What You Should Know Before Investing In Crypto
What many people thought was originally going to be a fad has proven that it is here to stay. Not only have people gotten rich by investing in crypto, but it has begun to see use in a wide range of applications. As such, the temptation might be there to throw your hat in the ring and to start investing yourself but take a breath before you get started. There are a few things you should know about the market before you dive in.
Know How Cryptocurrency Works
Before diving into cryptocurrency investment, it is crucial to understand how it works. Cryptocurrencies are digital or virtual currencies that use cryptography for security. Unlike traditional money, they are decentralized and typically operate on a technology called blockchain. A blockchain is a distributed ledger that records all transactions across a network of computers, ensuring transparency and security. Bitcoin, the first and most well-known cryptocurrency, paved the way for thousands of other digital currencies, known as altcoins. As a beginner, it’s essential to grasp the fundamentals of how cryptocurrencies are created (through mining or pre-mined), how transactions work, and what makes them different from traditional fiat currencies.
Understand Their Volatility
Cryptocurrencies are notoriously volatile. Unlike stocks or bonds, which may show steady growth or decline, crypto prices can fluctuate dramatically within short periods. This volatility is driven by a variety of factors, including market speculation, regulatory news, technological developments, and macroeconomic trends. For example, Bitcoin’s price has seen significant highs and lows within the span of months, sometimes even days. As a new investor, it’s important to be prepared for these price swings. Volatility can offer opportunities for significant profits, but it also poses risks for substantial losses.
Learn How to Use Exchanges
To start investing in cryptocurrency, you will need to use a cryptocurrency exchange or broker. Exchanges are platforms where buyers and sellers trade cryptocurrencies, while brokers act as intermediaries who buy and sell on your behalf. Learning how to use an exchange is key to making transactions, whether you’re buying Bitcoin, Ethereum, or any other coin. Popular exchanges allow you to deposit funds through various methods, such as bank transfers, credit cards, or even PayPal. Alternatively, if you’re not comfortable using an exchange, you can opt for a cryptocurrency broker. Brokers simplify the process, but they often charge higher fees.
Store Your Crypto Securely
Once you’ve purchased cryptocurrencies, storing them securely is crucial. Cryptocurrencies are stored in digital wallets, and there are two main types: hot wallets and cold wallets. A hot wallet is connected to the internet, making it more convenient for frequent transactions but also more vulnerable to hacks. Examples of hot wallets include mobile apps and desktop wallets. On the other hand, cold wallets are offline and much more secure, as they are not susceptible to online attacks. These wallets come in the form of hardware devices or even paper wallets, where private keys are stored physically. Cold wallets are recommended for long-term storage of large amounts of cryptocurrency, as they offer higher security.
Track Your Coins of Interest
Monitoring the performance of the cryptocurrencies you’ve invested in is essential for managing your portfolio. One way to track your investments is through a blockchain explorer, which allows you to view real-time data on transactions, blocks, and addresses related to a specific cryptocurrency. Tools like an eth explorer provide transparency, helping you verify that transactions have been completed and allowing you to track the overall health of the network. Keeping track of your coins not only helps you make informed decisions but also ensures you stay updated on market trends and any changes that could impact your holdings.
Avoid Falling for New Coin Hype
With thousands of cryptocurrencies in existence, new projects frequently emerge, each claiming to offer revolutionary technology or high returns. However, not all new coins have a solid foundation or long-term viability. Some may be driven solely by hype, and in many cases, they turn out to be scams or poorly developed projects that fail shortly after launch. As a beginner, it’s essential to avoid falling for the hype surrounding new or obscure coins without doing thorough research. Scammers often use tactics like celebrity endorsements, social media campaigns, and promises of unrealistic profits to lure inexperienced investors.
Assess the Strengths of Each Coin You Consider
Before investing in any cryptocurrency, take the time to assess its strengths and potential. This involves looking into factors like the team behind the project, the problem the cryptocurrency is trying to solve, its technological innovation, and the size of its user base. Established cryptocurrencies like Bitcoin and Ethereum have proven their resilience over time, while newer coins may have innovative features but higher risks. You should also consider a cryptocurrency’s liquidity, or how easily it can be bought and sold on exchanges.
Manage Your Risk Level
Cryptocurrency investments are high-risk, so managing your risk level is crucial. One of the fundamental principles of investing is never to invest more than you are willing to lose. The high volatility of cryptocurrencies means you could experience significant losses if the market turns against you. To mitigate risk, diversify your investments. Rather than putting all your money into one cryptocurrency, spread your investment across different coins. This strategy reduces the impact of any single cryptocurrency’s poor performance on your overall portfolio.
Decide How You View Crypto
Before investing, it’s important to clarify your long-term view of cryptocurrency. Some investors see it as a revolutionary technology with the potential to disrupt industries like finance, supply chain management, and more. These investors are often “hodlers,” people who believe in the long-term potential of cryptocurrencies and are willing to ride out short-term volatility. On the other hand, some people view cryptocurrency as a speculative investment, a way to make quick profits from price fluctuations. These investors tend to engage in short-term trading, buying and selling coins based on market trends and news. Deciding how you view cryptocurrency will influence your investment strategy. Long-term investors may focus on established projects with proven use cases, while speculators might seek out coins with high volatility to profit from short-term price movements.
There is money to be made in crypto, undoubtedly, but you have to know what you’re getting into and how you plan to make your money through it. The tips above can hopefully help with that.
