Things You Should Consider Before Investing in Cryptocurrencies
Before we start talking about investment in cryptocurrencies, let’s understand what is Cryptocurrency.
What is Cryptocurrency?
A cryptocurrency is a digital currency that can be exchanged online for goods and services. These can be kept in digital form, or converted into fiat currency. Several companies have issued their own currencies, called tokens, that can be traded for its own goods and services.
Cryptos work using blockchain technology, a chain of information that is completely decentralised, i.e., not controlled by any one entity. It works as a record of digital transactions, and operates independently from central banks.
Apart from its decentralised nature, there are two main reasons people are currently attracted to crypto:
- You can own and use crypto anonymously.
- Its up and down movement allows crypto to act as liquid asset, meaning you can invest in it to earn money when its price goes up.
There are over 10,000 different cryptocurrencies being traded publicly, according to CoinMarketCap.com.
Below are the 10 largest trading cryptos by market capitalisation are as on 15th June 2021:
|1||Bitcoin (BTC)||$784 billion|
|2||Ethereum (ETH)||$299.1 billion|
|3||Tether (USDT)||$62.59 billion|
|4||Binance Coin (BNB)||$56.3 billion|
|5||Cardano (ADA)||$49.6 billion|
|6||XRP (XRP)||$42.16 billion|
|7||Dogecoin (DOGE)||$40.56 billion|
|8||Polkadot (DOT)||$23.9 billion|
|9||USD Coin (USDC)||$23.7 billion|
|10||Uniswap (UNI)||$13.79 billion|
Before buying or selling any sort of digital currency, you’ll need a digital wallet. This is an online application that will hold your crypto assets. There are different types of wallets, like desktop, online, mobile, and hardware wallets, that you can use to hold your crypto. You can choose any depending on how you prioritise security and convenience. Some crypto exchanges also offer digital wallets.
You can create an account on any crypto exchange and transfer money to buy cryptos like Bitcoin and Ethereum. The most popular crypto trading exchanges are Binance, CoinDesk, Kraken, Gemini and Coinbase, but you can find exchanges online with lower trading fees that are available in your country. Robinhood, for example, charges no trading fee and is available in most states in the US.
Protecting Yourself and Reducing Risk
Before choosing a cryptocurrency to put your money into make sure you understand its value proposition and the risks involved. Take everything into consideration, including the number of tokens available, how easily new tokens can be minted, whether you have voting power as a token holder, and so on.
If you’re looking to buy a cryptocurrency from an ICO, do your research about the company’s prospectus.
Who owns the company? Are there major investors involved? Will you own a stake in the company or only currency/tokens? Is the currency already available, or is the company looking to raise money for its develop it?
A more established currency is safer, but dealing in cryptocurrencies is far from risk-free. Be aware that owning and dealing in cryptos exposes you to a greater risk of theft typically seen when in stocks and funds, and that the sector is known for a higher volatility than traditional investing.