Cryptocurrencies are investible assets that allow traders to buy, sell and spend. However, while they share plenty in common with conventional fiat currencies, they have unique characteristics that every beginner investor should understand.
What Are Cryptocurrencies and How Do They Work?
The first thing every potential investor should understand is that cryptocurrencies have no inherent value of their own. Instead, they’re digital representations of value, which is determined by supply and demand. With buying pressure, the value of a given coin goes up, while a sell-off reduces the price, much like the regular stock market.
Transactions take place on blockchains or other distributed technology. Rather than a central issuing bank or regulator, transfers occur between individuals and are recorded on a publicly viewable ledger.
How Many Cryptocurrencies Are There?
New investors are often surprised by the sheer number of cryptocurrencies available – over 5,000 at the time of writing. Bitcoin dominates the mainstream and is unquestionably the market leader, closely followed by Ethereum. Tether, Cardano, and Binance Coin round off the top five, and, between them, they’re responsible for over 80% of cryptocurrency’s overall market value.
Choosing Which Cryptocurrency to Buy
When investing, a key consideration is deciding whether the established names will continue their growth or if a minor player will break out and see similar gains. A single Bitcoin is expensive for many beginner investors, who could potentially get thousands of XRP for the same value. It’s like deciding between investing in IBM or a penny stock, but with higher volatility and more ambiguous valuations.
Like any investment, they can go down as well as up. Crypto may not have been around for long, but there has been plenty of time for coins to come and go. Referred to as ‘dead’ coins, those no longer with us usually fail due to a lack of volume or through association with dishonest trading practices.
There are no quarterly earnings reports and no investor conference calls. However, what most reputable cryptocurrencies do have is plenty of reading material. Whitepapers and other documentation outline the goals of the founder(s) and the impact they hope to have as a new currency alternative. As the old saying goes, past results don’t necessarily inform future performance, so reading up on what might drive future price growth is often the best option.
Buying and Selling Cryptocurrencies
Relatively few cryptocurrencies can be spent conventionally. However, Bitcoin is the closest to emulating fiat currencies following a brief period of Tesla acceptance and its adoption as legal tender in El Salvador.
In most cases, investors will use a cryptocurrency exchange. These exchanges enable investors to fund their accounts using regular currencies, such as through debit card deposits or wire transfers and convert them into cryptocurrencies of their choice. In many cases, members can use one cryptocurrency to purchase another.
Some platforms that are more conventionally associated with stocks and shares also provide cryptocurrency services, although relatively few enable traders to transfer or withdraw their coins.
Storing Your Assets
Cryptocurrencies reside in digital wallets. Virtually every reputable exchange also provides wallet services, such as through apps or browser extensions. These storage solutions are often offered separately from the primary exchange account for security purposes. Anything with a direct internet connection, like an app wallet, is considered a “hot” storage medium. They’re best for people that want quick and easy access to their cryptocurrency for spending or trading.
While the currencies themselves are digital, they can also be stored on physical wallets. Paris-based Ledger ranks among the biggest hardware wallet producers and specializes in “cold” wallets. This means they’re not connected to the internet and make your assets immune to remote hacking attempts.
As a beginner investor, an online wallet represents an appropriate entry point to the world of cryptocurrency. However, as your assets grow, it may be worth considering more secure, ringfenced solutions. Ultimately, you’ll often keep a small amount of cryptocurrency in a “hot” wallet for easy access and anything you have earmarked for long-term growth in a “cold” wallet.
What to Expect as a Cryptocurrency Owner
If you’re familiar with the traditional stock market, you’ll notice several similarities between share ownership and holding crypto coins. However, there are vast differences too, and beginner traders must be aware of them.
The most striking observation will be volatility. Sales figures and cash on hand don’t drive crypto assets. As well as supply and demand, they’re also powered by speculation. Elon Musk’s tweets are often a catalyst for sharp rises and falls in Bitcoin’s value. They’re also relatively illiquid compared to stocks and shares. This can lead to same-day peaks and troughs that reach well into double figures.
Another critical difference compared to the stock market is that cryptocurrency trading never closes. Thus, while conventional markets are driven by stock exchange opening and closing bells, together with out-of-hours trading periods, crypto trading is available 24/7.
The other primary consideration involves regulation. Part of the appeal for some investors is the lack of oversight and ties to official channels. However, as might be expected, regulators aren’t overly thrilled at being bypassed. El Salvador’s aforementioned adoption as legal tender had minimal price impact, pushing Bitcoin down if anything. However, China’s Bitcoin struggles tend to move the needle.
Nobody could have foreseen that Bitcoin would rise from $100 in 2013 to a 2021 peak of over $60,000. Nor could they tell that the same coin would fall back to $35,000 later the same year. It’s a rollercoaster investment vehicle, and that goes not only for Bitcoin but cryptocurrencies in general.
Consider it a high risk, high reward investment strategy, and there’s certainly potential for incredible growth.
Wrapping Up
Cryptocurrency trading is easier now than ever before, making it a viable option for beginners and experienced traders alike. As with any investment, it’s essential to be aware that prices can fluctuate heavily compared to traditional investments. There are still plenty of unknowns in the world of crypto, and it rarely represents an all-in strategy. However, it’s an opportunity for diversification, and there could yet be vast rewards for getting in early.
As with any investment, it is vital to do your own research and make your own decisions, and seek professional advice where necessary.