Not so long ago, cryptocurrency investing had zero trust from CeFi representatives and organisations and was bombarded by a constantly negative agenda in mass media. But today, after the major success of certain coins and tokens that managed to generate massive profits, investing in cryptocurrency does not face so much scepticism any more. The largest hedge funds and financial organisations invest millions of dollars in the crypto market.
In this article, we will guide you through the world of crypto, talk about investment strategies, and give you a full picture of some of the crucial details you need to know before making your first investment.
First thing first — what is a cryptocurrency?
A cryptocurrency, or crypto, is a digital asset based on blockchain technology. Certainly, cryptocurrency is usually used as a means to trade for profit.
About 11 years ago, when the crypto world was at its early stage of development, bitcoin was the only digital asset that could be found in the DeFi space. But today, we can see that the crypto world is blooming with various types of businesses and trends: all kinds of cryptocurrencies — led by bitcoin; dapps or decentralized peer-to-peer applications that can be adopted from finance to online gaming; exchanges and decentralized exchanges, allowing people to trade cryptocurrencies without middlemen; nft or non-fungible tokens and much more, you can name it. The crypto world has truly come a long way. Now, you are probably asking yourself: what do I need to know before investing?
Difference between crypto investing and trading
Even though both these methods focus on gaining profit from movements in the financial market, they require two completely different tactics.
Investing in cryptocurrency: Pursues the goal to create a long term position in digital assets. Some investors tend to keep their investments for years, decades even before selling them for profit, if selling them at all. The frequency of transactions is low, which makes investing less risky than trading, but it also impacts profits, making them accumulate gradually, not instantly. When making investments, it requires deep study of the market first, its psychology and behavior. Investing doesn’t require monitoring charts frequently, thus making it less stressful than trading.
Trading in cryptocurrency: Pursues short term profit by using the strategy of buying low and selling high. Since the price volume of cryptocurrencies can be a subject of extra volatility, traders can place many orders in a very short period of time. Such kinds of financial activity are considered very risky, but the rewards can also be very high. Trading requires being able to read the charts and numbers, since its main concern is short term price trends. Unlike investing, trading demands monitoring charts, trends, and news on a constant basis. That means a trader needs to be very stress-resilient and be able to keep emotions away.
Is cryptocurrency investment actually a good investment?
The world of crypto is still in the making, and it is much more volatile than stocks and bonds and other so-called traditional investment assets in general. But does that make an investment into the crypto market a bad thing? Certainly not.
Any kind of investing is a huge risk if you do that without proper analysis. Let’s face it: cryptocurrencies entered the market around 11 years ago, and ever since then the crypto market capitalization has only been growing up. More and more traditional financial organisations, like hedge funds, have their interest in cryptocurrencies. Even major banks, such as Citibank and Standard Chartered invest hundreds of millions of dollars into Bitcoin.
All that makes the whole crypto market a more mature place for investing, and that clearly shows that cryptocurrency are not going anywhere anytime soon. Certainly, the crypto market can experience it’s ups and downs due to high volatility, but this volatility can bring you not only risks, but also potential gains. What can be said for certain is that cryptocurrency is definitely worth considering as an additional asset to your investment package.
The momentum cryptocurrencies have gained in recent years has made it possible for numerous projects and assets to appear and bloom, thus providing multiple choices for potential investors. As always, investors need to do their own research and only invest what they can afford to lose. If you follow these golden rules, then the question of whether investing in the crypto market is worthwhile becomes irrelevant.
Investing in crypto and stocks. What’s the difference?
It’s quite common for beginners to burn themselves on their first investing because of the lack of knowledge between stocks and cryptocurrency. These two types of investments have their own particular qualities and it is important to know them before you make your first move.
Stocks are backed up by specific companies, and making investments in them means that you expect these particular companies to grow in the future. Stocks are issued by denominated groups, they have to adhere to specific regulations, go through an audit and must be checked by government authorities. There are usually hundreds of specialists that stand behind stocks, making it a collective responsibility.
