In the last couple of years, cryptocurrency investing has been the talk of the town. As a novice in the world of crypto, you’re probably wondering what the advantages are of carving out a niche in the crypto market. How do you know this industry is for you? Is crypto investing worth it at all?
Our guide aims to help you figure this out by introducing you to the concept of cryptocurrency, laying out both the advantages and challenges of crypto investing, and focusing on the most popular assets to find out what makes them so attractive.
You’ll also discover where to buy and sell cryptocurrency and how to store your assets. All this information will prove incredibly useful if you decide to get involved in crypto investing and will hopefully help you make some well-informed decisions in the future.
What is cryptocurrency?
Cryptocurrencies are virtual or digital assets people use to purchase goods and services. Cryptocurrencies can also be used as investments and mediums of exchange that allow more private, faster, and cheaper money transactions among network participants.
To transact with crypto assets, you need to purchase them in exchange for fiat currencies. The world’s first and most popular cryptocurrency is Bitcoin, which was launched at the start of 2009 by an unknown developer called Satoshi Nakamoto.
Since Bitcoin’s inception, the cryptocurrency market has been evolving and the crypto assets themselves (there are more than 1,000 of them now) have become important for global businesses worldwide not only as mediums of exchange and stores of value but as decentralized finance tokens too.
How do cryptocurrencies work?
The ‘crypto’ in ‘cryptocurrency’ stands for cryptography, i.e. computational practices that involve turning plain text into encoded data to provide secure communication.
Every cryptocurrency has its own electronic payment network that exists online on a digital ledger called the blockchain. The blockchain records all cryptocurrency transactions that ever happened and stores them in blocks as encoded data. This involves a complex mathematical process that ensures no one can alter the data or remove the transactions from the ledger.
The network is managed voluntarily by its participants, known as “miners”, who perform this complex algorithm and verify incoming transactions. This means that cryptocurrencies are decentralised, so there is no absolute authority (e.g. government or central banks) in charge.
Why invest in cryptocurrency?
Let’s run through the major advantages of crypto investing.
Liquidity
Popular cryptocurrencies have high liquidity, meaning it’s really easy to buy or sell them on the market and convert them into cash. Liquid crypto assets have high trading volumes and are less vulnerable to sudden price swings and market manipulations.
In comparison, so-called “whales” (individuals with a significant amount of capital), can easily influence the price of illiquid assets because there’s a lack of market activity and market participants. It only takes one large buy or sells order to disrupt the price of these assets, increase their volatility, and put investors at risk of losses.
Low entry threshold
If you want to invest in stocks or real estate, you’ll need large initial capital to get started. Cryptocurrencies, in comparison, have a low entry threshold. There are many cryptocurrency exchanges that let you deposit less than $100 for your first investment.
Security and transparency
Cryptocurrency transactions are more secure than regular bank transactions because they’re stored on the blockchain. It would require an immense amount of computing power to make any changes to this impenetrable ledger and its underlying technology. It’s not surprising that so many people around the world are turning their savings into crypto or opening crypto IRA accounts.
Portfolio diversification
Finally, investing in cryptocurrency is a great chance to diversify your portfolio and work on your risk management. The most common piece of investment advice goes like this: don’t put all your eggs in one basket. This is to say that if you invest your money across different asset classes, you’ll lose less in the event of negative market trends. Otherwise, if you invest all your money in one asset only and the price of that asset experiences a major fall, you’ll end up losing a lot of money.
The risks of investing in cryptos
However, while cryptocurrency investing has a range of benefits, it also comes with risks.
Regulation
Some investors are hesitant to enter the crypto market because of the lack of regulation within the industry. On the one hand, the whole point of cryptocurrency is to operate via decentralized payment networks, out of regulators’ reach. On the other hand, with no universal regulatory frameworks, the crypto platforms that crypto investors use are more liable to hacking attacks and frauds and can’t provide sufficient user and fund protection. This, in turn, puts crypto investors and their money at great risk.
Luckily, things are already changing with countries such as the EU, the UK, Canada, Australia, and the US recognizing both the presence and the potential of the crypto industry and are working towards suitable regulations.
Local authorities in these regions require crypto exchanges to comply with anti-money laundering (AML) and Combating the Financing of Terrorism (CFT) policies, so as a crypto investor you should search for a licensed platform to protect your investment.
Volatility
As a potential crypto investor, you might be worried about cryptocurrency volatility. Volatility refers to the large price fluctuations in the crypto market, something quite common for the early stages of any market.
However, if you’re careful and use the right trading strategy, you can use crypto volatility to your advantage. For example, HODL (an acronym for Hold On for Dear Life) is a popular crypto strategy wherein investors simply buy cryptocurrencies and hold onto their investments for a longer period of time in order to profit in the future. Instead of reacting to short-term price movements, they hope to maximize their returns while minimizing risks.
Scams
Unfortunately, scams are common across the crypto industry and you might find yourself on the receiving end of a fake email. Their main purpose is to trick people into sending money by making false promises and bogus business proposals. If you receive such an email, simply block the sender, ignore it, and don’t click on the email links.
Another thing to avoid is other investors’ traps and schemes such as the popular “pump and dump” scheme. This is when experienced traders create false hype around a new token and start promoting it on online forums to attract novice investors. The whales already own a large amount of this token, so when the newbies buy the asset and pump the price up, they sell their shares and dump the market.
How to recognize a trustworthy cryptocurrency
With so many digital assets flying around the crypto market, it’s becoming harder to single out trustworthy and promising altcoins. If there’s a digital currency you’re particularly interested in, the first thing to do is look for the asset’s whitepaper on the company website to learn more about its function.
