2021 will probably go down as one of the craziest in crypto. Bitcoin went from $10,000 to $60,000 down to $40,000 at the time of writing in less than a year. A lot of it can be attributed to global events, but cryptocurrency was already seeing signs of a revival before that.
This has made a lot of people curious about the whole phenomenon, and some people who were still on the fence might be tempted to jump in. Before you do so, however, you have to make sure that you understand cryptocurrencies and the cryptocurrency markets. You also have to understand some of the specificities of crypto and what makes it so different as an investment class. Here’s how you can start investing in cryptocurrencies right now.
Understanding the World of Crypto
The very first thing you have to do is understand what cryptocurrencies are all about. And to understand cryptocurrency, you have to understand blockchain technology.
One thing we would like to get out of the way immediately is that while cryptocurrency and the blockchain are interconnected, they are not dependent on each other. There are blockchain products and applications that have nothing to do with cryptocurrency, so don’t assume that any good news about the blockchain is automatically going to have a positive effect on whatever crypto you’re holding.
The blockchain is a ledger system that records every transaction that is made on a network. Each transaction is stringed together by blocks that are broadcasted to every computer on the network. The users on the network are the ones who are responsible for verifying the transactions by mining blocks using complex mathematical calculations. They are rewarded with a small cryptocurrency payment for every block that they mine.
Since the transactions are recorded on all computers and the network is usually decentralised, no one entity can alter the record since anyone in the network can verify them. This is what makes crypto so powerful.
Is Crypto Like Real Money?
No, it isn’t. Crypto is very different in that it’s a completely digital asset that is not backed by a central bank or economy. It is managed by the people on the network, which means that there is no need for a middle man.
Cryptos also have limitations when compared to fiat currency. For one, transaction speeds are dependent on the network. While you have very fast cryptocurrencies that can process thousands of transactions per second, bitcoin can only guarantee about 4.6 transactions per second. This means that there are sometimes bottlenecks and blocks are awarded based on supply and demand. So, if you want to have a transaction be validated, you’ll have to be ready to pay.
There are many things that cryptocurrencies do a lot better than fiat currency, however. Many cryptocurrencies are deflationary by nature, like bitcoin, for instance. This means that there is a strong chance that it will continue to increase in value, but also that the supply cannot be diluted by a central bank as we’ve seen in so many economies.
Another point in favor of cryptocurrencies is that they allow billions of people around the world who have either no or poor access to bank accounts to make transactions and store their money.
Different cryptocurrencies can have very different roles as well. Coins like Ether, for instance, are not primarily for peer-to-peer transactions. Instead, they are used as “fuel” to power apps on their proprietary blockchain. This is why you must learn about the different types of crypto so you can make wiser choices when picking one.
What are the Types of Coins I can Invest in?
There are mainly 5 main types of cryptocurrencies that you can buy right now: payment currencies, blockchain economies, utility tokens, privacy coins, and stablecoins.
Payment currencies, like their name suggests, are for transactions primarily. For example, these could be used to pay for goods, trade in exchange for fiat currency, or pay your bills. Coins like bitcoin, litecoin, and bitcoin cash all fall into that category.
Next, you have blockchain economies. Ethereum is the most popular example. These are very interesting as they do not solely derive their value from supply and demand. Since these are necessary to power apps on their networks, there is a certain intrinsic value to them, so they could become interesting stores of values once their price stabilises.
Utility tokens are another type of cryptocurrency that is very interesting. These can be used to pay for certain services. One example is Golem, which is a token that allows people to borrow computing power from the network for heavy tasks.
Privacy coins are made to protect the identity of the people transacting them. While these have been getting bad press because of how they’re used in the underworld, they’re also a great asset for people living in countries where liberties are heavily curtailed or laws against cryptocurrency.
Lastly, you have stablecoins. One thing you have to understand about stable coins is that they’re not used for speculation. They are there to counterbalance one of the biggest drawbacks of most cryptocurrencies: volatility.
These coins will usually be pegged to a more stable asset, like the US dollar for instance. This means that you will have a cryptocurrency that will be stable but also that will be able to transact for other cryptos. This brings us to our next point.
How Do You Trade Crypto?
The first thing you should know is that trading crypto is not as simple as going to your favorite broker and exchanging your fiat money for coins; you’ll have to first invest in a good wallet – then you can start looking at exchanges.
Know that there is always the possibility for you to leave the money on the exchange of your choice, but this is not recommended. This means that your money and the exchange’s destiny will be forever intertwined and if they go down, so will your funds. There have also been cases of exchanges outright stealing from accounts, so that’s not something you want to risk.
If you don’t understand what a crypto wallet does, all it does is protect and store your private key and public key. The public key is the part everyone will see. It will be used to identify transactions or send/receive money. The private key is like a lock that allows you to open this wallet and get access to your cash. This key should be protected at all times, and if you lose it, you lose your money.
This is why picking a safe wallet is essential. You also have to make sure that you don’t leave all your money in one wallet in case you miss it or it gets destroyed. Here, you can decide to go with a hardware wallet that sort of resembles a USB key, or a software wallet that you can use on the device of your choice. Also, you should know that a wallet can be nothing but a piece of paper with your private and public key on it, but it’s not recommended.
Next, you have to find an exchange. You have regular exchanges that will allow you to trade and exchange crypto or peer-to-peer exchanges where you can transact directly with other holders. These are usually more accessible, but they’re not as safe. All you have to do now is find a reputable exchange you can invest in.
Another thing you should know is that not all exchanges will allow you to trade fiat for cryptocurrency. This is where investing in a few stablecoins could be helpful, but you need to do your research before expecting exchanges to accommodate you.
Is there a Way to Invest in Crypto without Going Through This?
Yes, there is. Crypto ETFs could be one of the best ways to capitalise on crypto movements without holding any of them. This could be a good option if you don’t really understand cryptocurrencies but understand markets and investing. It would soften the learning curve and allow you to do things like short selling or using leverage in a way many cryptocurrency exchanges won’t.
The only issue is that bitcoin ETFs are still not approved and we don’t know when they will. If you want to know what a bitcoin ETF is in detail, we suggest you check out Wealthsimple. It explains how a bitcoin ETF would work, and what the best alternatives are. They speak about one particular fund that has a lot of assets in bitcoin which allows you to buy and sell their stock on the Toronto stock market. This could be the closest thing to a crypto ETF for the moment and allows you to get exposure to the crypto market without directly investing in the asset.
This is all you need to know to get started with cryptocurrency trading in 2021. The most important part is making sure that you understand them before you invest and only risk a small portion of your assets in them at the beginning.
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