Cryptocurrencies, on the other hand, are based on blockchain technology that “rebels” against conservative financial institutions and rules, allowing people to trade via peer-to-peer transactions. Some cryptocurrencies have use cases and functionality — like gaming or finances — but it might be a challenge to predict whether it will help a particular crypto token or coin to make it big. Anyone who knows how to code and deploy crypto contracts can make a currency, thus making it a small team or one-man’s job. So to say on the one hand it is still the same process of you evaluating the viability and the perspectives of the project behind the coin (same as with stocks) yet at the same time you probably have to dig through more dirt to get to the diamonds here.
All in all, investing in crypto can be seen as high risk, but numerous cases like Ethereum, Bitcoin, Cardano, Ripple, etc. show that it can bring a high reward.
Five Golden rules of cryptocurrency investing:
It is crucial to know beforehand the project or currency you are investing in, and if you do not look into what you invest in it can be a Wild West for you. Here are some golden rules that can help you during your journey in the crypto world (and honestly in any investment or trading world).
Only invest what you can afford to lose
This rule applies to any kind of investing, but within the crypto market it is indisputable. It is hard to say what can be considered as a safe sum for investment, since every case is different and unique. What can be said for sure is that taking a bank loan or selling your car to put all that money into crypto, even a very reliable one in your opinion, is reckless and wrong.
DYOR or Do Your Own Research
Do not just jump into some crypto project only because of hype or because someone else tells you to. Even if you think that you are investing into something reliable, you should always do your research first. This includes studying the whitepaper, the website, social media presence, the developer’s previous projects (if there were any), the use case of the project and so on. Surely you can just subscribe to some crypto influencers and follow their signals but that certainly does not guarantee you anything, but the DYOR method does.
Never put all your eggs in one basket
Currently, there are more than 6500 different coins listed on the CoinMarketCap website. And there are hundreds of coins that are still waiting to be listed or still preparing to go through the checks to be listed there. So it is a good idea to diversify your investments in several different projects, just in case one of them makes it better than the other. It might be a good decision to invest some of your money in the top 10 cryptocurrencies and invest the rest of the amount in more risky projects.
Avoid FOMO and put your emotions away
FOMO stands for fear of missing out, and sometimes investors, especially inexperienced ones, make a classic mistake — they jump into a project that is being hyped in fear of missing out on an easy profit.The crypto market can be the subject of external manipulations, and the risk of losing your investment because of reckless behavior is enormous. Your decisions should be based on research and common sense, and never on emotions. Even if you sold your currency and it all of a sudden began to grow in value, do not FOMO back. You will probably lose more than you will gain.
Protect your funds and learn from mistakes
It is inevitable that you will face scams, rug pulls, frauds, or simply failed projects that make you lose your investments. That is a normal thing, especially in a high-risk high-reward place like the crypto market. Do not let your failures discourage you, learn how to protect yourself and how to invest wisely. It takes time to gain experience, and you can’t become rich overnight. Learn from your mistakes to avoid bad decisions in the future.
Where to keep crypto: wallets, exchanges, custodial services?
When you have fiat money, you need a place to store it, be it a bank account, your wallet, or maybe even a glass jar — whatever makes you feel secure. With cryptocurrency, you also need a safe place to store it, but since it’s all digital, the options are different. Let’s look at crypto wallets first.
Hot wallet is an online wallet that allows you to store your digital currency. To use them, you need an internet connected device like a PC or your smartphone. They can look like web, mobile or desktop applications and they are especially convenient when you use them for transactions on a daily basis. The only issue with them is that, since they’re connected to the internet, they may be hacked and your savings can be stolen. Although this rarely happens, it still might be a good idea to have multiple wallets to store your cryptocurrency separately just in case one of them gets hijacked. There are quite a few hot wallets out there, like Exodus, MyCelium, and Wasabi. They are free of charge, and you can check any one of them to find the best wallet that suits your needs.
