Education

The Beginner’s Guide to Cryptocurrency Investing

As the technology literacy of the population advances, reception of cryptocurrency as a valid store of value ensues, and it boomed. Titles like ‘The price of Bitcoin hits new all-time high’ and ‘The price of Ethereum urges’ are now making headlines in the general public’s news feed, and people are increasingly seeking for guide to cryptocurrency. One sure thing is that individuals who were once doubtful about Bitcoin and the blockchain technology are slowly understanding, getting involved, and investing in cryptocurrency.

Current Makeup of the Cryptocurrency Space

Those learning to invest in cryptocurrency would have heard of Bitcoin and altcoins. This naming convention began when forks of Bitcoin appeared in the markets back in the days of 2011. The forks aim to serve a particular niche and strive to be better than Bitcoin. Since then many new cryptocurrencies have been developed, consuming Bitcoin’s cryptocurrency market capitalization dominance. These alternative coins are getting market share at a startling speed. More than ten times growth has been observed in a time frame as short as six weeks.

Cryptocurrency, Stocks, and Fiat Currency

In the crypto community, the traditional currencies we all know are referred to as Fiat currencies. Even though digital currencies are named with the word ‘currency,’ they are more similar to stocks than currencies. When you buy some cryptocurrency, you are in fact purchasing some tech stock, a part of the blockchain and a portion of the network.

Cryptocurrency Exchanges

One of the basics of a beginner’s guide to cryptocurrency investing is that an exchange is where people buy and sell cryptocurrency using fiat currencies. There are many criteria to judge the quality and reliability of a crypto exchange, such as liquidity, trading volume, platform security, purchase and withdrawal limits, insurance, spread, fees, user-friendliness. An exchange like Coinbase, for instance, meets most of the criteria.

After verifying your details with  a cryptocurrency exchange and setting up an intermediary bank account, you are only five simple steps away from buying Bitcoin:

  •  Access the ‘Buy/Sell Bitcoin’ tab
  • Select the payment method
  • Enter the desired amount
  • Click ‘Buy Bitcoin Instantly.’
  • Check your dashboard for your credited Bitcoins.

When you get acquainted with cryptocurrency investing and begin understand the process of cryptocurrecny trading, all you have to do is make an instant transfer from a basic exchange like Coinbase to more professional trader-oriented platforms like Binance or GDAX.

As you slowly get accustomed to other currencies, you might want to venture into investing in them. Poloniex and Bittrex are two exchange services that offer a wide range of selection.

When signing up on any exchange for the first time, ensure you verify your account with the required documents as early as possible, so that you will not be caught in the middle of some tiresome and slow admin activity when the trading opportunity arrives. It takes days to get verified on some cryptocurrency exchanges exchanges, and purchase/withdraw limits are dependent on trader’s trading volume.

Also, if you are using a currency other than USD, make sure you check out the ease of funding and withdrawal on the exchange. You do not want your exchange to encounter fiat currencies withdrawal difficulties.

Cryptocurrency storage Wallets

Exchanges have proprietary digital wallets on their platforms to keep the cryptocurrency you bought. However, if you do not want to keep your cryptocurrency holdings in the wallet provided by the exchange, you have the choice to either use a paper wallet service like myetherwallet.com or simply get a hardware wallet like KeepKey.

Both achieve the goal of removing platform risk, at the cost of taking up the duty of keeping your digital currency safe.

To transfer your digital currency from exchanges to your hardware wallet for long-term storage, just follow these steps, using Coinbase and KeepKey as a case study:

  • Plug in your KeepKey USB cable
  • Open your KeepKey Client
  • Find your wallet address on the KeepKey Client UI
  • Go to the Coinbase ‘Send/Request’ tab and input your KeepKey wallet address
  • Confirm amount and click ‘Send Funds’

Endeavor to first send a tiny portion of your digital asset, like 0.0001 bitcoins for testing before sending the whole, lest an error happened and you lost the transfer amount. A tiny network transfer fee might be charged.

It is also worth noting that the hardware wallet’s user interface makes the keeping of multiple coins easy, which is very handy when you participate in Initial Coin Offerings in the future.

