How to invest in cryptocurrency
The popularity of cryptocurrencies has spread to mainstream investors, but a recent drop in the value of these coins has many wondering if it is a better investment for them now or not.
While there are varying views on the possibilities for Bitcoin (BTC) and other cryptocurrencies in the future, demand for crypto assets has soared among investors worldwide.
But the upward trend in cryptocurrency has a chink. Between late December 2021 and a low in mid-May, the price of bitcoin fell by about 50%, and as of June 2, it was still trading at roughly $30,000, a long cry from its all-time high of around $70,000. Other cryptoassets are also having difficulties. Approximately 50% has been lost by Ether (ETH), 54% by Cardano (ADA), and 63% by Polkadot (DOT) so far this year.
Nevertheless, as of June 2, Bitcoin’s market valuation exceeded $570 billion, surpassing that of Meta Platforms Inc. (ticker: FB), one of the biggest tech firms.
Bitcoin leads all other cryptocurrencies with a market share of around 46%, but the cryptocurrency industry is huge. There are dozens of cryptocurrencies that may be traded, and as of June 2, the total market value of all cryptocurrencies was $1.24 trillion.
Cryptocurrency is no longer on the periphery of finance due to the continual increase in demand and usage of crypto industries including smart contracts, decentralised finance apps, and NFTs. You may eventually need to familiarise yourself with the workings of the cryptocurrency world and possibly think about investing in it as more companies begin to embrace cryptocurrencies and the blockchain technology that makes them possible.
What Is Cryptocurrency?
Digital money that is protected by cryptography, or secure communications, is known as cryptocurrency. It may be used as a peer-to-peer means of exchange, a store of value, or a form of investment.
The first blockchain cryptocurrency, known as Bitcoin, was created by an unidentified creator going by the alias Satoshi Nakamoto. Cryptocurrencies are not controlled by a bank or government body. Instead, most cryptocurrency transactions are documented on a public blockchain, which consists of digital data kept in a database.
A digital record of all transactions is maintained using blockchain technology, which also offers a secure data format for the ledger.
Cryptocurrencies are decentralised and independent of a central banking authority, in contrast to fiat money, or currency that has been issued by the government and is governed by central banks. Each of the tens of thousands of cryptocurrencies has unique value propositions and security requirements.
Despite being a more recent occurrence, cryptocurrencies have the power to completely alter the way we think about money and the financial system.
According to Max Branzburg, vice president of product at Coinbase Global Inc. (COIN), one of the top cryptocurrency exchanges, “Cryptocurrency is a new asset class that is at the foundation of the cryptoeconomy, an entirely new set of financial services, commerce, and global payments that will be built on top of this new technology.”
According to James Putra, senior director of product strategy at TradeStation Crypto, cryptocurrencies are giving individual investors access to “a world of global money, as opposed to what they can access via the U.S. market,” thanks to their distinct identity as currencies and investable assets.
Basics of Investing in Cryptocurrency
Numerous cryptocurrencies with various basic values are available on the market, numbering in the hundreds. Investors need to be aware that cryptocurrencies might appear one day and disappear the next, potentially rendering your investment useless. Because of this, it’s crucial to have a plan for investing in cryptocurrencies and to understand how to control your risk.
Beginner cryptocurrency investors may want to take into account factors like transaction costs, cryptocurrency kinds offered on a platform, education materials offered, and other characteristics that may match their interests and aspirations.
There are a lot of crypto exchanges to select from. Several companies, like TradeStation, Coinbase, eToro, and Gemini, provide simple, safe platforms for holding and using bitcoins.
The better return potential of cryptocurrencies draws in investors. But keep in mind the erratic nature of these assets and the part cryptocurrencies will play in your portfolio. Bitcoin hit a 16-month low in May, hovering around $26,000, before partially recovering its losses. Due to its volatility, which may result in sharp price fluctuations, Putra advises a balanced strategy to investing in cryptocurrencies, dedicating just 2 to 5 percent of your whole investment portfolio to this sector.
Similar to high-growth speculative tech equities, which have also done comparably in an environment of increasing interest rates, bitcoin is seen as a “risk on” asset. While there has recently been a surge in the link between Bitcoin and the stock market, particularly the IT sector, other analysts predict that there will ultimately be a decoupling.
Bitcoin has merged into the hazardous asset class, according to Wilshire Phoenix partner and co-founder William Cai. In the longer time horizon, investors will see a de-correlation, but in the short term, the high correlation indicates that the asset class is maturing, according to him.
Cryptocurrencies may be used as an inflation hedge by investors. Considering that bond rates are not keeping up with inflation, according to Putra, cryptocurrencies might act as an alternative to bonds.
Putra adds that due to the low interest rates on bonds, there has been a macroeconomic shift away from bonds and into more inflation-protected assets. Because the inflation protection they provide balances with their volatility, certain cryptocurrencies, like Bitcoin and Ether, may even give your crypto portfolio a level of stability, according to him.
What to Consider Before Investing in Cryptocurrency
Cryptocurrency investing is very speculative. Despite tales of wealthy investors, joining the market at the wrong moment may lead to sudden and severe losses.
Another danger: The future of cryptocurrency regulation is unknown, unlike other significant asset markets. The United States, Canada, and Australia are a few nations that now permit the usage of bitcoin more-or-less for free. Bitcoin was even accepted as legal money in El Salvador. However, other nations, like South Korea, are pressing for tighter cryptocurrency regulation, while China has effectively banned it. New law in the US makes taxation of cryptocurrency assets a priority.
Only a few companies accept cryptocurrencies as payment today, despite the fact that they were initially intended to be a medium of trade. Although proponents of cryptocurrency encourage its widespread economic application, this acceptance may take some time since global authorities are still wary of the digital asset.
How to Make Money With Cryptocurrency
When investing in cryptocurrencies, there are numerous methods for investors to raise the value of their possessions and ensure a return. Similar to the stock market, buying a cryptocurrency when it is undervalued and selling it at a higher price are the two strategies for making money when investing in cryptocurrencies.
Because of the price fluctuations and possibilities that traditional investments don’t provide, according to Branzburg, you may get more value out of your money with cryptocurrencies than with other traditional assets.
He mentions staking as the first technique. Staking enables you to profit from your cryptocurrency by taking part in the asset’s network. By staking your cryptocurrency, you increase the efficiency and security of the asset’s underlying blockchain. In return, the network rewards you with greater resources, similar to the income from a savings account.
Staking incentives are available on several cryptocurrencies including Cardano, Ether, Tezos, and Algorand.
In order to produce income, you may also lend the assets in your portfolio into decentralised finance, or DeFi, protocols, according to Branzburg. Users may “connect into a worldwide liquidity pool” by using DeFi, according to him. You get a dividend when other users borrow your crypto assets from the decentralised money market.
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