If you are striving for absolute security, then you should check cold wallets or, as sometimes they are called, hardware wallets. They look like USB devices and only need an internet connection when you plug them into your PC to make a transaction. Since it cannot be hacked or hijacked like an exchange or hot wallet account, hardware wallets are the best way to keep crypto safe. However, there are some disadvantages of using cold wallets: it may be costly, and they don’t support all kinds of the cryptocurrencies out there, so before you buy one you should check if it supports your currency.
The cheapest hardware wallet like Ledger Nano X will cost you around 50-60 dollars USD, and top-notch wallets like Opolo Cosmos cannot be purchased cheaper rather than 200 dollars.
This method of storing your digital assets is rather new but it’s getting more and more popular. Cryptocurrency custodial service is an independent off-chain storage solution for holding cryptocurrencies. That kind of solution is usually used by major players like hedge-funds to store large amounts of digital assets, because both hot wallets and cold wallets have their negative sides: they can be hacked or you can simply lose your hardware and thus access to your funds. Custodial services, on the other hand, provide a combined solution of hot and cold wallet, but it’s not available for everyone. In the United States, for instance, you can use custodial services only if you have over 150 000 dollars of investments. So even though this method might be the safest one, it is not available for everyone.
Keeping all your funds on the exchanges is never a good idea. Surely, it is convenient, and you always have your money ready for trading. However, one of the golden rules of safety in the crypto world says that you should keep only a small amount of funds on your exchange account, since account hacking is unfortunately a common thing in the crypto space. So, for trading and storing crpytocurrencies, always choose an exchange that is trustworthy and has a good reputation.
Which crypto exchange might be worth looking at?
Cryptocurrency exchanges represent digital business platforms where traders can buy, store and exchange cryptocurrencies. There are hundreds of different exchanges, and all of them provide different services. The best way to find out about the crypto exchanges is checking the Top Cryptocurrency list on CoinMarketCap website.
When choosing an exchange, you should always check its trading volume, the number of coins it supports, the fees they charge for deposits, trading, and withdrawals, and also, you should absolutely check its legal status in your home country. Especially if you live in the USA, you should check if the exchange has a licence in the state you live in.It is worth noting that apart from classic exchanges there are also decentralized exchanges or simply DEXes. These are the types of cryptocurrency exchanges that allow you to trade crypto directly via peer-to-peer transactions without the need for a third party. If this kind of exchange is more suitable for you, CoinMarketCap got you covered with their list of Top DEX exchanges as well.
Four tips how to protect your funds:
When you buy or exchange cryptocurrency a vital question arises: how to keep your investments safe? No one can, of course, guarantee your complete safety — even the most secure cold wallet can be physically stolen from you.Nevertheless, it doesn’t mean you shouldn’t care about your safety. On the contrary, the more tips you follow, the harder it will be to steal from you.
Avoid storing your cryptocurrency on exchanges
Yes, it might be very convenient to use your exchange account as a wallet for your digital assets, especially if you use it for transactions on a daily basis. But if you decide to invest for a long time, you should get yourself a crypto wallet and store your savings there. If you still want to trade from time to time, then it would be best to leave some of your funds on your exchange account, and store the rest of your digital assets in your wallet.Keep in mind that hacking an exchange account is one of the most popular crimes within the crypto world, not to mention that even exchange employees can commit such fraud.
Do not fall for scams
If someone sends you a direct message on Telegram or on any other social media stating that you have won a bitcoin and they need you to send them a small fee of 30 dollars, then you should clearly understand that it’s a scam. No one will ever give you anything for no reason in the crypto world. The only thing you can get for free is a trojan virus that will steal your entry data from your computer.There are literally dozens of types of scams and frauds: phishing emails, swap assaults, social engineering tactics and so on and so forth. You must be very cautious and stay alert all the time if you don’t want to lose your money.
