With Bitcoin prices rising to nearly $30,000 this year and the Dogecoin frenzy sending everybody into a panic, it makes sense that more and more beginner investors are wondering how investing in cryptocurrency works.
Unfortunately for some, investing in cryptocurrency can be a confusing and difficult process due to how technical the terms are (listen, we totally get it!). There are lots of cryptocurrency investment opportunities available on sites such as CoinMarketCap and CoinMarketCrypto. Each one is unique and offers something different to its users. But, that doesn’t answer the question of: how do I make money investing in crypto?
The biggest factor in investing is your belief that the specific cryptocurrency you're investing in will be successful and generate returns for investors, including you! For example, people who've invested in Cardano coin (ADA) have already seen huge returns. As an emerging cryptocurrency, it's traded at a relatively low price per ADA token.
As more people begin investing, the value of the currency rises and trading for many cryptocurrencies becomes easier and much more efficient. Some of these currencies, like Bitcoin, offer direct crypto investing platforms while others offer those investing through third parties such as Coinbase or other similar companies.
Here’s what to know, how to get started, and a few tips you can implement.
Ready to start investing today? You can find videos and help with investing in cryptocurrencies over at the Wealth Stack app. Download it for free today.
What is Cryptocurrency?
Cryptocurrency is a digital currency that uses encryption to make transactions secure. Some people also call it virtual currency, alternative money or cyber currency. Cryptocurrency investing includes investing in Bitcoin, Ethereum and other altcoins.
People buy these crypto currencies through online exchanges or via brokers like Coinbase at market price, which is what people around the world are willing to pay for it right now.
The most well-known cryptocurrency is perhaps Bitcoin – an online payment system created in 2009 by Satoshi Nakamoto (believed to be the alias of a programmer or group of programmers) – but there are literally thousands of cryptocurrencies out there.
What you’ll really need to understand as a beginner crypto investor is the difference between coins and tokens. It helps to understand how investors use them and what they can do within their ecosystem.
Coins tend to offer specific use cases; tokens are stand-alone software projects with no real function other than investing against infrastructure development.
Tokens usually have a defined goal which they intend to use funds raised for, which means investing in a token is investing in a project, rather than investing in the system itself.
What about Bitcoin? It's not a regular currency like a US Dollar or Japanese Yen. It's an innovative payment network which allows people to transact with each other without needing central bank or financial institution oversight.
How Do People Make Money Investing in Cryptocurrency?
Let’s start by answering some basic questions first. How do you buy cryptocurrency? Cryptocurrency investing is all about investing in digital currencies, like Bitcoin. To invest in digital currencies, you'll need to open a cryptocurrency exchange account. You can sign up for an account on Coinbase or even try out Binance if you're more advanced.
Essentially, investing in cryptocurrency is investing in the blockchain technology itself. As mentioned above, Blockchain technology was created by Satoshi Nakamoto. It allows for the decentralization of digital assets on the permanently recorded public ledger of transactions that no one person can control (because they aren't stored in any individual location).
Investing in crypto is different from investing in things such as stocks or bonds; it’s more like gold, which people obviously can't print at will like cash. There is a limit to the number that people can create or mine in certain cases.
For example, there is a limit to the number of Bitcoins that can be produced. There will only ever be 21 million Bitcoins in existence. This means that the price shouldn’t deviate below production cost as long as the number of users continues to grow.
Overall, because Bitcoin is like gold or fiat money in a sense, the price is affected by pure supply and demand. However, it’s important when understanding how investing in cryptocurrency works that you also understand that how each currency is produced also affects its value.
People who invest in crypto make money by understanding this. They understand that the five major cryptocurrencies fluctuate in value all the time. They change according to the number of users trading them and also by the speed at which miners can mine them (more on that here).
Is Investing in Cryptocurrency Safe?
Like any other type of investment, investing in cryptocurrency isn't without its risks. Many investors have seen big profits wiped out during crashes. Investing money you can't afford to lose is a sure fire way to end up feeling bummed about investing.
Cryptocurrencies are digital assets. Complex computer algorithms called "blockchain" build these digital assets. They run across thousands of computers in the world. They aren't physical coins or banknotes like cash, they're just code on the blockchain (public ledger). This makes them theoretically safe, but still quite prone to hacking and digital attacks.
Ah, you were wondering if investing in cryptocurrency is safe financially?
In general, digital assets are highly volatile and sensitive to news and market sentiment (take Dogecoin, for example). Even investing in a relatively safe bet like Bitcoin can be scary. Its price has fluctuated between $3,800 and nearly $30,000 in the last few years alone. That being said, researchers found that Bitcoin was less volatile than 172 stocks of the S&P 500 in a 90 day period and 155 stocks YTD.
Tips for Investing in Cryptocurrency
When investing in cryptocurrencies, it's important to do your due diligence when researching a potential currency investment and their respective value. In fact, investing an amount equivalent to just 0.2% of your existing savings into cryptocurrency could make you incredibly rich over time. It's true that investing in cryptocurrency takes patience. But with returns like these, it does make it an attractive investment, right?
Since investing in cryptocurrency is relatively new territory (as far as investing goes), scams are still very common. In fact, some scammers sometimes even create fake ICOs (Initial Coin Offerings) just so they can steal investors' money! Again, while there are certain risks with any type of investing, you can minimize the risks of investing in cryptocurrencies by following the tips we’ve included in this below.
Crypto Investing Tip #1: Be Smart About Your Investments
Some experts might suggest investing as much into crypto as you can afford to lose. This means investing enough money that it would hurt if you lost it, but not so much that you wouldn't be able to recover from your losses.
As a beginner investor, though, we don't suggest investing more than 20% of your income or savings to get started. This will allow you to properly diversify your investments without risking it all. Average investors are likely only investing between 5 to 7% anyways.
Crypto Investing Tip #2: Diversify Your Investments
Sure, you can invest only in Bitcoin (or Ethereum, or any other crypto). However, it's not the smartest strategy for investing. Why? Investing too much into one coin means putting all your eggs into one basket.
It's okay to invest some money into just one type of cryptocurrency. However, diversifying your investments across several different types of them ensures that even if something were to happen to one or two coins you hold, you'll still have balance and diversity in your investment portfolio.
Crypto Investing Tip #3: Educate Yourself
Before investing any amount of money into crypto, make sure that you're familiar with currency exchanges and how they work. Familiarizing yourself with buying coins on Coinbase or other exchanges can help you prepare to take on the risk and start your investing journey. However, we suggest taking another step back first.
Learn how to invest in general. Learn about what makes a good investment. And, learn about what you should be thinking of before you start investing in the first place. This means getting your finances in order, improving your credit score, working on a budget, and so much more. Then, you’ll be ready to learn the basics of investing.
You’re ready now? Download the Wealth Stack app for free to start viewing video courses on finance and investing.