The Ultimate Guide to Investing in Cryptocurrency
Like any other financial enterprise, the crypto industry has success stories and horror tales of bankruptcy-inducing scams. Some people enter the market with thousands of dollars and exit it with millions. Other less-inspired, and less-fortunate investors may travel the same path, but in the opposite direction.
More than a decade has passed since cryptocurrency became a real thing. The sector has developed at a rapid pace and has now become a solid, stand-alone market. Stepping into 2020 with an eye on crypto investment opportunities is the sensible thing to do for any daring investor that has a knack for innovation.
If you want to enhance the value of your assets, follow our beginner’s guides on the most popular cryptos. Read on to discover how to invest in cryptocurrencies and learn how to carve a successful trajectory on one of the hottest financial markets of our times!
Disclaimer: The following material is not a sure-fire investment plan. This guide is a well-researched compilation of data concerning the cryptocurrency market. Readers should treat it as an informational resource and not as a guaranteed get-rich-quick method.
How to Invest in Cryptocurrency – What you need to know FIRST!
If you’ve come this far, you have been pondering an investment in cryptocurrency more than once. Many people believe that Bitcoin and other blockchain-based assets are the future of financial transactions. These digital, non-palpable goods may reshape the global economy and change our understanding of money and property.
What is cryptocurrency?
The idea of virtual money has been around since the 1970s. For almost 40 years, it was nothing more than a geek’s dream of a futuristic economy. It was only after the release of a revolutionary technology called cryptocurrency in the late 2000s that the fantasy started to take shape.
In 2009, an anonymous individual or group known as “Satoshi Nakamoto” came up with a digital asset called Bitcoin, which would be available on blockchain technology. At that time, all of these terms sounded like gibberish to most people. To the neophytes, they still do today, and if you want to invest in cryptocurrency, you must understand precisely what they mean.
Blockchain is a decentralized system that enables the creation, execution, distribution, and trading of cryptocurrency.
Cryptocurrency is any digital currency that is regulated by a set of encryption protocols on a certain blockchain.
Bitcoin is the first and most popular cryptocurrency to date. It is a digital asset that is not under the control of a central bank, and which users can freely administer in a peer-to-peer network.
Reasons to Invest in Cryptocurrency
We may be on the brink of a new era where digital assets replace hard currencies. However, investing in cryptocurrencies before it becomes cool is not the only reason to put your money in cryptos.
The main reason for learning how to invest in the cryptocurrency market is your overall understanding of it. More specifically, the way you perceive three fundamental factors:
- The American Dollar, which is the current world-leading currency, is heading towards an imminent fall. Its replacement will not be another hard world currency.
- Cryptocurrency trading is a free, decentralized process that has unlimited ways of development. It is available to more investors than traditional financial transactions.
- The evolution of the financial market is subject to technological development and blockchain technology will influence it for many decades to come.
Nevertheless, cryptocurrency is not all milk and honey. Conservative financiers that shy away from investing in cryptos have their reasons, such as:
- Entry-level investors lose extravagant amounts of money due to their fear of missing out on a trending method of making easy money quickly.
- Just like any other financial sector, the crypto market is liable to scams and deceiving bubbles.
If you fall victim to these dire circumstances is only because you lack knowledge on how to invest in cryptocurrency. Through step-by-step learning, experimenting and acquiring more know-how, you can become a success story rather than an anecdote of failure.
Investing in cryptos became a global phenomenon between December 2016 and December 2017. Due to the staggering surge in the popularity of Bitcoin (BTC), the market reached a total market cap value of $500 billion. BTC tokens went on sale from $750 to $10,000 apiece in just 365 days!
Here is a graphic depiction of BTC price evolution throughout 2017, courtesy of coinmarketcap.com:
It is no surprise that buying and selling cryptocurrency became highly popular even for people who had never made any major financial investments before. Just when the crypto party was at its peak, the inevitable happened. The market dipped. The music stopped and Bitcoin together with other cryptos devalued overnight.
Many of the people who lost their lifelong savings in December 2017 Dip had not taken calculated risks. The disappointing outcome of their investments in cryptocurrency brings us to our first tip:
Only invest what you can afford to lose
The crypto market is highly volatile. There is no financial enterprise that will guarantee you substantial ROI come what may, and investing in cryptocurrency does not make an exception to this rule.
You need to ensure that funding a cryptocurrency venture does not liquidate your assets. Also, several factors can nullify your investment on the spot, such as:
- Your country outlawing cryptocurrency trading
- A hackers’ attack on your account
- A severe market dip
In the days of blockchain development, it is a rookie investor’s mistake not to hold cryptocurrency. It is just as worse to have all your assets in that form.
