What is cryptocurrency? Cryptocurrency, or "crypto," is a type of digital money like Bitcoin. It works as both an alternative payment method and a speculative investment. Cryptocurrencies use cryptography, which ensures secure transactions without needing a government or bank to oversee them.
So, how does cryptocurrency work?
Cryptocurrency runs on a blockchain. So, cryptocurrency and blockchain are inseparable.
Bitcoin was created as a decentralized payment system. While traditional payments rely on banks to verify transactions, Bitcoin allows people to send money securely without a central authority.
Ethereum, one of the main cryptocurrencies, also uses blockchain technology like Bitcoin. However, Ethereum is more than a payment system. It powers a network where entire financial systems can run independently. For example, imagine insurance services without an insurance company or real estate deals without a title company. The Ethereum blockchain makes this possible, and its cryptocurrency is used to pay for transactions on the network.
Why Invest in Cryptocurrency and the Development of the Cryptocurrency Market
People invest in cryptocurrencies because they hope the popularity of cryptocurrencies and their value will increase.
For example, if Bitcoin becomes more popular, its price grows. If you bought Bitcoin before this increase, you could sell it later for more money and make a profit.
Ethereum works in a similar way. Ether, the currency used on the Ethereum blockchain, is needed by developers to build apps without banks. If more people build projects on Ethereum, the rise in the cryptocurrency price will happen.
How to Start Investing in Cryptocurrency
Here is how you can start investing in cryptocurrency.
Choosing a Platform for Trading Cryptocurrency and Registration on a Crypto Exchange
To buy crypto, you a crypto exchange. The best cryptocurrency exchanges are easy for beginners and offer a variety of cryptocurrencies to choose from. Pay special attention to account security: KYC, two-factor authentication.
Pick a Cryptocurrency
You shall decide which cryptocurrency to start with. If you are a beginner, go with well-known options like Bitcoin or Ethereum. These coins are widely used and are much more stable than smaller, newer ones.
Set up a Wallet
You need a crypto wallet to store your digital coins. You can pick an online wallet (hot wallet) or an offline wallet (cold wallet).
Buy Your Crypto
Now you can buy crypto. You can buy a whole coin or just a part of one. After the purchase, your coins will appear in your wallet.
Create a Strategy
Investing isn’t just about buying. You need a plan. As a beginner, you could hold your investment for the long term (HODLing) or try trading.
Risks of Investing in Cryptocurrency
Cryptocurrency offers great potential, but it comes with risks that every investor should consider.
High Volatility
Cryptocurrencies can have big price changes. You can earn a lot, but you also take risks. This can be difficult for new investors who aren’t used to seeing such big changes.
Security Risks
There are risks in storing and managing your crypto. You can lose your funds because of hacks, phishing attacks, and wallet weaknesses. Use strong passwords, turn on two-factor authentication, and store your crypto in a secure wallet.
Scams and Fraud
There are many scams that may make you lose your funds. Always check that a platform or project is legitimate before you invest.
Here are some tips for beginner investors. They will help you to avoid the mistakes of beginners in cryptocurrency.
Understand What You’re Investing In
Always know what you’re investing in. Cryptocurrencies, like Bitcoin, don’t have underlying assets or cash flow, so their value relies on people willing to pay more. Some cryptos, like Bitcoin and Ethereum, are popular, but their value can change rapidly. Be sure you understand the risks before buying.
Don’t Rely on Past Performance
While Bitcoin grew from a low price to much higher levels, that doesn’t guarantee it will continue. Look to the future and understand what will drive future growth, not just what happened in the past.
Watch Volatility
Cryptocurrencies are very volatile. Prices can drop quickly, which can be risky for new investors. Professional traders with experience can handle this, but beginners might get nervous and sell at a loss.
Manage Your Risk
Set clear rules for your investments. For long-term investments, hold, even when prices fluctuate. For short-term trading, set limits, like selling if an asset drops by a certain percentage. Always keep some cash in reserve, so you’re ready for future trades.
Only Invest What You Can Afford to Lose
Never invest money you cannot afford to lose. If the loss will impact your daily life, do not use that money for crypto.
Why Diversify Cryptocurrency Portfolio
It’s best to begin with Bitcoins and altcoins which are more popular. Here are some of the top options.
Bitcoin (BTC)
Bitcoin is the most expensive cryptocurrency, and this is why it is popular among beginners. You can buy a part of Bitcoin and make it grow.
Ethereum (ETH)
Ethereum is an entire platform for smart contracts and decentralized apps (dApps). This makes Ethereum a good option for beginners because its value is increasing in the long-term.
Litecoin (LTC)
Litecoin is called the "silver to Bitcoin's gold." It has faster transactions and lower fees than Bitcoin. It’s a good choice for beginners who want a reliable crypto with quicker and cheaper transactions.
How to Evaluate Cryptocurrency Prospects?
Perform the fundamental analysis of cryptocurrencies. Check the project’s use case, team, community support, security, and long-term viability. Research the project’s whitepaper, development updates, and partnerships to understand its potential and risks.
Cryptocurrency Investment Strategies
We divide the crypto investment strategies into:
Long-term Cryptocurrency Investment
You buy cryptocurrencies and hold them for a long time. It’s a good choice if you are looking for long-term growth.
Medium-term Investment
You hold cryptocurrencies for a few months, but avoid the high risks of short-term trading.
Short-term Cryptocurrency Trading
You buy and sell cryptocurrencies quickly and try to make a profit from small price changes. This strategy needs constant market checking and fast decisions.
Dollar-Cost Averaging (DCA) Strategy: Regular Investment
You buy a fixed amount of money in cryptocurrency at regular intervals, doesn’t matter the price. It’s a good strategy for those who want to invest steadily over time.
Mistakes of Beginner Investors in Cryptocurrency
Now, let us have a look at some lessons for beginner crypto investors and check how to protect yourself from scammers.
Perform fundamental analysis: learn about the project, its use cases, its team, and how it may grow over time.
Crypto transactions can have several fees that new investors may not notice. Buying crypto with a credit card may come with high fees, plus exchange and blockchain fees. These can add up quickly, making your investment more expensive. Research fees beforehand to save money.
The desire to “get rich quick” can lead to risky decisions. While crypto can offer big returns, it can also cause huge losses. Think long-term instead. Focus on quality projects with strong histories, and treat crypto as a long-term investment rather than a short-term gamble.
Storing crypto in online wallets is convenient but risky. Hackers can target these wallets, leading to theft. If you ask how to minimize risks when investing, then, keep your money in an offline wallet.
Sending crypto to the wrong wallet address is a common mistake. If you mistype the address, the funds could be gone forever. Double-check wallet addresses before making transfers to avoid this risk.
Fraud in cryptocurrency is common, and criminals use various tricks to steal funds. Be cautious of romance scams, Ponzi schemes, phishing, and other fraud tactics. Avoid connecting your wallet to untrusted apps. Keep most of your crypto in offline wallets for extra security.