Crypto Currency
How To Invest In Cryptocurrency? Beginners Guide 2021
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Published
Thursday, August 5, 2021
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18 min read
Published
Thursday, August 5, 2021
•
18 min read
I have been in your place. Confused about how cryptocurrencies work, the technology behind them, and questioning if it is truly decentralized. If I invest, how much, where, and from which coin should I start? Most important of all, is it safe to invest?
I have structured this article as a learning path to help you take your first step in adopting cryptocurrency as an investment:
Cryptocurrency can simply be described as digital money. A decentralized public ledger records all cryptocurrency transactions using blockchain technology and cryptography. The ledger is accessible by everyone, which is why it is called as a “public ledger”.
In our current financial system, a central authority like the central bank facilitates all our transactions. However, all cryptocurrency transactions are validated and verified by a group of people/nodes who don’t know each other, are geographically distributed and participate purely for the incentives that a particular cryptocurrency has to offer. Hence it is called as a “decentralized system”.
To learn about how cryptocurrency works using blockchain technology, and what gives value to it, read our ‘Beginners Guide to Cryptocurrency‘.
Bitcoin is the first cryptocurrency to come into existence. It has been nearly 11 years since it was launched and is currently the world’s largest cryptocurrency by market capitalization. It is used as a store of value and a mode of payment.
However, ethereum is not just a mode of payment. Businesses from various sectors develop financial contracts and applications on the ethereum blockchain. These applications issue their own cryptocurrency tokens for users to use the application.
Cryptocurrency Investment is the act of purchasing a crypto asset, with the hope that it will increase in value over a period of time. Investors own the crypto they buy and can make profits only in the long-term. They conduct a research on fundamental factors of a cryptocurrency project – project team, whitepaper, tokenomics, market capital, maximum supply, etc.., to decide which cryptocurrencies to invest in.
Whereas, cryptocurrency trading involves conducting technical analysis where periodic trends are studied and analyzed across various time frames. Based on the analysis findings, traders will speculate on the price movements of a crypto asset by taking long or short positions:
If prices go against a trader’s speculations, they will incur losses. Some traders utilize margin & leverage to borrow huge amounts of capital to take long or short positions.
To conclude, crypto trading needs more risk management and if traded without technical analysis, it will lead to losses. Investing in certain cryptocurrencies need thorough research on their fundamental factors to keep yourself safe from any scams, or devaluation of a coin/token.
You got to trade a coin or token in a cryptocurrency exchange and hold them in your crypto wallet. Let’s see what each of them actually means:
Understand the difference between coins & tokens here
It is a Digital wallet which stores cryptocurrency coins and tokens. Similar to a physical wallet in which you hold your cash, digital wallets are on your phone or browser as an app or extension respectively. There are two types of wallets:
Know the difference between Hot Wallet & Cold Wallet
It is 25–30 alphanumeric characters that represents the address of your wallet. You can share it with others to receive cryptocurrency into your wallet.
It is also a set of alphanumeric characters. But, this key allows you to access your funds. If you forget your private key and haven’t recorded it anywhere, you will lose access to all your crypto funds. The key shouldn’t be shared with anyone. (Note: On centralized exchanges, the exchange company will maintain your private key for you).
This article is purely for educational and informational purpose and not to encourage you to buy cryptocurrency. You should always do your own research (DYOR), make your own decisions (MYOD) and be comfortable with the risks before making an investment. Investing in volatile cryptocurrencies involves an element of risk: prices of these currencies go up and down, (often in a manner that seems irrational).
We often buy products by comparing their prices. Similarly, some beginners in the crypto space, often compare prices of cryptocurrencies to decide which one to buy. Some buy a cryptocurrency only because a public figure or a community is talking about it.
Novice crypto investors are usually recommended to start with the world’s largest cryptocurrencies by market capital – bitcoin and ethereum. They are both extremely volatile. But what makes them more reliable compared to others, is the period of time for which they have withstood the storm of attacks and manipulations in their blockchains. In addition to that, it is easier to buy and sell bitcoin because it has the highest liquidity compared to other coins. After starting with these, you could then explore other coins or tokens that solve specific problems.
Before you invest, it is very important that you do your own research to decide which cryptocurrencies to invest in. It will not only help you to beware of scams, but to also develop a sense of confidence when you invest. But, what to research?
