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Investing in Cryptocurrency - is it a good or bad idea? That depends...

What to know before investing in Cryptocurrency

By Paulina MullerPublished 2 years ago 5 min read
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Investing in Cryptocurrency - is it a good or bad idea?  That depends...
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One of the most difficult things for investors to avoid when it comes to cryptocurrencies is falling prey to the hype. Many individual and institutional investors have adapted digital currencies into their investment portfolios. Analysts, on the other hand, have continued to warn investors about cryptocurrencies' volatility and unpredictability.

If you've decided to invest in the cryptocurrency market, you should do your homework first, just like you would with any other investment. We'll go over everything you need to know before investing in the next sections.

1. What is cryptocurrency?

A cryptocurrency (or "crypto") is a digital asset that can circulate without the use of a central monetary authority like a government or bank. Cryptocurrencies, on the other hand, are created using cryptographic procedures that let users to buy, sell, and trade them in a secure manner.

Think of it this way: Cryptocurrency is comparable to exchanging money in a foreign country. In the U.S., dollars can get you a good meal, but in Italy, euros are required for fine dining. Dollars and euros are valuable because they can be used to buy products and services. Cryptocurrency is the same way. You convert your money into cryptocurrency and utilize it in the same way that you would regular money (at places that accept it as a type of payment).

Bitcoin and most other cryptocurrencies are underpinned by blockchain technology, which retains a tamper-resistant record of transactions and keeps track of who owns what. Blockchains solved a problem that past attempts to create solely digital currencies had: prohibiting users from duplicating their holdings and attempting to spend them twice.

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2. Think about why you're investing in cryptocurrencies.

The most important question to ask oneself before investing in cryptocurrencies is why you're doing so. There are a plethora of investing options available, many of which provide more stability and lower risk than digital currencies.

Are you interested in cryptocurrencies simply because it is hot right now? Is there a compelling reason to invest in one or more digital tokens in particular? Of course, different investors have different financial interests, so some investors may be better off investigating the cryptocurrency area than others.

3. Make a decision on how you'll pay.

While many of cryptocurrencies are exchanged around the world, the most popular ones are readily available for purchase in fiat currencies such as the US dollar. If you're a first-time buyer, you'll almost certainly have to buy cryptocurrencies with conventional cash.

If you're a more seasoned investor, you might want to consider trading some of your existing crypto holdings for a different cryptocurrency, such as Bitcoin for Ethereum.

4. Choose a cryptocurrency.

There are a lot of cryptocurrency investment possibilities, but none of them are likely to be ideal for everyone. Before you buy, think about what you want to get out of this investment. Are you hoping for it to rise in value? Do you want to use cryptocurrencies to perform transactions? Do you want to use the underlying technology through decentralized apps?

These may assist you in making your choice.

  • Bitcoin, the first and most valuable cryptocurrency, was launched in 2009.
  • Ethereum is frequently used to carry out more advanced financial transactions than Bitcoin allows.
  • Cardano is a cryptocurrency that competes with Ethereum and is led by one of Ethereum's co-founders.
  • Litecoin is a Bitcoin fork designed to make transactions more convenient.
  • Solana is another Ethereum competitor that focuses on speed and efficiency.
  • Dogecoin started out as a joke but has now become one of the most valued cryptocurrencies.
  • Stablecoins are a type of cryptocurrency whose value is intended to remain constant in relation to real-world assets like the dollar.

Learn More About Cryptocurrencies...

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5. How to store your Cryptocurrency?

Cryptocurrency investors keep their funds safe in digital wallets. When it comes to digital wallets, there are several solutions to consider. A digital wallet, is usually an app or a service provided by the vendor from whom you bought it. Your wallet provides you with a private key, which is a one-of-a-kind code that you use to sign off on purchases digitally. It's mathematical evidence that the transaction took place.

If someone has your private key, they are free to do whatever they want with your digital assets.

6. Cryptocurrency - Pros and Cons

Cryptocurrency elicits strong feelings from a wide range of investors. Here are a few reasons why some individuals think it's a game-changing technology, while others think it's a passing fad.

Cryptocurrency pros

  • Supporters regard cryptocurrencies like Bitcoin as the currency of the future and are rushing to buy them now, presumably before they grow more valuable.
  • Some proponents prefer the idea that bitcoin removes central banks from managing the money supply, as these banks tend to devalue money over time through inflation.
  • Some people regard cryptocurrency as a possible foothold for populations who have been disadvantaged by the existing financial system.
  • Others like cryptocurrency's blockchain technology because it is a decentralized processing and recording system that is potentially more secure than traditional payment systems.
  • Some investors prefer cryptocurrencies because they are increasing in value, but they are unconcerned about the currencies' long-term adoption as a means of exchange.
  • Through a practice known as staking, several cryptocurrencies allow their owners to generate passive income. Staking coins entails utilizing them to assist in the verification of transactions on a blockchain network. Staking, while it comes with its own set of hazards, might let you build your crypto holdings without having to acquire more.

Cryptocurrency cons

  • Many cryptocurrency initiatives have yet to be thoroughly vetted, and blockchain technology as a whole has yet to acquire widespread usage. Long-term investors may never realize the rewards they expected if the core premise behind cryptocurrencies does not attain its full potential.
  • Other risks exist for short-term cryptocurrency investors. Its prices fluctuate swiftly, and although this has resulted in many people making quick money by buying in at the right time, it has also resulted in many others losing money by doing so shortly before a crypto crash.
  • Those large price swings may also go against the fundamental concepts underlying the projects that cryptocurrencies were designed to assist. People may be less willing to utilize Bitcoin as a payment mechanism if they are unsure of its value the next day.
  • Bitcoin and other projects using comparable mining protocols have a major environmental impact. According to a study conducted by the University of Cambridge, global Bitcoin mining consumes more than twice the amount of energy used by all household lighting in the United States. Some cryptocurrencies employ a less energy-intensive technology.
  • Governments all across the world are still figuring out how to deal with bitcoin, so legislative changes and crackdowns could have unpredictably negative consequences for the market.

Find Out More About Cryptocurrencies...

Final Thoughts

One of the most difficult obstacles for investors when it comes to cryptocurrencies is not getting caught up in the excitement. Analysts continue to warn investors about cryptocurrency' high volatility and unpredictability. Consider why you're interested in this particular alternative investment, and educate yourself on cryptocurrencies and blockchain technology so you can decide whether or not this is a good fit for you.

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