Bitcoin is not the only cryptocurrency out there
Bitcoin came into existence in 2009, and for 7 years it was the go-to crypto for investing in decentralized currencies. Many people even confused the two terms and generally referred to any blockchain-based token as Bitcoin. Some of them still do.
However, recent years have seen an exciting development of blockchain technology that has produced an explosion of cryptocurrencies. Also known as altcoins, these tokens have various features that make them either 99% similar to Bitcoin or completely different.
To this day, Bitcoin is still the dominant cryptocurrency, but investors have many more investment opportunities on the crypto market. Some of them even question BTC’s future and long-term reign as the world’s most popular digital asset.
Every day, developers come with new cryptocurrency projects that enhance the possibilities and potential of blockchain-based tokens. Some of the cryptos that vie for Bitcoin’s throne include:
These digital assets consistently attract new investors. Large communities form around them. Developers that take part in these projects often depart and use their skills and experience to found others. The “Crypto Universe” is rapidly expanding, and investing in cryptocurrency means more than just buying Bitcoin.
Understanding Cryptocurrency Tokens and their Functions
Before you invest in cryptocurrency, you should go through some of the guides on popular tokens to identify the ones that are most worthy of your portfolio. There are certain criteria to pick the cryptos that you are going to fund next. Here are some of them:
Every cryptocurrency starts from a whitepaper, which is the official document that presents the developer’s vision of the project. Whitepapers usually come in PDF form, and they become available for the public with months or even years before the crypto tokens’ release date.
If you have settled on a cryptocurrency for your next investment, you must study its whitepaper. This way, you will get a good idea of the token’s utility, its roadmap, and its profitability. Also, you will be able to identify if the project is doomed from the start by setting unrealistic targets. A poorly written whitepaper should normally carry that hint.
Whitepapers also propose the initial funding method of the project, which may be one of these:
- Initial Coin Offering (ICO)
- Initial Exchange Offering (IEO)
- Security Token Offering (STO)
Each of these methods comes with its advantages and downsides. You can read more about them and identify crypto worth investing in depending on the fundraising solution that it proposes.
Next, you should determine if the project is valuable enough for the entire cryptocurrency market. Simply put, does this project bring something new to the game or is it just another copycat paper of a more prestigious project?
There are three traits that the project must have to provide a positive change and become investment-worthy:
One example of a game-changing project is Ethereum. The second-most popular crypto in the world hit the market in 2015. Contrary to Bitcoin, Ethereum offered a scalable, blockchain-based environment that allows users to create and execute DApps through smart contracts. You can find out more about this revolutionary idea here.
The next step in understanding cryptocurrencies is to find out if a project needs a token to function.
Tokens are native assets on a blockchain that users can earn and trade as part of mining activities or transactions. Generally, every new project that uses tokens gives them to investors in exchange for funding whether they start with an ICO, an IEO or an STO.
There are several features that a token must meet to become a valuable asset for investors, and they include:
The token should provide you with user rights upon acquisition. In some cases, the tokens give you more influence on the blockchain where they operate. You can use them to vote for which in-development projects get the green light, and which don’t.
Tokens are relevant when they are part of a larger economic system. You should be able to exchange them for other tokens and even for fiat currencies. Additionally, the number of tokens that you hold should give you access to rewards and more users’ rights.
In some projects, a token can also work as a toll or a tax for accessing a new stage of the roadmap together with its benefits.
Tokens may also provide you with user benefits and privileges. You may use them to purchase advertisements on the same platform so that you can attract more investors to your developing projects.
The token should have a market value that you can verify on official cryptocurrency exchanges. This way, you can trade your tokens for other currencies.
The distribution of tokens among a platform’s users should be equitable. Tokens can achieve this trait in direct correspondence with their velocity. For example, when users hold on to their tokens, the digital coin has a low velocity. When they change owners quickly, the tokens have a high velocity.
A high transactional volume of tokens leads to high velocity, which in turn lowers the overall value of the platform. Low-ranking cryptos have this problem. Their users trade them so frequently that the tokens lose their value.
If you are looking to invest in cryptocurrencies, you should opt for low-velocity tokens like Bitcoin, Ethereum and XRP. These tokens have enough value that investors choose to hold on to them instead of hanging them out for sale.
How to Avoid a Cryptocurrency Scam
By now, you should have a good idea about the cryptocurrency in which to invest next. But, how do you know you are not falling victim to a blockchain-based scam?
Before converting a single fiat cent into a token, you should look at certain features of the crypto project that is the subject of your future investment. Look for:
A bit of research on Google will tell you if the names present in the whitepaper are real or not. You should also find biography details about the leading developers and see if they have experience in building blockchain-based projects.
A scam project will have made-up names and unknown developers. They will also guarantee immediate profits in exchange for your money. As anyone who has spent more than one hour on the crypto market would tell you, there are no guarantees when it comes to cryptocurrency.