For example, the asset might be designed as a decentralized finance token or it might introduce a technology that allows users to send anonymous transactions or make micropayments. It can be a social media token or an advertisement token. If there’s nothing revolutionary about it, the altcoin will be outperformed by its competition and won’t be a solid investment.
If you can’t find a whitepaper, check out the ‘About Us/Our Mission’ section on the official cryptocurrency website to find out who stands behind the project and what their goals are. Usually, you would see the executive team members’ names and some information regarding their previous experience in the industry. The website should also include the project’s mission, priorities, and values, as well as plans for the future.
If you can’t find any information on the website, try searching the founders or developers on LinkedIn. If that doesn’t give any results either, take this lack of transparency as a warning sign. Reputable teams are keen on building a strong media presence and being vocal about their project’s current and future aims as they have nothing to conceal.
Investing in Bitcoin and other popular cryptos
Let’s take a closer look at some of the leading cryptocurrencies.
Bitcoin
As the world’s first cryptocurrency, Bitcoin (BTC) remains the number one choice for crypto investors and takes up the largest portion of the crypto market capitalization. Out of 1,000 crypto assets, Bitcoin is worth around two-thirds of the whole market share! However, this is hardly surprising considering Bitcoin’s high trading volumes and deep liquidity.
Bitcoin is gradually becoming a global currency. As a recent study shows, merchants who have started accepting Bitcoin payments have noticed a significant increase in the number of customers. These customers are also more likely to purchase goods or services that cost more.
Ethereum
Ethereum or Ether (ETH) is a 2015 crypto project of young Russian-Canadian developer Vitalik Buterin. Ethereum is the second-largest cryptocurrency by market capitalization but unlike Bitcoin, a coin that’s primarily used as a store of value, Ethereum was a pioneering decentralized finance token.
Its founder, Buterin, found a way to use blockchain technology to build smart contracts. A smart contract is basically a computer code stored on the blockchain and programmed to be automatically executed once the agreed-upon terms have been met by the parties involved. Today, smart contracts are used in a range of industries, from finance to healthcare and insurance, and represent a key component of decentralized applications.
Litecoin
Litecoin (LTC) was launched by Charlie Lee, an early Bitcoin enthusiast who discovered the crypto market while working for Google. He embarked on a new project, developing his own cryptocurrency that others would use alongside Bitcoin. Litecoin is more scalable than Bitcoin so it can be used for making micropayments and small everyday purchases. For example, a German video game is using Litecoin’s blockchain instead of a central server and allows players to earn LTC during the game.
Ripple
Ripple (XRP) is a combination of crypto assets, currency exchange, and a platform used by banks and other payment providers to settle remittances. For Ripple’s team, it makes no sense that we can send information via the internet in a matter of seconds but need to wait a couple of days for our money to be transferred overseas.
By using Ripple, you can make cheaper and more secure international payments that are processed in almost real-time. The Ripple network converts the transfer value into XRP to facilitate the transactions, instead of converting one currency into another, thus eliminating conversion fees and speeding up the processing of payments.
How to invest in cryptos: Cryptocurrency exchanges
The most widely-used cryptocurrency marketplaces are cryptocurrency exchanges. These platforms let you buy, sell, trade, and transfer cryptocurrency investments. Some exchanges are purely for crypto-to-crypto exchanges, while others allow you to deposit and transfer fiat currencies like EUR, GBP, CHF, and more for your favorite cryptos.
For example, the SwissBorg app allows you to deposit 15 different fiat currencies for buying 12 of the most popular cryptos available. You can also benefit from the best prices available thanks to their revolutionary Smart Engine, which scans the Binance, HitBTC, LMAX, and Kraken exchanges to find the best price for every trade.
How to sell cryptos
A key part of investing in crypto is being able to sell your investment when you want (ideally for a profit!). Fortunately, you can use the same trading platforms to sell cryptocurrencies as you would use to buy them.
In the SwissBorg app, to sell cryptos and perform an asset exchange, simply navigate to the Portfolio tab and open the asset you want to sell. Tap “Exchange”, and then choose the currency you want to sell it for.
Next, choose the amount you want to sell, and the entire transaction will be completed in the app!
How to store cryptos: Cryptocurrency wallets
You’re probably wondering where to store your crypto investments once you purchase them. Digital currencies are stored in digital wallets that use cryptographic security methods to protect your funds. You can choose one of the many online wallets (cloud-based or software ones) or invest in a hardware wallet.
However, most digital wallets share the same weakness — they all rely on a private key. A private key is an encrypted address that investors use to sign transactions with and access their wallet balance. Although these are practical and secure at first glance, private keys can be easily mistaken for public keys, meaning the investor accidentally shares their key and someone can access their funds. Or an investor might even lose or forget their key. If this happens, it can’t be recovered.
Fortunately, SwissBorg has partnered with Curv, a fintech startup that has come up with a revolutionary blockchain solution to provide next-level digital wallet security.
Curv is the only cloud-based wallet that uses multi-party computation (MPC) that allows multiple parties to perform complex algorithms at the same time, creating separate cryptographic secrets or encoded data called ‘shares’. The independent shares are used to produce a public key and digital wallet address without the need for additional private keys. So with the SwissBorg app (which doubles as a wallet and an exchange), you don’t need to worry about forgetting or losing your private keys.
How to invest in crypto: Conclusion
High liquidity, low entry threshold, and the security of the underlying blockchain technology make cryptocurrencies a lucrative investment class and a great way for investors to diversify their portfolios.
To minimize potential risks, you need to conduct thorough research and discover the purpose of the currency you’re interested in. Don’t make rash decisions based on hype and noise. Calculate how much you can spend and don’t go over your limit. Finally, find a reliable crypto exchange in line with your investment plan.
