How to start your cryptocurrency investment – a simple guide for beginners

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Different cryptocurrencies

Since the start of the last decade, cryptocurrency has emerged as an enticing, yet overlooked investment asset. These currencies are not recognized by the traditional central institutions including governments and banks in many countries worldwide. That being said, we have noticed a shift in the tide across the crypto space, especially since 2016. The number of crypto investors has increased at a consistent pace over the past few years due to a myriad of reasons. 

Did you know that nearly 59.6 million Americans owned some type of cryptocurrency in 2021; a 16% rise from the previous year? [1]. Growing awareness regarding crypto, the decentralized nature of blockchain, and increasing interest from governments are some of the key reasons why crypto investments have increased over the past few years. 

While investing in crypto is an interesting option, you should know the risks before investing. That being said, if you are wondering how to invest in cryptocurrency, this article is just for you. 

We will explore how beginners can start investing in cryptocurrencies in this article. Without further ado, let’s begin. 

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Investing in cryptocurrency – a guide for beginners

First and foremost, you need to have your finances in place if you want to invest in cryptocurrencies. This entails having an emergency fund set up, a sustainable amount of debt, and preferably a diverse investment portfolio. Your cryptocurrency investments may end up adding to your portfolio and, ideally, increasing your overall returns.

We recommend you keep the following tips in mind while investing in cryptocurrency. 

1. Do not invest blindly

Making a crypto investment - choose wisely

Similar to other investments, it is crucial to understand what you are investing in. For instance, if you are buying stocks of a certain company, it is very important to do your research and analyze the companies you are investing in. It would be logical to apply the same approach while investing in cryptocurrencies. Why? Simply because there are over 12,000 cryptocurrencies in the world right now. Each crypto functions differently and as you read this, new cryptos are making their way to the market. Therefore, understand the investment case for every trade. 

It is worth noting that there is nothing to back the credibility of crypto including cash flow or hard assets. That’s the case even for the most popular cryptocurrency Bitcoin wherein investors largely rely on someone else paying for the asset than what they purchased it for. Therefore, unlike stocks, where you can earn returns as a company grows, crypto assets predominantly depend on a market becoming more bullish for investors to earn profit. 

At present, some of the most popular cryptocurrencies include Dogecoin, Cardano, XRP, Bitcoin, and Ethereum. 

All in all, analyze and evaluate the potential pros and cons before you invest in cryptocurrency. 

2. What happens in the past, stays in the past

Many new investors make the mistake of extrapolating previous results to the future. Yes, Bitcoin was once worth pennies, but it now has a considerably higher value. The key concern here is whether Bitcoin will grow in the future, and even if it does, it might not do so at a rapid pace as seen before.

Investors don’t consider an asset’s past performance; they instead focus on the future. What will fuel upcoming returns? Investors in cryptocurrencies are looking at future gains, not those from yesterday.

3. Monitor the volatility of cryptocurrencies

When you look at different assets, the prices of cryptocurrencies are as volatile as they can get. The prices may fall or rise solely because of a baseless rumour, a tweet from an influential personality, and other sources. This may work in the hands of a seasoned investor who knows how to execute trades without wasting time and has a rich understanding of how the market works. 

We do not expect new investors to hone these skills and get a grasp of market trends immediately. It would be fair to say that it is a minefield for new investors who lack the necessary skills to make informed decisions. 

Volatility does not intimidate Wall Street traders who are focussed on outperforming other deep-pocketed investors. A new investor could easily drown in a volatile market. On the other hand, seasoned traders would take action and may buy cheaper assets and go by the motto “buy low and sell high”.

4. Learn and understand risk management 

Risk management while investing in cryptocurrency

Risk management is crucial while trading any asset on a short-term basis, especially while dealing with volatile assets such as cryptocurrencies. Therefore, an inexperienced trader would need to learn the best ways to control risk and plan a strategy that minimizes losses. This procedure may vary from person to person.