Pyramid Scheme Resemblance
A pyramid scheme is a financial investment plan that lures in users with substantial and often guaranteed rewards. The catch is that you only get a share of the profits when you recruit other members, and then when those members recruit others and so on.
Usually, this kind of scam goes on and on, and the only beneficiaries are the ones sitting at the top of the pyramid, and who originally started the process. This kind of business is illegal, but people have fallen victim to similar crypto scams like Bitconnect.
Purchasing cryptos today is far much easier than it was 10 or even 5 years ago. Before recently, you had to access an official exchange of which there were very few around. You also had to have a place to store your tokens, which in most cases were Bitcoins.
However, market evolution and the ever-increasing number of altcoins have made investing in cryptocurrency an affordable and accessible venture for most people.
Today, you can even buy Bitcoin tokens without having to store them. In this regard, you can opt for one of these Bitcoin-based financial products:
These tokens work as certificates for brokerage operations that involve Bitcoin investors who speculate on the volatility of the famous digital asset. For now, they are not available for other cryptos.
You can use one of the many official exchanges available online to buy cryptocurrency, such as:
You can start by creating an account at any of these exchanges and purchase any of the main tokens out there (Bitcoin, Ethereum, Litecoin) with fiat currency. If you want to invest in other cryptos, you can exchange these tokens in a crypto-to-crypto transaction for the tokens that you want to hold. Also, make sure that the exchange you are using is legal in your country.
Find out how to pick the right cryptocurrency exchange here.
Where to Store Cryptos
Exchanges ask you to have a wallet where you can store tokens before you attempt investing in cryptocurrency. You can opt for various forms of crypto storage depending on how you plan to use them. There are two main categories to choose from:
These storage options keep your account in a permanent connection to the internet. They work under high-security protocols, but they are more prone to hacker attacks than cold storage wallets. They can be mobile wallets, desktop wallets or online/cloud wallets. Official exchanges usually host the latter.
The main benefit of using a hot wallet is that you always have quick access to your stash of cryptocurrency. You can speculate rapidly on price fluctuations. You can pay for products and services instantly where this method of payment is standard.
Here are some examples:
Cold Storage wallets
For maximum security of your digital assets, you can opt for cold storage wallets, which you do not have to connect to the internet.
The most popular type of cold storage wallet is a hardware wallet, which is a USB memory stick that has been optimized to hold cryptographic information highly secure. Here are some examples:
You can only get access to your cryptocurrency account and possessions through private keys, which are numeric serials. You must always be the only person to know this access protocol and never share it with other people.
You can also choose to store your private keys on paper wallets, where they are printed in the form of QR codes. You can use them for all your transactions simply by scanning them. The main benefit of using paper wallets is that your account cannot fall victim to malware or hacker attacks.
Popular choices for printing your paper wallet include:
When is the Best Time to Invest in Cryptocurrency?
There is no precise formula for when to invest in cryptocurrency. Not even the most experienced financiers and brilliant market readers can provide you with an exact time for buying cryptos.
As a general rule of thumb, you should not attempt to purchase cryptocurrency when it is near the peak of its bubble. At that point, the buying price is usually high, and if the bubble bursts immediately after your purchase, you might find that your newest assets have a fractional value of what you paid for them.
Also, you should avoid buying cryptos when the price is on a rapid downfall, as it usually is after a bubble bursts. You might want its value to hit rock bottom and invest in it when it is showing a healthy rising trend.
Just as it’s the case with any financial investment, timing is essential. Keep a close eye on a token’s evolution. Find out as much information about it as possible. Buy it when you have a solid hunch that it is good for your portfolio.
Once you get a hang of it, investing in cryptocurrency should become a regular investment venture. The market is in continuous expansion, and new tools appear every day that ease the trading process. One of them is the staking platform, which helps its users to trade coins and generate a substantial profit in the form of stakes.
Paying Taxes on Your Cryptocurrency
One of the biggest advantages of investing in cryptocurrency is that in most countries where holding them is legal there are no VAT taxes. Countries like Germany and the USA consider cryptos to be property and not a financial product. As a result, you do not have to pay extra fees when you make a profit from trading them.
Regardless of your plans for cryptocurrency investments, you should always check with your country’s legal jurisdiction regarding crypto trade and possession. Ask your accountant or a tax advisor to clarify the taxes and fees that you would have to pay when investing in Bitcoin, Ethereum or other altcoins.
Investing in Cryptocurrency in 2020 and Beyond
For the past two years, the cryptocurrency market has gone through rough times. The bearish moves that followed the Bullish Bubble of December 2017 have kept most cryptos, including Bitcoin at consistently low values.