Use strong and long passwords
It is essential that you never use the same “123456” password you use for your WiFi when dealing with crypto. The longer and stronger passwords you create for your exchange accounts and for your wallets, the better the chance that they won’t be hacked. It might be a good idea to change your passwords from time to time if you can, just in case. Definitely write down the passwords on a piece of paper and hide them somewhere safe, so even if you forget one, you can always check and remember it. Keep in mind that, in most cases, if you forget your entry data to your wallet or exchange account, you will lose access to them forever.
Engage only with trustable apps and websites
Before you even visit some website or app page, you should do some research to determine whether it is safe and reliable to use. Do your homework: study reviews first, do the background check, and learn about their data security. Since we are talking about money and investment, extreme caution must be a normal thing for you. So that means not opening the links from suspicious messages and emails and not sharing your seed phrases or secret keys to anyone.
Invest in bitcoin or altcoins. Peculiarities and what to choose
Investing in crypto doesn’t always stand for investing in Bitcoin — there are thousands of cryptocurrencies out there waiting for potential investors. Finding a good crypto to invest in might take awhile, and before making a crypto investment, it is crucial to learn the difference between Bitcoin and altcoins.
Bitcoin was the first cryptocurrency ever created more than 11 years ago. Other coins, known as altcoins, began to appear on the crypto market as knowledge about Bitcoin and crypto in general spread around financial enthusiasts. Even Ethereum, the second largest coin in the crypto space, is considered an altcoin. So, to put it simply, Bitcoin is the first cryptocurrency, and all other currencies are altcoins. But when talking about investing, which one to choose?
If you are looking for a rather safe investment and are targeting it for a long term, then Bitcoin might be your best bet. Its dominant position and acceptance by major hedge funds and banks make Bitcoin the perfect choice for those who want to have potential gains in the long run. And the fact that its price has only been growing, thus attracting new investors, shows that Bitcoin is still the king of the crypto world.
If you are more interested in short term holding and day trading, then altcoins are also worth checking out. But since there are literally thousands of altcoins that fly under the radar, you might ask yourself a reasonable question — how can I find a good cryptocoin for investment? If you are a newcomer, you might want to check out the CoinMarketCap cryptocurrencies list and see for yourself. Some altcoins can have a rally-like chart, sometimes gaining and losing thousands, even millions of dollars in just 24 hours. All that makes investing in altcoins a risky business for sure, but then again, it can be a high-risk, high-reward activity.
Seven ways to invest and earn with cryptocurrency
Crypto market is diversified to the extent that every investor can choose which strategy to uphold. Moreover, there is no absolutely right or wrong type of investment when dealing with crypto. The only thing important is that you are aware of these types, and when the moment comes, you can use any of these approaches to earn potential gains.
These types of investors prefer long-term investment strategies without cashing out in the near future. They are prepared to witness ups and downs, bear and bull market phases without panicking. This type of investment strategy can be applied both to newcomers and experienced investors — all it takes is strong faith in the project you put your money into.
Alternatively to just sitting on your potential ‘moon bag’ and waiting for the best opportunity to sell everything, you can use the Smart Hodling approach. This strategy includes selling a little bit of your investments when the chart is green, and then buying even more when the coin faces a price drop. That kind of approach can increase your overall investment.
The problem with that strategy is that you might miss the chance to sell your investment for a maximum profit at the right moment, believing that you have to hold it a little longer.
This approach is pretty easy to comprehend: you buy cryptocurrency at its lowest and sell when the price is high on a regular basis. However, in reality, it may not be that simple. First of all, this is like a full-time job, since you have to monitor market charts all the time in order to buy and sell at the right moment. Secondly, before making any purchases, it is important to study the market first, and then the historical values of the crypto asset you plan to invest in. On top of that, it is crucial to diversify your portfolio so you can compensate for one of your losses with another successful trade.
Still, even if you do everything by the book, it does not guarantee you anything, since no one can tell how the market will behave. The only thing you can do to decrease the chances of loss and increase the chances of success is to conduct a rigorous analysis and learn how to predict the price movement in the short run.