Every cryptocurrency project is created to solve a problem. The project’s whitepaper provides an overview of the technology on which it is built, what problem it solves, features and upgrades. Read the white paper of any cryptocurrency that you want to invest in. It will help you understand what value the cryptocurrency is bringing to the whole eco-system. On the other hand, if a whitepaper fails to convey its value or does not have realistic goals, then it is probably not a cryptocurrency you should invest it.
It is very crucial that you check for the credibility of the team that is working on the cryptocurrency project. One way of checking is to just google their names & find their Linkedin or Twitter profiles. Go through it. Check if they have ever built or worked for a renowned firm before? Have any other credible people in the crypto space supported/endorsed them? How often do they talk about the progress of their project or about the industry? This will help you establish a little bit of sense of security that your money is in safe hands.
Some crypto coins are cheaper because their supply is significantly larger. Let’s understand this better by comparing two cryptocurrencies in real-time – XRP and Bitcoin
As you can see from the table, XRP’s circulating supply is larger than that of BTC. But, its market capital is lower. Which is why the price of XRP is cheaper than BTC.
Now, for $XRP to reach a price target of say $45,000, it’s market capital should approximately increase by 51,098 times! That would be more than quadrillions of dollars!! which is near to impossible.
You may now ask ‘Does this mean I shouldn’t invest in cheaper crypto?’
No, you may invest in crypto that’s cheaper in price. But, don’t invest all your money in it. Diversify your crypto portfolio. Invest in cryptocurrencies whose value you believe in. Decide the ratio of your diversification by comparing their market capital & supply.
You can find all the listed cryptocurrency coins and tokens on coinmarketcap.com
Get on twitter & subreddits. Be curious and spend some time on these channels. Follow personalities who are active in the industry. Discover new coins. The more you read, the better you will understand how cryptocurrency & blockchain technology can change the way our financial systems work. It will help you develop a sense of belief in the system.
Exchange Platforms have been critical to the success and widespread adoption of cryptocurrencies. However, users face confusion about which exchange type to use. At the moment, there are two types of exchanges:
Each have their own sets of advantages & disadvantages. Let’s compare them before concluding which platform to use:
CeX: You have to sign-up & make an account on the exchange to buy crypto. In the process, there will be KYC (Know Your Customer) procedures.
DeX: No sign-up process. You just have to download a wallet & connect it to a DeX only when buying or selling crypto assets.
CeX: creates an exchange wallet when you sign up. The wallet’s private key is with the exchange. So, you don’t have complete control over your crypto assets.
DeX: You have complete ownership of your private key, wallets and crypto assets. But, if you lose your private key, you will lose access to your funds.
CeX: Transaction requests can be tracked on blockchain. However, reserves cannot be publicly verified.
DeX: All transactions are publicly viewable & is fully transparent.
CeX: Crypto can be bought using fiat currency on the platform. It has a easy user experience and customer support team that we can reach out to, incase of any mishaps.
DeX: You need to have Ether or stable coins like USDC to buy crypto assets on the exchange. It takes time to get familiar with using the platform. There is zero customer support.
CeX: Has higher liquidity because large number of users make buy/sell orders according to market trends. Orders are tracked & matched in an order book.
DeX: There is no order-book system. You may have to pay higher prices if there isn’t enough liquidity on pairs you want to trade.
CeX: Charges a % of trading fee per transaction, depending on the platform
DeX: When placing a transaction, users pay a ‘gas fee’ to confirm their trade on DeX. It could start from as low as $0.01 & could go significantly higher when a blockchain gets more traffic
CeX: lists only verified coins/tokens on their platform. Governments regulate centralized exchanges for customer protection. In case of hacks, depending on its nature, a widely known exchange can refund some funds.
DeX: Non-verified/Scam tokens could be listed on DeX. There is zero consumer protection. It isn’t suitable for retail customers.
Conclusion: Experts recommend beginners to start with a centralized exchange because of its ease of use. Give yourself some time and get first-hand experience on how the cryptocurrency market works, by buying and selling on centralized exchanges. Understand the risks involved. Once you develop confidence with investing in cyrpto, start reading about DeFi projects and different types of wallets. That will help you decide which DeFi coins/tokens you want to invest in. Then you can choose a decentralized exchange integrated with the DeFi token you want to invest in, and start investing.
