum, it is more energy-efficient, resulting in lower costs.
Deciding to invest just because someone said it’s a good idea may not be the best strategy. It’s important to conduct your own research. When buying cryptocurrency, remember that it doesn’t have intrinsic value. It rather represents ownership of a digital asset. The price is determined solely by public perception of its value, so you have to believe in the value of the cryptocurrency you intend to invest in. How to develop such beliefs? By conducting your own research.
Are cryptocurrencies a good idea for investment?
Cryptocurrencies, such as Bitcoin, are investments that can bring a lot of excitement due to their volatility. Imagine a situation where you decide to buy a few units of Bitcoin, and suddenly its value starts to rise because well-known personalities recommend it, a loud movie or article about it appears. Then more people want to buy, pushing the price up. However, it is important to remember that as quickly as the value rises, it can fall just as quickly.
If you decide to sell at the right moment, you can make a fortune. That’s exactly what speculators do – they sell when demand is at its peak, pocketing hefty profits. The problem is that it’s hard to pinpoint the perfect time to sell. Financial markets are unpredictable as it is, and the cryptocurrency market is even more volatile. The value of a cryptocurrency can plummet sharply within a few days or even hours. If you don’t sell before the demand drops, you could lose a lot.
Nevertheless, for experienced investors who enjoy adrenaline and are not afraid of risks, cryptocurrencies can be a source of huge profits. It is important to follow the market and react quickly to its changes. However, remember that investing in cryptocurrencies is a high-risk game and should not be the foundation of your investment portfolio. It is better to start with lower-risk investments, such as bonds or real estate, and treat cryptocurrencies as an addition that may, but may not, bring high profits.
How much should you invest?
Experts often advise not to allocate more than 1% to 5% of your wealth into cryptocurrencies. When deciding how much of your investment portfolio should be dedicated to crypto, it is crucial to limit your overall exposure to this sector. Never invest more than you can afford to lose. While a small exposure to cryptocurrencies can enhance the risk-return profile of a diversified portfolio, the total amount invested in crypto should align with your overall investment plan and risk tolerance.
Taking this into consideration, diversification within investments in cryptocurrencies is another important aspect. The specific cryptocurrencies you choose to invest in matter because some coins have better long-term potential and are less susceptible to price manipulation.
Although the entire cryptocurrency market can be unpredictable and volatile, investments in larger, more popular cryptocurrencies may involve less risk compared to smaller, more speculative ones. However, even the largest and most well-known cryptocurrencies can experience significant price fluctuations. Therefore, it is worth considering diversity of cryptocurrencies in your portfolio, as well as the total amount you will invest in them.
Security when investing in digital currencies
When investing in cryptocurrencies, you must take special precautions to protect both yourself and your capital. Doubts about credibility, security, and privacy are common among novice cryptocurrency investors.
One way to reduce these concerns is to thoroughly research the cryptocurrency you want to invest in, as well as the platform behind it. Check who owns the market you are interested in and look for more information about it. Investigate how long the company has been operating in the market and at what stage of development the platform is in.
Unfortunately, cryptocurrencies are susceptible to hacker attacks and other technical issues that do not affect other types of investments as frequently. Therefore, it is crucial that you understand the market you are planning to work with. A good starting point is often choosing platforms used by established investors. This, along with a solid company structure, can serve as a sign of stability in that market.
Summary
In our guide “How to invest in cryptocurrencies for beginners” we have presented the basic information that every new investor must know. By having the right knowledge and using a balanced approach, one can take advantage of investing in virtual money to build a diversified portfolio that will bring high financial returns. It is worth remembering that every investment carries risks, but making informed decisions and continuously educating oneself in the field of cryptocurrencies can significantly increase the chances of success.