Cryptocurrencies have reshaped the financial world in the last decade. These digital currencies run with blockchain technologies, and unlike traditional currencies, they are not governed by governments or centralised financial institutions.
However, since its debut in 2009, it has continued to make headlines and piqued people’s interest.
If you are one of those crypto enthusiasts looking to invest in these digital currencies, it is crucial to know how they function. It will help you to make crypto investments in a much easier way.
What are cryptocurrencies?
A cryptocurrency is a form of currency that exists digitally, whereby transactions occur with blockchain technology and are secured through cryptography.
Blockchain technology is a decentralised, distributed ledger that records the source of a digital asset, making it impossible to counterfeit or double-spend.
Governments and financial institutions do not issue cryptocurrencies, making them theoretically immune to government manipulation or interference.
Benefits of investing in crypto
Experts predict that the global crypto market will increase by more than threefold by 2030, reaching a valuation of $5 billion and will grow with a CAGR of 12.8% by 2030.
Listed below are the advantages of cryptocurrency:
- Potential for high returns
Interestingly, all cryptocurrencies share some characteristics, such as their propensity for sudden price increases (and decreases).
Prices are primarily determined by the supply of coins from miners and the demand for them from purchasers. And these supply-demand dynamics can yield substantial profits.
For example, the price of Ethereum doubled between July 2021 and December 2021 and investors who jumped on board at that time indeed made a tidy profit. Digital currencies being highly volatile, has the potential to provide monstrous returns.
Blockchain technology ensures a high level of security and user anonymity through cryptography. Hence, the transactions cannot be easily manipulated.
As cryptocurrencies aren’t tied to a specific currency or economy, their value reflects global demand rather than market inflation.
Furthermore, the number of coins is severely restricted, and thus, the available amount cannot rapidly deteriorate, hence, no inflation.
- Fairer, transparent financial system
In cryptocurrencies, no third-party intermediaries are involved, and they function on the conception of shared ownership.
In simpler terms, anyone can view the data and hence, it is perceived as an efficient alternative to the traditional financial system.
Things to keep in mind while selecting a crypto
As a newcomer to cryptocurrency, you may be overwhelmed with the number of options available.
However, it is important to keep several things in mind while selecting your cryptocurrency. After all, not all crypto is worth your money. Here are various factors that you should keep in mind while selecting a digital currency to invest in:
- Level of risk tolerance
As an investor, you must ask yourself some pertinent questions such as ‘ What am I hoping to gain from this investment?’, ‘Will I be ready to soak up the loss if the coins drop in value?’
Moreover, experts recommend that investors choose the market leader, Bitcoin, as it has yielded greater returns.
Bitcoin is the most traded and popular cryptocurrency in the world. As of 11th March 2022, Bitcoin was worth approximately $750 billion in a nearly $2 trillion crypto market.
Before investing in cryptocurrency, you want to ensure that your funds are safe.
Hence, it is best to thoroughly research the cryptocurrency and its risks and benefits before depositing a considerable amount of money there.
- Learn to use both cold and hot wallets
Last but not least, you must learn the usage of both hot and cold wallets and the benefits associated with them as you dive into the journey of diversifying your assets!
Pointers to keep in mind while selecting DeFi or CeFi
There are primarily two types of finance available within the cryptocurrency sphere: Decentralised Finance (DeFi) and Centralised Finance (CeFi).
Let us delve deeper into both of these.
1. Centralised Finance
Most cryptocurrencies are traded on Centralised Finance, where these digital currencies are kept in a ‘hot wallet’, and the owners do not have sole control over the key to their wallet.
Furthermore, an investor would be able to choose only the coins that Centralised Exchanges wishes to list.
These crypto exchanges operate similarly to traditional asset exchanges, with established rules and regulations (trading, withdrawal, and deposit fees) that users must follow.
2. Decentralised Finance
Decentralised finance, also known as DeFi, uses cryptocurrency and blockchain technology to manage financial transactions.
In this case, there is no central authority, and the user has complete control over their assets. Furthermore, transactions are verified by the parties involved by solving a complex math problem on the same blockchain.
In addition, a user will be able to sell assets, earn interest, obtain a loan, and do various other things without signing any paperwork.
When is it a good time to buy crypto?
Cryptocurrency is a fluctuating asset class, so many people believe that they should only invest in it during specific times.
Dollar-cost averaging is the best strategy to use, in which you invest little by little over time. You can use this strategy to mitigate the effects of market volatility!
For example, suppose you spend $100 over two weeks. This means that this $100 will buy more Bitcoin and yield significant returns when the market recovers from a downturn.
Hot and cold wallets- Exchanges in crypto
As an investor, you’d want your crypto to be safe, so you’d try to walk a fine line between security and functionality.
Hence, you must choose between storing your money in a hot or cold wallet or using a combination of both.
Let’s understand this concept in more detail:
A hot wallet can be vulnerable to attacks as it is connected to the internet, resulting in funds being stolen. However, as it is easily accessible, sending money becomes hassle-free and quick.
A cold wallet is a physical device, which is usually much more secure as you would require PINs or passwords to access the funds. However, you must opt for this only if you plan to keep your cryptocurrency in it for the long term.
Tips for managing your risks
To profit from cryptocurrency, you must have developed an effective risk and money management strategy.
Along with that, you must invest as much as you are willing to lose. It would help if you also considered the overall risk. Generally, your total risk should be less than 10% of your portfolio, implying that you only risk 1% of your portfolio per trade.
Thus, cryptocurrency beginners should remember the above pointers before investing in them. Although cryptocurrency is a dangerous undertaking, choosing the right ones can generate substantial returns for any investor.
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