Some hackers create fake websites to collect your login credentials and hack your accounts. Therefore, it is important to ensure that you are accessing the right website URL’s. You can cross-check some of the website URL’s with exchange tokens that are listed on http://coinmarketcap.com. Also ensure that the website has a ‘HTTPS’ protocol. This ensures that the website has a Secure Sockets Layer (SSL). An SSL protects user’s information which passes through the website.
2-Step Verification (also known as 2FA or two-factor authentication) adds an extra layer of security to your wallet. You’ll need both your wallet password and a one-time passcode (OTP) created by the Google Authenticator App to log in. It is more secure than SMS because it is offline and local to your device. It does not require an internet connection or phone service.
Hackers steal your SIM by requesting your cell phone provider to provide a new SIM card. If they get access to your SIM card, they can access your accounts. To prevent this, set up a passphrase with your cell phone provider, which must be disclosed before activating a new SIM card.
This tool will encrypt everything you type in real-time, in order to prevent malware from recording your keystrokes that will allow them to hack your account/wallets.
Wohooo, now that you have taken a few safety measures, let’s dive into the process of how you can actually buy cryptocurrency on a centralized and decentralized exchange.
When you buy crypto for the first time, you have to buy it through your fiat money, on a centralized exchange. Follow the below steps to do so:
(Optional) After buying crypto, if you plan on holding it for long-term, transfer your crypto assets to a hardware wallet. This is just a safety measure to protect your crypto assets from any hacks.
Guide to buying cryptocurrency on Coinbase exchange
Decentralized exchanges require you to have Ether or stable coins like USDC to buy crypto. Ether or stable coins can be bought on a centralized exchange (see above). Once you have Ether or stable coins in your centralized exchange wallet, follow the steps below:
(Optional) After buying crypto, if you plan on holding it for long-term, transfer your crypto assets to a hardware wallet. This is just a safety measure to protect your crypto assets from any hacks.
In most countries, cryptocurrencies are taxable. How they are taxed depends on regional and national regulators. In United States, United Kingdom & Australia, crypto investors & traders pay capital gains tax or income tax on crypto activities.
Due to the ever-changing crypto landscape and growing adoption of cryptocurrency as an investment, tax regulations are also developing. You have to stay up-to-date with them to avoid penalties. Here are 4 factors you should know about to meet your tax obligations & avoid penalties for nonpayment:
Read in detail here: https://bear.tax/blog/crypto-tax-reporting/
Complete guide on cryptotaxes in the United States
As a beginner, without our conscious, we make investments based on our emotions. There’s a little bit of trading psychology that’s involved here. When prices of a cryptocurrency increases, we start experiencing FOMO (fear of missing out) on making huge profits. So, we end up buying our crypto assets when prices are high. And when prices start declining, we fear making losses. So, we start selling our crypto assets. That’s why it’s important to understand that cryptocurrencies are highly volatile. Prices are falling & rising in seconds!
So when to invest then?
Use a method called dollar cost average. In this method, you buy a fixed amount of crypto at regular intervals (weekly/monthly), without giving much thought on prices. For example: Assume that you have allotted $1200 for investing in bitcoin. Divide this $1200 over 12 months. Every month, at any point, buy bitcoins worth $100.
Even when you allot some portion of your portfolio for crypto investments, diversify your crypto investments as well. Instead of investing in one cryptocurrency, you might want to invest in a few other cryptocurrency just to protect yourself from adverse circumstances. Plus, some cryptocurrencies may have the potential to outperform others.
For example: Instead of investing $1000 in Bitcoin, you can invest $500 in Bitcoin and $500 in Ethereum. They both have the largest market capitalization and longest price history as well. This is a very good ratio for beginners to start with.
Stock prices change with a company’s performance. But most cryptocurrencies’ prices aren’t tied to anything specific. This makes it difficult to predict their future value. So, experts recommend to allocate only a small portion of your total investment portfolio for crypto. If you are saving up to buy a house, repay debts or education loans, don’t use that money to invest in crypto in the hopes of doubling it faster. You may lose all your money. Figure out an amount that you can truly afford and stick with it. Be patient with the process.
Now that you know how to research and choose crypto coins or tokens that you want to invest in, how you can buy them, mistakes you should avoid, and risks involved, you are all set to start your journey!
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