How to Invest in Cryptocurrency
Cryptocurrencies can open your portfolio to new investment opportunities.
Cryptocurrency popularity has reached key investors, but the recent fainting in the value of these currencies has raised many questions as to whether cryptocurrency is a risk or an opportunity for them.
While there are different views on the future prospects of Bitcoin (BTC) and other cryptocurrencies, cryptocurrency assets have been popular and are gaining widespread demand from investors globally.
But there's a crack in the bullish encryption line. The price of bitcoin fell almost 50% between late December 2021 and the lowest level in mid-May, and as of June, the 2 was still hovering around $ 30 thousand, a far cry from an all-time high near $ 70 thousand. Other encryption assets are also struggling. Ether (ETH) is down nearly 50%, Cardano (ADA) is down 54%, and Polkadot (DOT) is down 63% since the beginning of the year.
However, Bitcoin had a market capitalization exceeding $570 billion as of June 2, which is larger than that of Meta Platforms Inc. (Index: FB), one of the largest technology stocks.
Bitcoin's share of the total cryptocurrency market is about 46%, making it a leader in all cryptocurrencies, but the cryptocurrency market is wide. There are thousands of cryptocurrencies available for trading, and the global market value of cryptocurrencies was $1.24 trillion on June 2.
With demand and benefits from encryption sectors such as smart contracts, decentralized finance applications, and NFTs steadily rising, cryptocurrency is no longer on the financing fringe. As more companies accept cryptocurrencies and blockchain technology that make it easier to operate, you may inevitably have to learn the dynamics of the crypto world and even consider investing in it.
Here's what you need to know about investing in cryptocurrencies:
- What is cryptocurrency?
- The basics of investing in cryptocurrencies.
- What to consider before investing in cryptocurrency.
- How to make money from cryptocurrency.
What is cryptocurrency?
Cryptocurrency is a digital currency guaranteed by encryption, or secure communications, which can be used as a peer-to-peer exchange, value store, or investment tool.
Bitcoin, the first blockchain cryptocurrency, is a form of digital currency invented by an anonymous founder using the alias Satoshi Nakamoto. Cryptocurrencies are not managed by a bank or public agency. Instead, encryption transactions are usually recorded on a general blockchain, including digital information stored in a database.
Blockchain technology is used to keep an online ledger for all transactions and provides a data structure for a ledger that is considered safe.
Unlike paper money, or government-issued currency, controlled by central banks, cryptocurrencies do not require banks to verify transactions and are independent of a central banking authority. Each of the thousands of cryptocurrencies has its own security standards and value offers.
Although cryptocurrency is a newer phenomenon, it has the potential to revolutionize the financial system and how we think about money.
Says Max Branzburg, Vice President of Product at Coinbase Global Inc. (COIN), one of the leading crypto exchanges.
With its unique profile as investible currencies and assets, cryptocurrencies open retail investors to a "world of global capital, as opposed to what they can access through the American market," says James Putra, Senior Director of Product Strategy at TradeStation Crypto.
Basics of investing in cryptocurrencies
There are thousands of cryptocurrencies on the market that have different core values. Investors should realize that cryptocurrency can be here one day and go the next, which can leave your investment worthless. That's why it's important to have a strategy to invest in cryptocurrencies and figure out how to manage your risk.
Cryptocurrency investors may want to consider elements such as transaction fees, cryptocurrency types available on the platform, available educational resources, and other features that may be in line with their interests and objectives.
There are many cryptocurrency exchanges to choose from. TradeStation, Coinbase, eToro, and Gemini provide, among other things, easy, accessible, and secure platforms to own and make transactions in cryptocurrencies.
Investors are attracted to the super-return potential of cryptocurrencies. But consider the volatile nature of these assets and the role cryptocurrency will play in your portfolio. In May, Bitcoin fell to a 16-month low, around $26,000, before compensating for some of those losses. Putra says it's best to take a balanced approach to invest in cryptocurrencies, allocating only about 2% to 5% to the sector in your portfolio because its volatility can cause radical fluctuations in value.
Bitcoin is a "risk" asset similar to high-growth speculative technology stocks, both of which performed similarly in a high-interest rate environment. While the relationship between Bitcoin and the stock market, especially the technology sector, has increased in recent months, some experts say the chapter will eventually follow.
"Bitcoin has integrated into the risky asset class," says William Kay, partner, and co-founder of Wilshire Phoenix. Investors will see a decline in longer time horizons, but for now, a high correlation is a sign of maturity of the asset class, he says.
Investors may also choose cryptocurrency as a hedge against inflation. Since bond yields do not keep pace with inflation, cryptocurrencies can serve as an alternative to bonds, Putra says.
"Due to low-interest rates across bonds, there is a reshuffle of capital at the overall level of bonds to other assets protected from inflation," explains Putra. He says some cryptocurrencies, such as Bitcoin and Ether, can give your cryptocurrency portfolio a measure of stability because of the inflation protection it provides balances with its volatility.
What to consider before investing in cryptocurrency
Investing in cryptocurrencies is very speculative. Despite the stories of investors earning millions, entering the market at an inappropriate time can lead to rapid and excessive losses.
Another risk: Unlike other large asset markets, the future of cryptocurrency regulation is uncertain. Some countries that so far allow fairly free use of bitcoin include the United States, Canada, and Australia. El Salvador even adopted bitcoin as a legal tender. But other countries, such as South Korea, are pushing restrictive regulation of cryptocurrencies, with China essentially banning them. In the United States, the new legislation targets encryption investments for taxes.
Although cryptocurrencies were conceived as an exchange unit, today there are only a handful of companies that accept crypto as a form of payment. Crypto advocates support its broad economic use, but this adoption can take time because regulators around the world remain skeptical of digital assets.
How to make money in cryptocurrency
There are several ways investors can increase the value of their assets and secure profit when investing in cryptocurrency. Just like in the stock market, the way to make money when investing in the cryptocurrency market is to buy a cryptocurrency when its value is low and then sell it when its value increases.
"You can get more of your money in cryptocurrency than other traditional assets," says Branzburg, due to price fluctuations and opportunities that traditional investments do not offer.
The first method he refers to is bet. Staking allows you to earn income through your encryption by participating in the original network. When you contribute to your encryption, you make the basic blockchain of this asset safer and more effective. In return, you get more assets from the network, such as the return you will receive from the savings account.
Some of the cryptocurrencies that offer bonuses on shares include Cardano, Ether, Tezos, and Algorand.
"You can lend assets in your portfolio in decentralized funding protocols, or Defi, to generate a return as well," says Branzburg. Access to Defi allows users to "take advantage of the global liquidity pool," he says. From the decentralized money market, other users can borrow your encrypted assets, and you get a return.
Takeaway
Cryptocurrency is a new and exciting way to think about money. But experts say the first and most important step is to educate yourself about these emerging cryptocurrencies and the technologies you use so you can understand the risks and rewards.
Calculating the intrinsic value of a publicly traded company may be a little simpler, but learning about encryption and how it performs can help you avoid investment at its peak.