Cryptocurrency is a digital asset that can potentially bring a decent income.
Two strategies for investing in cryptocurrency
As with any exchange-traded asset, be it currencies, stocks, or bonds, there are two main strategies for crypto:
- Investing
- Trading
In the first case, the trader receives income from short-term price up-down movements.
Investing usually means that a person invests money, buys a cryptocurrency, and does not touch it as long as possible. It can last a year, two, or three. During this time, the price of the same bitcoin on exchanges can rise 20-30 times.
When investing in cryptocurrency, you can make a profit solely from the increase in the asset price.
Trading benefits
- Potentially big earnings
- Money inflow from falling prices
- Benefits of investing:
- No need to waste time
- Significantly less risk of loss
Aggressive intraday trading often results in losses. It is very difficult to predict price behavior over time intervals of less than 12 hours. Especially it relates to bitcoin. Its rate does not depend on any states, corporations, companies, and the current situation.
Medium-and long-term investments in cryptocurrency are much preferable.
Below is a step-by-step algorithm for investing.
Choosing a cryptocurrency
There are more than 7,300 cryptocurrencies in the world. How to choose the right one? First, we determine the investment goal. Cryptocurrencies are potentially very profitable assets, and there are two large groups among them.
Cryptocurrencies with large capitalization and relatively slow growth. They have a capitalization of at least $500 million and are in listings of most crypto exchanges: Bitcoin, Ether, Ripple, Dash, Monero.
Cryptocurrencies with a small capitalization, but with an upside potential that is not typical of cryptocurrency giants like Bitcoin. Its “star” path from $1 to $10,000 has already been passed. It can hardly be expected that in the next ten years it will grow another 10,000 times. But “young” cryptocurrencies with a small price and capitalization so far are quite capable of this.
So it is useful to divide your cryptocurrency portfolio into two parts:
- Cryptocurrencies – “giants”: Bitcoin, Ether, Litecoin.
- “Young” cryptocurrencies, such as Cardano, Polkadot, YUSRA.
Choosing the amount
People have different financial opportunities. Before investing money, it is advisable to immediately decide:
- how much money to invest;
- for how long;
- how to diversify your investment portfolio.
The amount and term depend on the funds availability and the time to keep money invested. Diversification is desirable to conduct on multi-level:
- invest money, not in one, but 5-10 different cryptocurrencies;
- buy not only cryptocurrency but also other investment instruments like stocks, bonds, currencies.
There is also a need for deep diversification among these instruments.
The portfolio of such investor will be much more stable. With all the faith in the blockchain, buying only Bitcoin or Ether is a too risky decision.
Cryptocurrency wallet
A cryptocurrency wallet is an agent program. It connects to a central server through the Internet and exchanges information. But as to cryptocurrency, thousands of devices have this program and store cryptocurrency coins, but not in the centralized service.
There are two options for storing your investments in cryptocurrency:
“Hot” wallet on the exchange
“Cold” wallet on your computer or laptop
Using a wallet on a reliable exchange is more convenient. First, you can make any transactions on deposit, withdrawal, or funds exchange in 1-2 clicks. Secondly, your cryptocurrency will not be stored on your computer but another device belonging to the exchange.
You may think that this is not a plus, but a minus. Cryptocurrency is different from bank accounts and payment systems. You own it only when your electronic device works properly, and you have access to it and remember the private key. If your laptop overheats or your phone falls into a river, or you just forgot your key, no one will ever give you back access to your money.
In case such a nuisance happens to the exchange’s wallet, the platform is obliged to get you another wallet with the same amount. That is why storing funds in a “hot” way is almost always more reliable.
The only exception is if you decide to invest several million dollars in cryptocurrency. Then you will have to handle money using a reliable server, ensure its maintenance and security.
Initially, it was necessary to have a separate wallet for each cryptocurrency: one for Bitcoin, the second for Ether.
Today the concept of a multi-wallet allows simultaneous storage of several cryptocurrencies and their easy exchange.
The right way is to create a multi-wallet on the exchange. It is only needed to install an application on a PC or smartphone and receive from the exchange server updated information on accounts and currency exchange rate updates. But a smartphone will no longer collect and download information about all transactions from hundreds of other devices.
The second option of a multi-wallet is a personal account on a cryptocurrency exchange. It shows all your deposits made in different cryptocurrencies and the current number of tokens of each of them.
For a person who constantly buys and sells something, a multi-wallet on the exchange will be much more convenient than the one created on their device. Some sites like the Ethereum platform, allow download programs that function as multi-wallets. But it takes more time to work with them, and the commission for transfers within your wallet is often less than on the exchange.
Buying cryptocurrency
Where and how to do it correctly?
There are several options:
- Exchanger
- Stock market
- Individuals who own cryptocurrency
The latter option should be used only if the individual is your relative or trusted friend, and you perfectly understand the purchase algorithm. Otherwise, you will either be deceived with the price, or the digital currency tokens will not be credited to your account at all.
There are several fundamental differences:
- The owner of the exchanger is also the owner of all its funds.
- It determines the value of each cryptocurrency (exchange rate).
- If he has not got the necessary amount of Bitcoin or Ether you cannot buy it.
The exchange owner can update exchange rates at his discretion and refuse to buy/sell any assets.
En exchange is not the best option to invest in cryptocurrency. Prices in it are not as favorable as they are on the stock exchange. But you can count on instant transactions, and the exchange rate is always known in advance.
Before you invest money in an exchange, it is advisable to check three things:
- the reputation of the site (on review sites);
- the jurisdiction (find permits on the exchanger website;
- clarification of information on the regulator website.
Exchange rate. It should be a bit higher than the over-the-counter average. But if it is more profitable than the exchange, then this company is probably fraudulent.
The documents and customer data the exchanger requires is a passport and its data. In case more data is needed, it appears suspicious.
An exchange is a platform where cryptocurrency sellers and buyers themselves look for and find each other. It is just like in the market. If you are interested in ways to invest in cryptocurrency with minimal losses on commissions, then the exchange is one of the best options.
Its disadvantage is that you have to wait until a seller/buyer offers you the right lot at the right rate. But you can buy Bitcoin or Litecoin at the best possible price.
To deposit the exchange you will need to:
- complete the registration by entering your passport data;
- top up your account or crypto wallet;
- start looking for attractive buy/sell offers.
Many exchanges allow buying crypto on pending orders. For example, you can program buying Bitcoin when its price is no higher than a certain level. The system “waits” until the programmed price sets, and then automatically performs the operation.
The exchange suits those who invest in cryptocurrency often and in large quantities. It does not serve to buy small amounts from time to time.
Cryptocurrency exchanges:
- Binance
- Bitmex
- Exmo
- Coinbase
When to sell cryptocurrency?
It is advisable to decide the point to start selling it and set the profit milestone before investing in cryptocurrency.
For example, there could be options:
- to start selling after a year regardless of the price;
- upon reaching a certain financial result regardless of the time.
For novice investors, it is useful to set a minimum term they are ready to invest and calmly wait this time to come.
With the “explosive growth” of the cryptocurrency in which you have decided to invest money, it is worth selling half the amount each time you reach a significant price milestone. In this case, you will ensure yourself against losses in the event of a sharp collapse. But if you continue to grow, you should keep some cryptocurrency amount for sale at a very high price.
