INVESTING IN CRYPTOCURRENCIES: THE BEGINNER'S GUIDE

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The idea of cryptocurrencies came to be in 2009 when the first digital currency, bitcoin, was invented. Then, it was nothing more than an interesting phenomenon. Although technicians and analysts could see a bright future for cryptocurrencies, it wasn't very popular as a form of investment as it is today. Today, there are many cryptocurrencies in the market; others have come and gone while bitcoin has withstood the test of time despite numerous waves. Here, you get to learn how cryptocurrencies work and how to invest in them.

What is cryptocurrency?

For beginners, cryptocurrency refers to digital currencies held and distributed online. Simply put, it is a digital asset that can gain or lose value, just like stocks and bonds. Unlike the traditional currency that uses notes or metal coins, a cryptocurrency uses virtual coins, tokens, or units. As a beginner, you can buy a token, coin, or unit from a company that facilitates cryptocurrency exchange. Then, you can buy and sell crypto with other investors who own cryptos in a process known as trading.

Cryptocurrency uses blockchain technology which is decentralized, meaning that any institution does not control it. Instead, it is a system that contains all the records of digital transactions, registration, and distribution of virtual currencies. The system monitors all the units of cryptocurrencies and their owners, determines when new units can be created, and eliminates the middle parties such as banks.

How do cryptocurrencies work?

The value of crypto is based on the market demand and supply or simply consumer interest in buying cryptos. If many investors are buying a particular cryptocurrency, its price goes up, and if people stop purchasing it, its value goes down.

Cryptocurrency values are also associated with the marketplace but not tied to corporate benefits. The value of one unit is wholly based on whether people want to buy the cryptocurrency units or not. That is why it is a highly volatile market. Again, cryptocurrency can yield enormous profits for a trader who takes advantage of the marketplace surges. Common types of cryptocurrencies include Bitcoin, Litecoin, Etherium, Ripple, Binance, Stellar, Dogecoin, etc.

Many people are interested in cryptocurrencies because:

• They are anonymous- you can own and use cryptos without the knowledge of anyone.

• They are prone to price fluctuations that make them suitable for investment.

How to invest in cryptocurrency as a newbie

Place only a small part of your portfolio to cryptocurrencies.

Regardless of anything, cryptocurrencies should only occupy a small percentage of your portfolio because they can be a risky investment. That cryptocurrency will be a good investment depends entirely on whether its price increases significantly and remains that way for a while. Originally cryptos were designed to be a medium of exchange on the web, but they haven't filled the role of being that because only a few merchants accept them. Since the market determines their values, be careful when investing in cryptos.

Select your preferred cryptocurrency

This is the most challenging bit when it comes to cryptocurrencies. There are hundreds of cryptos in the market, and it is difficult to tell the most reliable and best ones. Bitcoin appears to be the most dominant cryptocurrency, and if anything, your investment position should mainly occupy this crypto. Let other cryptos occupy a much lower position in your portfolio, and they should be seen as even more speculative than bitcoin.

The reason is, most cryptos have come into the market and disappeared while others are flatlined. Based on the high price volatility of cryptos, the wrong investment could go up to zero.

Choose an exchange to buy cryptocurrencies.

One thing about cryptocurrencies is that you cannot get them in conventional financial institutions such as banks and investment brokerage firms. Therefore, you are limited to holding, buying, and selling cryptos to dedicated platforms known as crypto exchanges. So, select an exchange such as Coinbase, Gemini, GDAx, etc., and make an account with them to buy cryptocurrencies. Note that the exchanges charge a fee for buying and selling.

Store your cryptocurrencies

Once you buy cryptocurrency units, they are stored in your cryptocurrency wallet. Wallets do not necessarily store your digital currency but allow you to access them on the blockchain using a public key or cryptocurrency address (the one the other party sees when you transact with them) and a private key only you know. As such, you need both keys to facilitate and complete a transaction. It also provides a record of transactions in the blockchain and your crypto balance.

There are software wallets and hardware wallets. A software wallet means a program that stores your crypto keys, while hardware wallets store your keys in a hardware device, for example, a USB drive. Hardware wallets are more secure because they are not stored online, where there is susceptibility to unauthorized access. 

You have to have security in mind when selecting a cryptocurrency wallet. If anyone accesses your keys, they can access your cryptos and transfer them, and you lose all your investment. So, research more about the wallet you select.

Prepare for a bumpy ride.

Cryptocurrencies have many ups and downs, and a good example is bitcoin. In 2013, it was trading below $130. Then it rose to $17,060.55 in December 2017 before it dived deep down months later. In 2021, it started to rise again, closely approaching $50,000 in April 2021.

Since it is volatile, many investors consider cryptos a short-term investment. The possibility of them becoming stable investments that hold significant profits for the long term is unknown. Another noteworthy point is about capital gains tax. Whenever you sell crypto and generate profits, you have to pay capital gains tax levied on what you earned.

CONCLUDING THOUGHTS

Many people fall for the hype surrounding every cryptocurrency bubble and take the wrong risks. You need to take a calculated risk when investing in cryptos. The takeaway is never to invest more than you are ready to lose.

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