How to Invest in Cryptocurrencies
The ability to conduct digital transactions anytime and anywhere has opened new possibilities for investors
Most people have heard of Bitcoin (BTC) and Ethereum (ETH), but there are thousands of other cryptocurrencies and related digital assets, such as the tokens based on the ETH blockchain.
The retailers that accept BTC have been growing over time. Some online stores like Overstock, Newegg, and TigerDirect allow customers to pay directly with BTC, while many other retailers allow the use of digital gift cards purchased with BTC from services like eGifter.
There are also non fungible tokens (NFT) that can be assigned to unique digital assets, such as pictures, music, and videos. These can be purchased using cryptocurrencies on platforms based on blockchain technology, which record the transactions on distributed ledgers.
The emerging societal consensus is that cryptocurrencies are here to stay. Many countries and US states have already passed regulations regarding the exchange of cryptocurrencies and other digital assets, and many others are currently developing them.
For instance, El Salvador officially recognized Bitcoin as a legal currency in 2021, while also considering the conversion of part of its foreign currency reserves to this alternate coin. Companies like Tesla (TSLA) and Block (BLK), formerly called Square, also have significant stakes in BTC.
In this context, knowledge of how cryptocurrencies work is crucial for investors to make their money grow, and avoid substantial losses because of lack of information.
Here are some important things people considering buying cryptocurrencies should know about.
Understanding cryptocurrency volatility
Cryptocurrency prices are highly volatile and can fluctuate rapidly. This means that people may end up losing or gaining significant amounts of money within very short timeframes.
If left unmonitored, the market value of a crypto asset could change dramatically overnight, or over a weekend. That is why holding those assets with a broker that enables the ability to place stop-loss orders could be a helpful way for investors to limit their losses when market prices go down.
Some cryptocurrencies, known as stablecoins, were designed to be less volatile than their counterparts. These include, for instance, Tether (USDT), an Ethereum-based token paired to the US dollar, and Terra (LUNA), which tracks fiat currencies and absorbs volatility.
Analyzing the risks of cryptocurrencies
In addition to volatility, there are cybersecurity risks associated with the ownership of cryptocurrencies. This is evidenced by the many hacking incidents involving the theft of data affecting cryptocurrency holders, specialized providers, and other market participants in the cryptocurrency ecosystem.
On this topic, the security of the holdings is a key factor to consider. If a person decides to hold their crypto assets in their account with their cryptocurrency broker, finding out the measures and contingency plans that that broker has in place to protect their customers’ assets is paramount.
Holding crypto assets in physical wallets is often portrayed as a safer method of holding cryptocurrencies in the long term. This can be done by purchasing a hardware wallet such as the Ledger Nano (models S or X), Trezor Wallet, fingerprint cold wallets, among others.
Before deciding on the best cryptocurrency to invest in, people are encouraged to conduct their own research to find the one(s) they are most comfortable investing in. While BTC may be the obvious choice for many, other options may be worth exploring, depending on the specific situation of each person.
Beyond the cybersecurity risks of cryptocurrencies, there is also the possibility that some cryptocurrencies could disappear and leave investors holding worthless tokens, for instance, if the group behind it were to fail to achieve the permissions needed to carry out its intended operations.
There is also the possibility that the price of a given cryptocurrency could experience substantial crashes, with the initial unrealized gains evaporating. In such scenarios, some general principles used in stock market investing can be helpful to reduce risks, such as diversification, position sizing, stop loss orders, etc. This article provides additional tips to protect an investment portfolio.
There is also a concern that the anonymity of cryptocurrency holders provides an easy way for criminals to profit from illegal activities. However, in 2021 law enforcement was able to track the movement of ransom BTC payments associated with the Colonial Pipeline cyberattack. The US Department of Justice is also strengthening its National Cryptocurrency Enforcement Team (NCET) to target cyber criminals.
Selecting a cryptocurrency broker
Cryptocurrencies are usually traded on specialized platforms. Some popular ones include Coinbase, Binance, Gemini, and Bittrex. Each of them has its own advantages, depending on the needs of investors and the type of trading activities they intended to conduct.
While the simplicity of the Coinbase platform could be attractive for beginners interested in trading with market orders, other platforms such as Bittrex offer conditional orders and more advanced charts for technical analysis, including indicators such as Bollinger bands, moving averages, trading volumes, etc.
Binance offers the option to use a basic or advanced interface to place orders and visualize information, with the added possibility of trading derivatives, such as cryptocurrency futures and options.
Some stockbrokers also allow the trading of cryptocurrencies through their online platforms. These include Webull, Robinhood, eToro, and Sofi Invest, among others. Robinhood crypto enables people to place market and limit orders of cryptocurrencies by the unit, fraction, or dollar amount.
In addition, many other stockbrokers allow the trading of Bitcoin trusts and futures (i.e., BITO, GBTC). These are can be normally traded directly from their stock investment accounts.
Stock market investors can also buy shares of companies engaged in cryptocurrency mining operations (i.e., HUT, MARA), which provide the processing power for the verification of crypto transactions.
Cryptocurrency mining can be also done by people and organizations buying specialized equipment called ASICs for BTC, for instance, or computers with advanced graphic cards for ETH. People involved in cryptocurrency mining normally join cooperative mining pools to increase their chances of profit.
Many of the principles applicable for stock market investors are applicable to the trading of cryptocurrencies as well, provided that adjustments are made in a manner consistent with the type of cryptocurrency in mind, and the added levels of volatility characteristic of crypto assets.
Fundamental analysis concepts like intrinsic value will not apply to cryptocurrencies whose value is based on the perceptions of the collective, since there is no underlying company to use as a basis.
At the same time, the identification of trading patterns and the trends in cryptocurrency transactions can benefit from the tools developed for the technical analysis of stock charts. People interested in buying cryptocurrencies are encouraged to learn as much as they can. The Internet is a rich source of information on the topic available for free, including articles, books, videos, white papers, forums, etc. Consulting multiple sources will provide a broader view of the cryptocurrency landscape.
Disclaimer: The contents of this article are provided for educational purposes only and are not intended to be investment, tax, or legal advice. Any action taken upon the information on this article is strictly at your own risk. Readers interested in obtaining investment advice should consult a duly licensed investment advisor.