Are you considering investing in cryptocurrency, but aren't sure where to start? Don’t worry. In this article, you’ll learn some of the basics of crypto investing, what to consider before investing and how you can potentially make profit from your crypto investments.
In general, cryptocurrency is a type of digital asset that is created and secured using cryptographic techniques, supported by blockchain or other distributed ledger technologies, and that is not controlled by central authorities such as banks or governments.
Blockchains contain individual blocks of data, which can contain information about anything, such as cryptocurrency transactions. Each data block refers to the previous one, creating a chain of blocks. Using cryptography, the reference keeps the chain immutable, so hackers cannot alter it.
At the moment, there are thousands of cryptocurrencies available. Due to the ease of creating a new currency with smart contracts, that's largely what's driving this trend. A new coin can simply piggyback on an existing blockchain that already has an established network of computers verifying blocks.
There are several options available when it comes to investing in cryptocurrencies. Generally, people buy crypto through exchanges or invest directly in specific crypto projects. Additionally, one can consider investing in cryptocurrency funds or becoming a miner or validator. What approach is right or most suitable for you depends on what type of crypto investor you are.
All investments involve some degree of risk. However, conducting proper research and due diligence before investing in crypto is not only essential to understanding the risks, but also to avoiding them.
Typically, traditional investors want exposure to Bitcoin as a hedge against inflation and the collapse of fiat-based economies. While bitcoin's volatility is a concern to many investors, volatility is expected to decrease as institutions and governments enter the market.
Investing a small portion of your disposable income in cryptocurrencies makes perfect sense. However, it’s important to diversify your investments to prevent a total loss, instead of investing all your money in one project.
The first step to investing in cryptocurrencies is to understand what you're investing in. The majority of cryptocurrencies have no tangible backing, neither hard assets nor cash flow. It is the case with Bitcoin, for example, where investors rely solely on someone paying more than they did for the asset. To put it simply, unlike stocks, where a company can grow profits and drive returns for you that way, most crypto assets rely on the market becoming more optimistic.
Secondly, you need to manage your risks when trading short-term assets, and this is especially true of volatile assets such as cryptocurrencies. As a new trader, you will need to understand risk management and create a process for mitigating losses.
In addition, you should ensure that your finances are in order. What does that mean? It means that you should be fully aware of what’s the right amount for you to invest. As a rule of thumb, investors - especially beginners - should never invest money that they can’t afford to lose.
Other techniques or strategies that beginners may consider include diversification and dollar cost averaging.
In the crypto trading world, there are a ton of strategies available. Here is a table summarizing the most widely used ones:
Buying and selling - the concept behind this strategy is simple: buy low and sell high.
Experienced investors know that becoming rich isn't something that happens overnight. Long-term planning and discipline are often required. In spite of the fact that cryptocurrency is a relatively new asset class, it may already be a viable long-term investment worth considering.
Cryptocurrency's relatively short history provides some insight into whether crypto is a good long-term investment. Consider Bitcoin and Ethereum, the two largest cryptocurrencies by market capitalization, for example.
Since Bitcoin was launched in 2009, its value has grown by almost 12,000%, whereas Ethereum has grown by over 92,000%. Investing in either digital currency early could have made you a considerable amount of money today.
If you’re a long-term investor and is more focused on building wealth over the long term, you may consider the following crypto investing strategies:
The truth is that there is no one-size-fits-all crypto investing strategy that guarantees success. A strategy that suits you depends on your personal preferences or approach to investing. You may also want to consider your financial situation and goals when choosing a strategy.
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