How to Invest in Cryptocurrency & Blockchain Technology

By: Jeremy Biberdorf

November 20, 2017

How to Invest in Cryptocurrency & Blockchain Technology

For several years now,  the topic of cryptocurrencies has been at the forefront of global financial news. There has been ongoing intense debate surrounding this digital asset and the supposed instant achievement of millionaire status by investors. People have been enticed to buy and sell cryptocurrencies as a means of attaining great wealth.

This is a dangerous precedent when it comes to investment strategy. This is due to the fact that there are certainly no guarantees of investment success attached to cryptocurrency and blockchain technology. There are significant risks and potential investors should be careful not to be entranced by the hype which often accompanies talk of cryptocurrency investment. For anyone interested in how to invest in cryptocurrency, understanding the associated risk is vital. A good place to commence building this type of knowledge is the understanding of cryptocurrencies as an entity.

What are cryptocurrencies?

The basis of all solid cryptocurrency investing lies with appreciating the concept of cryptocurrencies. In simple terms, cryptocurrencies are the newest form of digital currency. Imagine a peer to peer transfer without the interaction from any 3rd party. This means you can go to any store, purchase anything and no one will know what you purchased. Crypto investments and trades are not anonymous so the amount related to a transaction will be shown. In addition, the seller and the buyer are pseudonymous so they are not completely unknown.

Just like foreign exchanges, digital currency can be traded too and many people are day trading cryptocurrencies on the cryptocurrency exchange. It’s definitely a volatile market, so it’s essential to have the ability to swing trade and to be able to do it quickly.

One common mistake that many people make is to confuse virtual currency with digital currency. Digital currency is money in the digital form whereas virtual currencies are usually tokens purchased with real money that can only be spent inside a virtual world. For example, NBA 2k17, a very popular basketball game that is available on PlayStation and XBOX, uses its own virtual currency that people purchase with real money. This virtual currency can be used inside the game to purchase different shoes, apparels or skills for players.

How to invest in cryptocurrencies – the risk

Having achieved an understanding of what cryptocurrencies are, it’s essential to appreciate the risks that are attached to cryptocurrencies as an investment opportunity.  As Dante Disparte said, while writing for Forbes,

“While there is no doubt cryptocurrencies, digital tokens and blockchain-based business models are here to stay, understanding how risk interplays with this emerging market and their underlying technologies will not only help protect investors, it will also give regulators a steady hand… ”

There are excellent reasons for opting to invest in cryptocurrencies including:

  • Protection of an investment portfolio against issues with US dollars.
  • Support for the social vision that is the foundation for cryptocurrencies.
  • An understanding of, and appreciation for, the technology behind cryptocurrency advancement.

It’s clear that expecting cryptocurrency investment to secure hugely advantageous returns is not an excellent reason for choosing to invest in cryptocurrencies, or for choosing to explore a cryptocurrency trading platform. This is due to the obvious amount of risk that is involved in this form of investing.

Anyone choosing to invest in cryptocurrencies needs to be prepared for calculated risk. For instance, there is always a possibility that cryptocurrency trading and exchange could be outlawed in certain countries. Assuming that risks are understood, investors need to consider the different cryptocurrencies that are available, before they make investment and trading decisions.

Top 3 Cryptocurrencies

Bitcoin was the first cryptocurrency to enter the public consciousness. In fact prior to the end of 2016,  there was not much besides Bitcoin. Other early cryptocurrency options, known as Altcoins, tended to be less than reputable.

Although, Bitcoin is still dominant when it comes to cryptocurrencies, the situation has altered somewhat. As of September 2019 it’s share of the crypto-market stood at approximately 50%. There are several reasons why Bitcoin is no longer the only cryptocurrency option including the fact that the currency itself has experienced problems and the fact that other interesting currencies have entered the arena.

Currently, three of the top cryptocurrencies are Bitcoin, Ethereum and Litecoin.