Here are two risk management scenarios for investors with different objectives:

  • Risk management for a long-term investor simple means, never selling their assets, regardless of the price. This long-term strategy enables investors to stick with a position. 
  • Risk management works differently for a short-term investor. Short-term investors need to define the parameters of when to sell. For example, if the value of a certain investment has dropped by 8-10 per cent. Such investors follow a few rules to ensure that minor market blips do not turn into huge losses. 

Here’s some handy advice for new traders. Consider allocating a certain amount of funds for trading and using only the money you have set aside. Therefore, if investments are dropping, you have funds to fall back on to trade later. 

All these risk management strategies apply when you are investing in cryptocurrency. 

5. Investment is risky, invest wisely

This is arguably one of the most important points when you are thinking about making a cryptocurrency investment. Refrain from putting all your money in cryptocurrency. That would not be a wise decision. In addition, avoid investing what you need in speculative assets. 

It is important to understand that if you cannot afford to lose all the money you are putting in, you should reconsider your decision. In short, avoid investing in risky assets including cryptocurrency if you cannot afford to lose it all. This rule applies to other investments including ETFs, stocks, and more.  

Whether you are saving money to buy a house or anything else, it is important to keep it safe and use it on a rainy day. Last but not least, pay attention to the security of any exchange or broker you use. Even while you may legally be the owner of the assets, someone must still keep them secure, and that security must be tight.

Ways to make cryptocurrency investments

Although making a direct investment in cryptocurrencies may be the most popular method, there are other, direct, and indirect ways to enter the cryptocurrency market for traders.

These include:

  • Crypto futures
  • Crypto funds
  • Crypto exchange or broker stocks
  • Blockchain ETFs

Investing in cryptocurrency – FAQs

  • How much money does one need to invest in cryptocurrency?

Theoretically, investing in cryptocurrencies just costs a few dollars. For instance, the majority of cryptocurrency exchanges have a $5 or $10 minimum trade requirement. The minimum on other cryptocurrency trading applications might be considerably lower.

However, it’s important to understand that some trading platforms charge exorbitant fees if you trade only small quantities of cryptocurrency. Finding a broker or exchange that reduces your expenses is important.

  • How does blockchain work?

Blockchain technology is the foundation of cryptocurrency. A blockchain is a type of database that keeps track of and timestamps each entry. We can compare a blockchain to a running receipt of transactions. Cryptocurrency is powered by a blockchain database, which keeps track of and verifies all transactions made in it as well as the ownership of the currency.

  • How can I invest in Bitcoin?

There are different ways to invest in Bitcoin. These include:

  • Crypto exchanges
  • Traditional brokers
  • Financial applications

Final words

Different types of cryptos

Since cryptocurrency is a very speculative market segment, many astute investors have redirected their investments to other areas. However, it is recommended that beginners who want to invest in cryptocurrency should only use money that they can afford to lose.

Make sure you have funds to pay off your debt an emergency fund, and retirement savings plans, before you consider making a cryptocurrency investment.

For the latest blockchain and crypto articles, continue reading iTMunch!

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Feature Image Source: Photo by Kanchanara on Unsplash

Image 1 Source: Photo by Mathieu Stern on Unsplash

Image 2 Source: Photo by Kanchanara on Unsplash

Image 3 Source: Photo by Kanchanara on Unsplash

Sources:

[1] (2022) “PYMNTS Data: 23% of Americans Owned Crypto in 2021 as Processors Stepped up Support” PYMTS [online] Accessed [October 2022]

 

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Karandeep is a technical content writer based out of Pune, a city in India that is also known as the Oxford of the East. His journey with writing started in 2014 when he decided to try his luck in a gaming startup as a Content Developer. Since then, he has written on a wide range of topics within the gaming and the tech space. Apart from his love for gaming, Karandeep is keeping tabs on the hottest trends in the tech industry. After completing his Bachelors in Business Administration (BBA) from Symbiosis International University, Pune, he worked as an intern in an NGO that focused on urban development.
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