Place that cryptocurrencies occupy in your investment portfolio

This section will be wildly subjective. Cryptocurrency has the potential to actualize many ‘rags to riches’ tales, but its extremely high volatility makes it pretty unpredictable.

As a forethought, the money you put in cryptocurrency should be money you can afford to lose. We cannot overemphasize the significance of this as people often underrate how the volatility influences our emotional inclinations. The upside is enormous, but it comes with lots of risks and, a particular level of emotional torment.

A moderate portfolio we would suggest is as follows:

  • Less than 30 years old -: 30% Crypto, 50% Traditional Investments
  • From 30 – 40 years old -:  20% Crypto, 60% Traditional Investments
  • More than 40 years old -: 10% Crypto, 70% Traditional Investments

This particular outline is not meant to be age biased but puts into consideration the fact that people take up more financial responsibilities as they grow older.

Within the assigned cryptocurrency share of your portfolio, you may diversify your coins based on how much risk you can take.

Cryptocurrency Investing – how to make the right choice

Now, this is where it gets interesting.

How do we choose the winner and avoid picking the loser?

Bear in mind that cryptocurrency is now in a massive bull market and anything could happen over time. Also, do not discard the likelihood that we may be in a bubble like the dot-com boom in early 2000. However, ask yourself these questions before you decide to invest in a cryptocurrency:

  1. Are my investments safe with those behind the project ?

Preservation of capital is the first rule of any investment. Can you trust the development team with your funds? Will you be leaving your money with developers who have been involved in scams in the past? Make sure to back off immediately if you see these interpretive signs. The coin’s price might increase for all you care, but it is just not worth it to put your money at such risk.

  1. What is the long-term perspective of my cryptocurrency?

Make sure you read the coin’s white paper even if you cannot understand the yellow paper. What are the developers trying to achieve? Do they have what it takes, or have they worked towards their goals already? What are the milestones and timelines?

  1. Does my cryptocurrency of interest look like a well-marketed plan without backup?

Many ICOs these days just have an attractive webpage, and then they’re dispatched out to sell. Watch out for these: can they deliver?

  1. How long should I hold the cryptocurrecny before selling ? What is the back-up plan ?

There will be some currencies you do not want to hold for a long time, but want to flip for some short-term profits. In this instance, ensure to have an exit price, or set a timeframe to reduce the influence of emotions on your trades. Stick to your plan and guard your emotions.

  1. Does it have real-world usefulness?

Some cryptocurrencies appear to keep rising in value only because of supply and demand factors. This trend might be unsustainable. For a digital currency to have long-term sustained value, it must have a real-world. Be cautious of currencies that look too much like a get-rich-quick scheme.

Short-term margin trading

After getting accustomed to cryptocurrency, you may wish to trade on your coins in hopes of increasing it. This is nothing new for the seasoned retail forex traders. But for the novice cryptocurrency investor, you may want to brief up on cryptocurrency investing for beginners to understand how to execute a leveraged trade.

Short-term trading helps investors make quick bucks by taking advantages of incoming news. If you anticipate good news from an upcoming release of a cryptocurrency, you may want to trade long and see how it goes. If you wish to profit big with short-term trading, remember to buy the rumor, sell the news; act fast and be daring.

Mining

Mining is the way for those who are more satisfied with a predictable form of reward. Mining entails setting up of a rig, consisting of GPUs and investment in electricity. Only cryptocurrencies that follow the Proof of Work protocol can be mined. Setting up the rig and getting things running takes some effort, but it is an excellent way to generate long-term passive income as long as you are determined.

Staking

The Proof of Stake version of ‘mining’ is referred to as Staking. Imagine this as making returns on your stock. The staking method and reward rate differ significantly among Proof of Stake currencies, but generally, it doesn’t take much effort in contrast to mining.

Arbitraging

As you transact with various exchanges, you may wish to purchase from one exchange platform and sell on a different one to make ‘arbitrage’ profits when you find an arbitraging chance. Take note of two critical things if you want to do so: remember to consider the fees, and remember that there may be a change in price when you are transferring your digital asset between exchange platforms, particularly during times of high volatility. USD is pretty liquid, so this occurs less for it, but for other currencies like Canadian dollar (CAD) and Singapore dollar (SGD), there may be more arbitraging chances to exploit.