Bitcoin

There is no doubt that Bitcoin is still the biggest and baddest of all crypto, despite the noticeable reduction in its complete dominance of the market. This is mainly because it was the first of its kind. It originated in 2008 and made crazy gains from that time onward. At one point, it was hovering around .6 cents USD. It jumped up to $1,000 per Bitcoin at the beginning of 2017 and then rose to around $7400 before it began to lose its impetus. Also in 2017, a hard fork was undertaken which led to the creation of bitcoin cash, a cryptocurrency which enables a greater number of blocks in the blockchain.

Ethereum

Ethereum is the next most prevalent cryptocurrency after Bitcoin. It is a platform to help companies getting on the blockchain so it has huge potential.

Litecoin

Although Litecoin does not have the third biggest market cap it is definitely one of the longest standing cryptocurrencies. It also has an impressive record. However, it may not present the best opportunities for investors who aspire to make money swing trading as it has a reputation for being a stable coin.

Which cryptocurrency should you invest in?

Deciding which cryptocurrency represents the best investment opportunity can be a complex activity. One metric which can prove useful when making this decision is the market cap. This is the value of all of the token available for a specific cryptocurrency. While market cap is by no means a perfect measurement of the value of cryptocurrency, it’s the most useful that is currently available.

Once the market cap for a cryptocurrency has been determined, it’s vital to study the whitepapers for various ICOs, in order to determine which represents the best opportunity for investment success. The reason for taking this action is twofold; there is an opportunity to acquire enhanced knowledge of a cryptocurrency and the standard of the white paper is often a good indication of the quality of the ICO. If there is no white paper in place for an ICO, it’s not worthy of consideration.

After digesting the information contained in white papers, it’s essential to undertake additional investigative activity in order to ensure optimum investment success. This activity includes:

  • Determining the value that is being added to the ecosystem by a project. What utility is the project enabling that will assist in it becoming a successful enterprise?
  • Establishing whether a project is aimed at solving an especially troublesome issue that is a current vexation to the cryptoworld. Issues of this type include scalability, and interoperability.
  • Recognizing when a project is not transparent and is potentially covering for scam activities. A genuinely focused and reputable project is relatively easy to identify. The team behind it will have obvious vision, technical flair and enthusiasm for the ethos of the project. It’s good practice to avoid projects where this is not the case and where the benefits and outcomes are incomprehensible or appear to be undisclosed. As with any other asset class, such as real estate, the ability to identify genuine investment opportunities is essential.
  • Understanding that promises of guaranteed returns are disingenuous as there are definitely no guarantees of a return on investment in the crypto world.

Once the in-depth research has been completed, it’s time to buy the cryptocurrency that you have chosen to invest in.

Buying cryptocurrencies – what you need to know

There was a time that buying cryptocurrencies required the investment of a colossal amount of time and effort as establishing a means of making the purchase required a significant amount of investigation. Today, the situation is greatly simplified.  You have a choice between using an exchange or a brokerage platform.

Cryptocurrency exchange

There are two types of exchange where buying cryptocurrencies is currently an option, fiat to crypto and crypto to crypto. Using a fiat to crypto exchange means that you are enabled to buy cryptocurrencies in exchange for fiat currency. Alternatively, you are able to utilize a crypto to crypto exchange which enables you to exchange certain cryptocurrencies. An example of this type of exchange is Binance. Exchanges are relatively simple to use and provide access to a range of cryptocurrencies.

Cryptocurrency broker platform

For anyone who is interested in investing in cryptocurrencies but does not feel comfortable using the exchanges with no assistance, utilizing a cryptocurrency broker platform is a good option. Access to a good quality broker platform provides cryptocurrency investors with the benefit of extensive features which can help with the development of strategies. The downside of using a broker is that the number of cryptocurrencies available can be limited. However, brokers such as Plus500 are renowned for offering a wide range of choice when it comes to cryptocurrencies. For a broker which provides a plethora of tools to use, XTB is often a preferred choice.

When is the best time to buy cryptocurrencies?

