Given today’s scenario, we all have realised that life can be quite uncertain and exacting. If we are being honest with ourselves, we know that our earning abilities are limited to maximum of 50 years or so. And the only consolation we have would be our retirement funds or pension. But is that enough?
In the past year, most of us lost our jobs and making ends meet, paying off debts, etc was quite a task. This is true for people who haven’t made any investments.
“Never invest in something that you don’t understand”Warren Buffet
And that is absolutely true, and it applies to pretty much any kind of investment you decide to make.
But this article, as the title suggests, is about few things that you need to know before investing in cryptocurrency. But before that let’s go by what one of the most successful investors of our times quoted; let us first try to understand what cryptocurrency is and then move on to the things we need to know before investing in cryptocurrency.
What is Cryptocurrency?
Cryptocurrency is a decentralized digital or virtual currency which is mainly based on blockchain technology. Or in simple words- it is an internet-based medium of exchange which uses cryptographical functions to conduct financial transactions. It is a form of online payment that is used to exchange goods and services. Quite a few companies have issued their own currencies commonly known as “tokens”. In order to access goods or services, one would need to exchange real currency for the cryptocurrency.
Coming to blockchain- a blockchain is nothing but a digital record of transactions. It derives its name from its structure; where individual records, known as “blocks” which are interconnected together to form a single list, called a “chain”- which forms a spreadsheet containing information of every transaction. Here, one spreadsheet is called a “block” and the whole group of sheets is called “blockchain”. When a block attains or reaches a particular number of “approved transactions”, a new block is formed. Once this sheet is updated, no changes can be made to it, thus making it impossible to pirate.
A demarking feature of cryptocurrencies is that they are normally not issued by any central authority and thereby are free from any government interference or contrivance.
Therefore, cryptocurrency or the digital money exists in the form of “coins” or “tokens”. Having said that, there are a few of them that have migrated into the physical world through/with credit cards or other projects. These currencies can be directly sent using private or public keys with minimal processing fees as opposed to the exorbitant fees charged by the traditional financial institutions. Today, cryptocurrencies have become an expanding global phenomenon, and has gained a lot of traction amongst investors thereby making it the “digital gold”.
This money provides assurance of safeguard and increase of its value over time. They make for a fast and comfortable mode of payment spanning throughout the world and are private. The downside to this: since they are anonymous, they can be misused for any outlawed economic activity.
Cryptocurrencies are dynamic and fast growing, thus making it a favourite amongst investors.
Even though Bitcoin has spearheaded the world of cryptocurrencies, there are several others that have made it to the list of this digital currency- Ethereum (ETC), Litecoin (LTC), Cardano (CDA), Bitcoin Cash (BCH), Polkadot (DOT), Chainlink, Stellar (XLM), Binance Coin (BNB), Tether (USDT), Monero (XMR) and Ripple.
Almost every day new cryptocurrencies surface and the old die; enable the early investors to become wealthy while some investors do end up losing money.
This brings us to the aim of this article- things you need to know before investing in cryptocurrency.
1. They are volatile and risky.
Investing in cryptocurrencies needs extensive research. The value of these go through extreme highs and lows. Yes, any kind of investment carries the same risk, but with cryptocurrencies, it is a bit higher and more speculative. If you are not a seasoned investor, then it is best advised that you only invest an amount that you are ready to lose.
2. It is important that you know how the system exactly works.
Investing in cryptocurrencies comes with a lot of unknowns. There are very few people who know exactly how the system works and have the wherewithal to operate it. And this could render you unfortified.
3. The uses of these currencies could vary.
As I mentioned earlier, it is quite easy to use cryptocurrencies for funding illegal activities. There are a lot of people who prefer to remain unidentified and ditch the bank or government regulations and tend to dabble in the black markets. While investing in cryptocurrencies, one must be aware that money laundering is a common feature or a drawback in the world of cryptocurrency.
This obviously doesn’t mean that everyone who invests in cryptocurrency would indulge in fraudulent activities. Just that those who want to, could find it to be an ideal platform for such activities.
There are several legal businesses that accept cryptocurrency. As they offer quick, low-cost money transfers, they are a popular choice for international transfers. Since the authorities have no control over them, these currencies cannot be frozen; the reason being that only someone who owns a private key to the wallet can access the funds.
4. Make sure that your timing is right.
One thing that you need to bear in mind while investing in cryptocurrencies, is that these assets are volatile and the prices tend to fluctuate with very little prior notice. It is advisable to monitor the industry before to decide to make your move. These currencies tend to follow a typical price pattern. Hence, it is advisable to do a meticulous research and get a feel of the market. Once you have done that, determine the project/s you want to invest in.
It is important that you time your investment and monitor the crypto market. It is often seen that when a hot new currency with lots of promise becomes popular, the investors make their move quickly and make a lot of profit. On the other hand, those who don’t, tend to lose their money. Just like in any other investment, investing in this space comes with a risk, albeit a bit higher than its contemporaries.
5. Question your choice: Why do you want to invest in cryptocurrency?
This is a question not specific to just cryptocurrency but any form of investment. However, when it comes to cryptocurrency, having a clear idea could go a long way and help cut down loses. We for sure know that there are many options available that are more stable and less volatile, unlike cryptocurrencies. So, why is it that one would want to invest in the crypto market?
Is it because of the trend or hype? Or are you interested in investing in one or more specific digital token for some solid/compelling reason? What are your investment goals and does the crypto market seem more feasible to you?
Despite all these questions, the fact remains that investing in cryptocurrency may make more sense for some and for rest it is best to avoid taking the risk.
6. Do your research.
It goes without saying that getting a proper research done before investing in cryptocurrency is very crucial. During your research, you might come across companies which create and sell new cryptocurrencies. For example, if you decide to invest in ICOs, then make sure that you read the paperwork thoroughly. Make sure that the business model actually requires the blockchain technology.
7. Opt for a Good Crypto Exchange
While investing in cryptocurrency, make sure that you choose a crypto exchange which is reliable, has strong liquidity and strong security measures. Certain websites like coinmarketcap.com and a few others are quite useful for those who are new to investing in cryptocurrency. They provide all the comprehensive information one might require for entering this market.
8. Make sure to protect your private keys.
It goes without saying that it is important to keep your cryptocurrency safe. A foolproof method would be by doing this through a hardware wallet. This ensures the safety of your assets and keeps it far away from an internet connection, making it difficult to hack.
Last but not the least, watch out for scammers. It is possible that you might come across a lot of hype about or around some investment strategy that promises great returns from dubious crypto assets. There are possibilities that you might hear unverified rumours about how the price of Bitcoin is going to rocket. Sadly, many fall prey to such scams and end up losing a lot of money. A proper online research could help you avoid such scams and keep your crypto safe and secure.
In conclusion, the crypto industry is brimming with unbiased reviews and websites free from outside control that can help you make a good and well-informed decision.
So, if you think it is too good to be true, who knows, it just might be!