Cryptocurrency is a very confusing topic for most people because the concept of an alternative currency is not easy to grasp. At the same time, interest is very high. Especially when Bitcoin hits record levels of value as it is doing at the time this article was written.
The topic of investing becomes very popular and people want to know if it is too late to jump on board or if the risks are too high. As with any type of investing there are risks. The trick is to be as informed as possible about the investment so you can have a better chance of success. Investing in cryptocurrency is no different.
There are quite a few things about cryptocurrency that make it different than a traditional investment. In this article, we will go over some relevant information to help you make an informed decision about whether or not to invest in cryptocurrency.
1 – You’re not buying shares
When you buy a traditional stock, you now own a small portion of the company. This is called a share. And with a share, you get paid a portion of the profits relative to how many shares you buy. When the company does well, your share increases in value. You can either collect dividends or sell the share for the increase in value and profit that way.
This is not the case with cryptocurrencies like Bitcoin or Ethereum. Buying cryptocurrency is a form of speculation. There is no inherent value in the currency as there is no company behind it or means to make a profit. People buy it at a lower value and hope that demand grows for it to gain in value and then sell it. There are no dividends paid out nor is there any profit sharing. You profit only when you sell the amount of cryptocurrency you wish to part with at a higher value.
This speculation is what makes it volatile and sees a lot of crashes and surges in value. A company has a history behind it plus a product or service being sold on the market. Generally, the profits are stable and can be counted on unless there is a general crash in the economy as a whole that affects the value of the stocks.
There is usually more money to be made more quickly with cryptocurrency because of its speculative nature. When it crashes, many people are eager to buy and then sell it when it seems like it has hit its peak. This is risky as it can crash again just as quickly.
2 – Cryptocurrency and safety
There is a lot of confidence in Bitcoin and other cryptocurrencies since they are on the blockchain. The blockchain is very secure since it is not a single server. Rather, it is on millions of computers so there is no point of entry for a hacker. Nobody can hack into millions of computers simultaneously.
This gives people a false sense of security, however. It is possible to have cryptocurrency get stolen or to lose their coins forever. There are some traditional scamming techniques that work to take cryptocurrency from their owners. Phishing scams are very common within cryptocurrency circles as people who don’t know better can be convinced to hand over their secure keys that can be used to transfer their coins to somebody else’s wallet.
Another way for a hacker to get a hold of somebody else’s coins is to hack into their personal computer and force their way into a hot digital wallet. This is a wallet that is always online so it makes it available to hackers.
The best thing to do to stay safe is to never give anybody your secure keys for any reason and to make sure that you never lose them either. Secondly, a cold wallet should be used for storage so it isn’t always online. It is similar to a USB flash drive that is disconnected from the computer so there is no way for anybody to gain access.
3 – Diversify
In any kind of investing, the advice is always to keep your portfolio diversified. By doing so, you spread out the risk so if there is a dip in th emarket you can protect most of your investment. You’ll see some investments lose money but others should prop them up so you don’t lose a lot.
The same advice holds true for cryptocurrency. In fact, it makes even more sense since cryptocurrency isn’t tied as strongly to a central stock market. If the economy crashes there are few traditional stocks that won’t be affected. There are factors that cause a dip to lose value across a lot of cryptocurrency but there are some that are slightly immune to the same dips.
Do plenty of research to understand what contributes to a particular cryptocurrency dropping in value whil eothers stay afloat. Then, buy up some altcoins accordingly to make sure that when there is a dip you have some that have held their value.
4 – When to hold
Investing in cryptocurrency takes a lot of courage to see through the dips and crashes. It involves using logic to form a strategy that you can stick to and remove emotions from the process as much as possible. There are frequent crashes that happen but there are almost as many instances of it bouncing back stronger than ever.
There needs to be a point when you decide to sell if you are not planning on holding for the long term. If a dip coincides with the timeframe in which you were planning to sell then you have to be careful not to wait too long to sell while at the same time not selling too quickly in case it is about to bounce back.
Investing in cryptocurrency is not for everybody. Although anybody can and should look into it, it can be nerve racking fo most. If you do decide to get into it then make sure to understand what you’re getting into.