Bitcoin value between January 1st, 2018 and December 1st, 2019, according to coinmarketcap.com:
Some very optimistic voices in the industry believe that cryptocurrencies will explode in the upcoming decade. One of them is that of John McAfee. The Anti-Virus mogul and 2020 US Presidential Candidate believes that Bitcoin’s price will increase by $2526.18 every day in the forthcoming months.
McAffee follows other crypto experts’ perspective and is the ideal fantasy of an endless bullish run that should last long into 2021.
More conservative voices consider that the cryptocurrency market has matured since its inception. The increasing number of exchanges and the increasing stability should lure in more investors. Max Keiser, a former Wall Street Trader and host of RT program Keiser report, believes that Bitcoin’s price will increase steadily. However, he has played down his previous prediction that BTC value will reach $1 million in 2020.
The crypto pessimists see a bleak future every time they discuss the evolution of cryptocurrency and Bitcoin’s development. One of them is Anthony Pompliano, founder of Morgan Creek, who said that BTC price will continue to drop and might reach a dismal value of $3,000 in the upcoming months.
However, just as Pompliano stated, this decrease should not cause too much alarm, and it will not represent the end of cryptocurrency as we know it.
On the contrary, even if Bitcoin price is subject to intense volatility, the rest of the coins may be able to keep their market share. Developers still trust up-and-coming altcoins, and investors always find new projects to fund and keep the cryptocurrency flame alive.
The Benefits of Investing in Cryptocurrency
One of the best things about investing in cryptocurrency is the tax-free process that comes with it. This benefit is available mostly in European countries like Poland, Estonia, Germany, Australia, and Sweden. Most of these nations’ governments have tried to impose VAT taxes on crypto trading, but the European Court has dismissed their cases one by one.
In Germany, making a profit from cryptocurrency transactions is subject to a smaller tax than that on regular financial income (25%). Additionally, if users hold on their digital assets for more than one year, they will not pay any taxes when they finally sell them. This measure was adopted to prevent a high rate of same-day trading on the part of market speculators.
As the cryptocurrency industry increased in value, so did the number of exchanges. You can count on these third parties to practice fair transactions for Bitcoin and other cryptos. Also, they can hold a record of your usage, trade, and ownership when you use the same exchange.
Another important benefit of investing in cryptocurrency is investor’s anonymity. Blockchain technology features a permanent collection of your activity on the system. Since every transaction is stored in its blocks forever, you will always have access to your trade history. At the same time, the platform allows you to maintain total secrecy over your portfolio, your trades, and your identity.
The Dark Side of the Crypto Coin
As with every financial investment, there are certain risks that you have to consider before funding a crypto venture. Besides taking extra measures against scams, pyramid schemes and hack attacks, you should also think of the downsides that come with crypto trading.
For now, most countries that allow cryptocurrency transactions only have laws for Bitcoin and just a handful of altcoins. It means that if you trade lesser-known crypto, you will have to exchange it for BTC every time you engage in a trade.
The major disadvantage in this equation is the amount of taxes that you will have to pay. Most governments will charge you for Bitcoin transactions, which may affect the profit that you would normally take if you could trade altcoins directly.
In some extreme cases, you may lose money during an altcoin – Bitcoin – fiat money transaction, and still, have to pay taxes for it. So, a buyer’s beware is crucial every time you take part in cryptocurrency trade.
There is a YouTube video dating back to 1995 that shows how new, groundbreaking technology is not taken seriously within its incipient stages. In this clip, a young Bill Gates tries to explain “the internet” to an equally younger, but more reluctant to changes David Letterman. The latter saw no use to it and did not consider it more important than printed magazines or tape recorders.
In 1995, the public internet was merely 10-years old, and many people still saw it as a fad. David Letterman even called it a “chatroom for the troubled loners,” and his view was surely shared by many at that time. Few were those who could foresee the impact that the internet would have on our world today. Those who did are also the ones who capitalized on it.
Just as cryptocurrency is celebrating its first decade, many people still look at this breakthrough technology with bafflement. Plenty of people still see it as an ephemeral trend in the financial world.
And, who can blame them?
They have a superficial understanding of what cryptos and blockchains represent. They see no use for them, and they do not consider cryptocurrency to be a threat to the traditional financial system that has been working, more or less efficiently, for the last couple of centuries.
If you are keen on investing in new technologies, then cryptocurrency should be at the top of your list. You can capitalize on a revolutionary innovation that can change the entire world as we know it. And, you can do it in its early stages of development.
Begin investing in cryptocurrency with calculated risks in mind. Stay away from scams and learn the game as you go. Understand how trades become the subject of taxation laws in your country. Start small and enhance your portfolio by supporting innovative projects. And, last but not least, enjoy the ride!
Featured image courtesy of Shutterstock.