When it comes to investing in cryptocurrencies, there is no generic rule. However, it’s generally a bad idea to buy when a bubble is at its peak or when the currency is crashing. The optimum time to buy a cryptocurrency is when it’s stable and at a reasonably low level. It’s important to realize that cryptocurrencies have a high level of volatility, so a bubble is not 10%. It’s more likely to be 100% or even 1,000%. It’s also vital to understand that a dip may be accompanied by more of the same. Cryptocurrencies are notoriously hard to predict, which is why success is never guaranteed.

Storage of cryptocurrencies

One concern which crypto investors always need to think about is where to store the cryptocurrency they have bought. Although some exchanges are reliable, such as Bitcoin.de, there have been many examples of hacking and other issues in cryptocurrency markets. This is why many investors choose to keep their cryptocurrency off the exchange and in their own crypto wallets.

Hot wallets

Hot wallet options are those which will at some point be connected to the Internet. This includes options such as a digital wallet and a mobile wallet which can be accessed using a mobile app. The main advantage of the hot wallet option is that access to the cryptocurrency is simple and quick. However, it can be very simple to hack various types of hot wallet leaving the cryptocurrency investment at risk. This is why hot wallets should only ever be used to store small amounts of cryptocurrency. It’s important to note that the private key and seed phrase are essential in order to restore a hot wallet, in the case of human error.

Cold wallets

Cold wallets involve the storage of cryptocurrency offline. They come in different forms including hardware wallets and paper wallets. They are similar to a bank account which is used for savings. The downside of a cold wallet is that access to the cryptocurrency is not as simple as with hot wallets. However, cold wallets are less prone to illegal interference, especially if a paper wallet is used. They are the most appropriate storage option for anyone who chooses to buy cryptocurrency and keep it on a long-term basis. .

The action of mining or staking

Mining is a great way to make money off cryptocurrencies while helping with the blockchain. In order for transactions to be recorded on the ledger and have everything go smoothly, miners are the ones making sure that this happens. When someone makes a transaction with cryptocurrencies, it needs to be recorded and placed into a list called a block. Every block goes into the blockchain and connects together, hence the name blockchain. Everyone has access to the blockchain so everyone knows what’s going on.

In order to mine, you can go two routes. One is the more expensive but a better return on investment while the other is the slower and more decentralized route. To mine Bitcoin and Litecoin, you need to go with a more expensive hardware called an Asic miner. Asics are really strong small computers that are specifically made to mine and nothing else. They are coded to contain a specific algorithm.

The other way to mine is using your computers Graphics Processing Unit (GPU). Using specific programs, you can pick which coin you want to mine. GPU mining takes a bit longer but electricity expenses are much less. This is still a great way to make money while supporting your favorite coins network.

Staking

Staking is a different form of mining but you do not need any hardware to do this. You simply have your tokens in your cryptocurrency wallet and you will continue to get a percentage of tokens, almost like dividends. The point of having tokens in your wallet is to keep the network more secure and keep from mass selling. The confirmations are done with already owned coins. It is also a hedge against inflation.

Stocks and Companies Related to Blockchain

MGTI – One of the most prominent figures in cryptocurrency is John McAfee and he created a company called MGT Capital Investment Inc. They buy mining equipment to mine and give back a portion of the profits to investors. With mining becoming bigger and more useful than ever, it is a great time to invest in them. If you believe in cryptocurrencies in general, they are a good way to double down.

Riot Blockchain (Nasdaq: BIOP) – Investing in the stock market is a much different game but if you don’t want to be directly involved in purchasing and selling Bitcoin. You can invest in hedge funds that purchase different cryptos for you. BIOP is investing mainly in Ethereum and Bitcoin together with a few other coins.

About the Author:

Jeremy Biberdorf is the founder of Modest Money. After working many years in the website marketing industry, he decided to take on blogging full time and also get his finances headed in the right direction. Also check out his contributions to Equities.com and Benzinga.

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