Early Adopters. Presales and buying at launch
The name of this strategy speaks for itself. The investors who use this approach invest into the project at its early stage of development or right after it was launched, usually such projects launch ICO or IDO. Some of them invest their funds during presales using platforms like DXsale or ICOdrops, so they could be among the very first adopters and currency holders.
This kind of approach can be both very profitable and risky. You can surely dive into some projects that will return multiple Xs quickly, and at the same time, you can just waste your money because the project might be a scam or just end up a failure. So when you decide to participate in an ICO or IDO, you should definitely do your research: Read the white-paper and answer yourself whether you understand what the project is doing and whether you believe it is viable and in perspective, take a look at the team behind it and their background, look at the advisors they have on board, do they have a minimum viable product and some user traction, what is their tokenomics (i.e. what is the token they are launching used for). Also, decide whether you are planning to just buy the coin at presale or ICO and then quickly sell it at the first spike when it is listed on the exchange, or whether you are looking into hodling it for a longer time — this is important because it is either just the initial hype you are evaluating or the long-term viability of the project.
Trading bot users. Using bots for investing or trading
Using trading bots can be convenient for any type of investment, be that long or short term. Due to high volatility, it may be difficult for investors to quickly react when needed, especially when they don’t have access to their wallet or account, not to mention time you need for transactions. Fortunately, there is a solution for such cases: trading bots — automated tools that can perform transactions on the behalf of the investors.
There are several types of such tools, like scalping or arbitrage bots. The latter one, for instance, examines the price of the cryptocurrency you want to buy on different exchanges and buys it where the price is the lowest.
Even though it might be convenient to use trading bots, investors must remember that this niche is still very young and underdeveloped, so it is crucial to use bots from reliable developers. On top of that, investors must keep in mind that a bot is just a tool, and without market knowledge and strategy, it won’t be much of an asset.
Miners. Mining crypto with your hardware
Crypto mining as an activity appeared as soon as people started to learn about cryptocurrencies. So when you hear the word ‘cryptomining’ it is usually referred to as Bitcoin mining, but that is not the only currency you can actually mine.
To put it simply, mining refers to the technical process that involves hardware and cryptographic processes to solve functions and record data onto a blockchain. You cannot mine every coin out there, but there are still quite a lot of currencies available for mining: Bitcoin, Ethereum, Dash, Litecoin, Monero, to name a few.
This kind of investment might not be suitable for most people, since, unlike in the early days, nowadays you need a big mining farm dedicated to mining only and cheap electricity to make it a worthwhile investment. So, before you start building a farm, you need to calculate all your expenses and see if it is worth it.
Lending. Using cryptocurrencies as collateral for loans
The basic principle of a crypto-backed loan is very similar to a mortgage loan — pledging your digital assets to get the loan and pay it off in the future. This type of investment is rather new, and you can get that kind of loan from crypto exchanges or specific lending platforms.
You still have ownership over your crypto assets, but you cannot sell it or make transactions with it. Moreover, if the currency that you gave for lending drops in price, you will have to return that difference, so in the end you might end up owing back more than your loan was. Nevertheless, there are some benefits in this kind of investment.
Some exchanges offer really nice APY (Annual Percentage Yield) in return for lending. You don’t need a good credit history, and your loan can be approved in a matter of hours. So in case you urgently need money but don’t want to sell your crypto, lending might be a good choice for you.
Another way of earning from lending is by supplying liquidity into pools on decentralized exchanges. Liquidity providers can earn money from allowing traders to use their liquidity for making transactions.
Stablecoins. Less volatility, more stability
If you want to invest, but feel uncertain about the high volatility of the crypto market, then stablecoins might be your best bet.
Stablecoins are backed by an asset, usually fiat money or precious metals. For instance, USDT stablecoin (Tether) is backed by the US national currency, and its price equals one dollar USD. These coins are designed to maintain a fixed value, and that is the reason why stablecoins do not suffer from pumps and dumps like many other cryptocurrencies. There are several ways you can make money after you invest in stablecoins.
