Cryptocurrencies have become trendy in this age and every day, people are investing in different cryptocurrencies. The banking industry has been revolutionized as investors now deal with currencies in a different.
A smart way of diversifying your investment portfolio while reducing risk is through crypto trading. However, before you make your move and sink in your money into crypto, you must understand the risks and the benefits.
You must do your research to find out the best crypto platform to trade in, the coins to buy, and the volatility of the market. In this article, I highlight some of the important things you should know and how you can invest in cryptocurrency.
What is cryptocurrency?
Cryptocurrencies are the new form of digital money. A cryptocurrency is a form of currency that removes the regulatory authority and circulates between two parties. They are not controlled by the government or banks. Cryptocurrencies instead are created using techniques that are cryptographic and enable people to do transactions with them in a secure state. Cryptocurrencies use decentralized control which is different from centralized control of electronic money and central banks.
They are popularly referred to as “Crypto”. Blockchain technology is the basic framework that is used for documenting transactions in the ledger. The unique characteristic of the blockchain is that no single entity can manipulate or control the cryptocurrency. This makes transactions to be secure and the crypto cannot be counterfeited.
Steps to cryptocurrency investment
Follow this step to invest in cryptocurrency:
1. Decide on the Cryptocurrency options available to you
There are more than 10,000 Cryptocurrencies in the market and every day new ones come out. Some of the popular cryptocurrencies are Bitcoin and altcoins like Ethereum, Litecoin, Binance coin, Solana, Cardano, Ripple, Terra, etc. All of them are paired with USDT for trading. USDT is Tether, a stable coin that is the equivalent of the United States Dollar.
N/B: Altcoins are alternative cryptocurrencies in the crypto space. Bitcoin is the most popular and wildly traded coin. Any coin that is not Bitcoin is referred to as “altcoin”.
2. Learn about the management of cryptocurrencies
Popular cryptocurrencies like Bitcoin are built on their blockchain and generate new units in a process known as mining. The supply of some of these digital currencies is limited. This creates demand and increases their perceived value. Bitcoin for example has a maximum supply of 21 million coins.
Most altcoins are just like Bitcoin in their method of production and characteristics. However, some altcoins use a different process for the production and validation of blocks of transactions. Ether, for example, the cryptocurrency of the Ethereum network uses decentralized applications (dapps) for the creation of automatically enforceable contracts.
Fundamental analysis for cryptocurrency is a bit different from the traditional approach used in measuring the inherent value of a business. However, there are certain benchmarks for crypto valuation that investors can analyze including market cap, hash rate, trading volume, number of active addresses, and transaction value and fees.
Crypto benchmarks to understand
Market capitalization (market cap): This is also referred to as the network value. The market Cap of any crypto is calculated by multiplying the total number of coins by the current price of the coin.
Trading volume: Crypto trading volume indicates how much of a cryptocurrency has been bought and sold within a time frame, like a day, a week, or a month. The trading volume can be measured for an exchange or on all exchanges.
Hash rate: This is a measure of the efficiency at which coins are mined and transactions are processed. It is can be used to assess how strong a blockchain network is. The hash rate is used on Cryptocurrencies whose blockchain is based on Proof of Work(PoW), e.g, Bitcoin, Litecoin, Ethereum, Monero, etc.
Active addresses: This metric measures the blockchain addresses that are active in a given period. To calculate the active address for a cryptocurrency, you can add up the total number of receiving and sending addresses across certain periods, like days, weeks and months, then you study the activity to evaluate the level of interest in a given cryptocurrency.
Transaction fees: Huge computing power and energy are used in supporting a cryptocurrency network, also the cost of mining a coin is high hence the miners have to be compensated. This compensation is done in transaction fees which rises with time. When analysis of the fees paid over time as transaction fees over different periods, investors can then ascertain how secure or stable a cryptocurrency is.
Note: Multiple benchmarks for crypto valuation should be done together and not in isolation, also, the metrics of a cryptocurrency should be compared against that of its competitors.
4. Choose an exchange
Investors who want to invest in cryptocurrency can start by selecting an exchange for trading. There are hundreds of exchanges that you can use. The most popular ones include Binance, Coinbase, Luno, Busha, Kucoin, Hotbit, Huobi, etc. There are options to invest in the long term or term. There are options of trading in the spot market or the Futures market.
When selecting a crypto exchange or broker, the investor has to consider the kind of cryptocurrencies that are available for trading and the trading fees. Trading fees vary from exchange to exchange, some charge between 0.1% to 1% or even more per trade. Also, the investor must research the credibility of the exchange before making a decision. IN general, the exchange must give you the best option in storage, exchange, liquidation, and other facilities.
5. Buy your cryptocurrency
You can buy some of the major cryptocurrencies with your local currency if your country of residence supports the purchase of crypto directly from bank accounts. If not, you can use the Peer-to-Peer (P2P) method to buy cryptocurrency.
Generally, you will need to have Tether(USDT), or any of the stable coins to buy cryptos on exchanges as they are paired with stable coins. If you have bitcoins, you can also use them to buy other cryptos. The first step is to fund your Funding account with the required stable coin before going ahead to the markets to trade.
6. Store your assets
After investing in cryptocurrency, you need a cryptocurrency wallet to store your digital assets. A wallet is an app that stores your cryptos. It helps you to watch over your cryptocurrency portfolio. Generally, two types of wallets are available when you open an account with a cryptocurrency exchange: Hardware wallet and software wallet. The right wallet to choose depends on how frequently you will be using the cryptocurrencies.
Any investor who wants to store their cryptocurrency can transfer their assets either to their cold or hot wallets. The major difference between cold and hot wallets is that a hot wallet is connected to the internet while a cold wallet is not.
Cryptocurrencies are here to stay, they are not a fad and won’t disappear. Cryptocurrency investment is important as money continues to evolve and as more countries keep adopting digital currencies. You must be well informed to be able to follow the right procedures for investments in cryptocurrencies.
However, you must note that Cryptocurrencies are highly volatile hence investments should be done with spare funds to profit in the long term.