With more people embracing the idea of digital currency as a means to hedge their money from inflation and grow their wealth, you may want to join the bandwagon to have your slice of the cake. However, before you jump in, you may want to understand what cryptocurrency is and how to invest in it.
To invest in cryptocurrency, you need to research to choose a coin you want to invest in. After doing your research, you’ll need to create an account with a cryptocurrency exchange and purchase the cryptocurrency of your choice.
Before investing in crypto, you need to understand the basics. Do you know what cryptocurrency is, or are you investing in it because your friend is doing the same? What about how to select the cryptocurrency to invest in? Do you know the top performing cryptocurrencies? These are some of the things you need to know. Lucky for you, I have covered them in this post.
How Can Cryptocurrency Be Used?
How to Invest in Cryptocurrency?
Let’s begin with the meaning of cryptocurrency.
Cryptocurrency is a kind of digital currency designed to act as a medium of exchange, like money. Cryptocurrency has become popular in the last decade, with Bitcoin becoming the most widely monitored alternative currency. Normally, cryptocurrency is electric-only and doesn’t have the physical form like standard currencies.
Cryptocurrency appeals to many individuals due to its ability to be managed without a central bank and thus concerns regarding secrecy and subterfuge. It appeals due to its ability to hold value and not be inflated away by central banks that want to print money. It’s also very hard to counterfeit due to the blockchain ledger system that manages the currency.
Cryptocurrencies have become popular in the investment realm due to the huge appreciation seen by some coins since their introduction. More recently, cryptocurrencies have seen huge declines as the Federal Reserve increases interest rates, which has affected the most speculative investments. Bitcoin and Ethereum, two of the most popular coins, have each fallen by over 70% from their all-time highs as of June 2022.
Perhaps you like the idea of cryptocurrency and wish to invest.
How do you go about it? Simple!
Once you have found a cryptocurrency you think is good, you’ll need to buy it.
The first step is to open an account with a cryptocurrency exchange. Most stock brokers don’t support trading in cryptocurrency. Binance is one of the most popular and beginner-friendly exchanges. You want to ensure that the exchange platform supports the coin you intend to invest in.
After funding your account with fiat currency, you can make an order to purchase your cryptocurrency. Orders on an exchange work the same way as orders in the stock market. The exchange will match your buy order with someone making a sell order at the same price and initiate the trade. Once the trade is complete, the exchange will hold your cryptocurrency for you in a custodial wallet.
Buying cryptocurrency is quite easy. As a crypto investor, the hardest part is preparing for volatility. Cryptocurrency generally is more volatile than traditional asset classes like stocks. Price swings of 10% or more in just a few hours are very usual.
Also, you should consider how much of your portfolio you ultimately want to allocate to certain crypto and the asset class generally. With the volatility of cryptocurrency, ensure you give yourself wide bands of acceptable allocations. If your investments go south, ensure you rebalance.
How to Select a Cryptocurrency to Invest In?
Before you buy some coins or tokens just because a friend recommends it, it’s wise to do your own research.
First off, it’s important to understand that selecting a good cryptocurrency is not like shopping for a good dress or stock. A stock represents ownership in a company that makes profits for its shareholders or at least has the potential to do so. Owning a cryptocurrency represents ownership of a digital asset with no intrinsic value.
What makes a crypto increase or decrease in price is supply and demand. If there is increased demand and a limited supply increase, the price skyrockets. If supply becomes constrained, the price goes up, and vice versa. So, when evaluating cryptocurrency, the most important questions to answer are how the supply rises and what will drive demand for the coin higher.
You can answer those questions by studying the white paper that a cryptocurrency team publishes to attract interest in their project. Look at the roadmap for a project and see if anything could encourage an increase in demand. Research the team behind the project and see if they have the potential to execute their vision. Try to find a community of individuals already investing in cryptocurrency and gauge their sentiment.
It’s also important to look at how much money has already flowed into a cryptocurrency. If the market capitalization is already high, there may not be much potential growth left. A high price will reduce demand and raise supply as early investors look to make money off the project.
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Here are some popular cryptocurrencies and their approximate market capitalization based on CoinMarketCap, as of June 2022:
- Bitcoin – $388 billion
- Ethereum – $132 billion
- Tether – $67 billion
- USD Coin – $56 billion
- Binance Coin – $36 billion
- Cardano – $16 billion
- XRP – $16 billion
- Solana – $13 billion
- Dogecoin – $8 billion
- Polkadot – $7 billion
Given the volatility in cryptocurrencies, these numbers can often fluctuate even in a short period.