The first one is that when you open a crypto exchange account, you can accrue daily interest on your holdings. This only works with stablecoins that are backed up by precious metals, like gold for instance, but doesn’t work with stablecoins that are backed up by fiat money.
You can also lend your stablecoins for an APY, which can vary from 5 to 12%, depending on the exchange or lending platform.
Staking your stablecoins is another way you can earn money. The process is similar to depositing money in a savings account. Only within crypto, your funds are used to maintain the flow of the blockchain network on a certain asset. So you “lock” your cryptocurrency to receive a reward in return.
Crypto world might be overwhelming with all its vocabulary and attributes. In this section, you can find answers to some of the most common questions you can have while doing your research:
CeFi vs. Defi
DeFi stands for “Decentralized Finance,” and CeFi, in its turn, stands for “Centralized Finance.”
CeFi represents traditional financial institutions such as banks, insurance companies, stock markets — everything that has a middleman, person or group of people in charge. With CeFi, someone always has to be in control and offer paid services for decision making.
DeFi, on the other hand, fully relies on a protocol that rules peer-to-peer transactions with no need for middlemen and a set of nodes that support the infrastructure. Unlike CeFi, with DeFi you reserve your anonymity and do not need to provide legal documents for financial operations. At least for now, as some governments like the USA are looking into regulating this as well.
Hot wallet or cold wallet?
It’s up to you which wallet to use, be that cold or hot one. How wallets are more flexible and you can access them via your smartphone or PC at any time you want. Cold wallets need to be plugged in your computer, and the number of supported cryptocurrencies is usually smaller than in hot wallets. However, if your hot wallet, in theory, can be hacked, your cold wallet can be stolen only physically, since it’s not connected to the internet 24/7. Hot wallets can be used for free, and cold wallets need to be purchased for money, sometimes even for a little fortune.
There is no clear ‘yes’ or ‘no’ here. You need to check them personally to make up your mind about this decision.
How to know if the project is good?
Always do your research before you start investing in some projects. Study the whitepaper, the project’s website, social media accounts, the use case of the project and so on. Look for so-called “red flags” that can help you to determine if the project is a potential scam.
For instance, if its telegram channel has more than 20 000 subscribers, but the online number of people is only around 500, then it means this channel is heavily botted and the developer tries to create a facade of hype.
If the project doesn’t have a whitepaper, that is also a red flag. In the best case scenario, the project will end up as a pump and dump coin, or a scam in the worst case.
Every solid project aims for as much media presence as possible. If there are no social accounts for the project, then there is something fishy about it. Do not trust anything that doesn’t have a social media account where you can ask any question or concern.
Last but not least, you need to learn how to read the project’s contract or know the apps that can read them for you. There are websites and telegram bots that can do a quick scan of the project to determine if it’s a honeypot or if the contract owner can disable trading and so on. Keep in mind that even a clean contract does not guarantee that the project can’t end up as a scam.
Do you need to pay taxes?
Yes, depending on your home country people who get their income from crypto trading must pay taxes: those who live in the USA, the EU, or Canada in particular. However, this tax varies from one country to another, and you need to check your local laws to know the exact percentage. It is necessary to keep the record of your losses and gains for future reports. Tax dodging can be a serious financial crime in your country, so it is crucial to know everything before you start investing in crypto.
Is it safe to invest in cryptocurrency?
It is crucial to learn how to protect your funds even before you start investing in cryptocurrency. Always use maximum security when it’s possible.
That includes two-factor authentication, long passwords, keeping track of transaction history, distribution of your profits across several wallets and so on. Surely, it can be a bit exhausting, but in this case, it is better to be safe than sorry.
As for the general safety of your funds, investing in cryptocurrency doesn’t differ much from any other kind of investment. If you don’t do it wisely without proper research, you can and will lose money, just like in other traditional forms of investments, like stocks and bonds.