The financial world is buzzing about cryptocurrency and bitcoin. What is this new financial system and what does it mean to you? How does it work? Where do you get started? Is this going to impact the future of investing? Information is needed to decide how to navigate this digital monetary system. Here is some basic information to help beginners decide if investing in cryptocurrency if for them.
What is cryptocurrency?
Cryptocurrency is similar to USD. It is a monetary system that can be used to buy, sell and invest. The difference is that cryptocurrency is a digital asset made possible by the principles of cryptography.
Cryptography is the key to cryptocurrency.
Cryptography is a way of storing and sharing data in a secure format. During World War II a need for a secure, uncrackable way to communicate was needed. Cryptography was the solution. Since then it has become more complex through the use of mathematical theory and computer science. In the financial world, cryptography has birthed a secure monetary system. Simply put, cryptocurrency is a digital currency that uses complex codes.
A growing financial system
Bitcoin was the first publicly accepted cryptocurrency but there are hundreds of other virtual currencies. These are known as altcoins. In 2011, forks, or clones of Bitcoin began appearing in the market. Each tried to find its only market and potential be better than Bitcoin. These altcoins are chipping away at Bitcoins dominance. Consumers who once thought this way of investing and doing business were passing fads are getting more involved. The amount of money involved in cryptocurrencies is growing daily.
Fiat currency vs. Cryptocurrency
Most monetary systems in the world are referred to as fiat. That means they are backed by something. It can be the gold the government has, the strength of that county or the trust in that country. The United States government controls how much money they print and by printing too much they devalue it. Cryptocurrency is more like buying stock than cash. When an investor purchases a coin they are acquiring technology that is part of a network known as a blockchain.
Where to do business
Cryptocurrency exchanges are generally the places where investors buy and trade. Consumers use fiat currency to purchase or sell crypto coins. It is important to judge the trustworthiness of the exchange you use.
Ask questions and thoroughly vet the exchange you are deciding to use. You can determine the dependability and worth of the exchange you are interested in using by considering the following criteria:
- purchase and withdrawal limits
- trading volume
- ease of use
Coinbase is one of the most popular exchanges on the market and is available to 32 different countries.
Begin to invest
Once you are comfortable with an exchange it is time to do business in cryptocurrency. You begin by setting up your account which includes connecting your bank account, credit card or debit account and confirming your personal details.This will enable you to convert your local currency into or out of Coin and provides a secure place to store your investment.
Now you are ready to purchase your first coin. Remember, exchanges do charge a fee for converting your fiat currency into cryptocurrency.
Using a desktop computer or an app on your mobile device you can easily buy and sell coins via the exchange dashboard. Access the buy/sell tab. You can choose your payment method from a drop-down menu. Enter how much you want to convert click buy. Your credited coins will appear on your dashboard for verification.
The next step in cryptocurrencies is buying and trading. You will need to transfer your coins from your exchange to a cryptomarket where the excitement happens. If that sounds confusing then think of the exchange as your bank and the cryptomarket as the stock market. One place is where you store and convert your investments, the other is where you invest or trade them.
All of the cryptocurrency exchanges have online wallets to store your coins. A wallet is a computer program keeping track of and storing the private and public keys that are your coins identity. They interact with the blockchain enabling users to trade, sell and make purchases with their cryptocurrency. It monitors your digital balance. Think of it as your personal ledger. When someone uses coins to purchase something from you, they are signing off ownership of those coins to you. There is no exchanging of physical coins. It is all done with digital codes. The balance in their wallet decrease and the balance in your wallet increase.
Some people feel uncomfortable using the online wallets built into exchanges. Investors have options. There is software for available for paper wallet services or you can purchase a hardware wallet. Wallets vary in their security. Online wallets are most vulnerable to hackers.
Offline wallets are not connected to the internet and less risky. Many investors like the feeling of something tangible to represent their holdings.
Whatever type of wallet you choose to use, keep it safe. Cryptocurrency cannot be reclaimed if lost. Transactions cannot be reversed. Make sure you take precautions to secure your investments.
- Backup up your wallet
- Only store small amounts in each location
- Check your balance regularly
- Update software and passwords
- Add more layers of security such as complicated passwords and 2 level verifications
- Do your homework before you invest and make sure the wallet you choose has a high level of reliability.
Cryptocurrency and your investment portfolio
Right now cryptocurrency is used more as an investment than a day to day monetary tool. Many good investment advisors tell their clients to diversify. This is good advice. Cryptocurrency is like any other investment. It is unpredictable. While it has the possibility of growing, you can lose money as well. It comes with many risks. A good rule to follow is to invest only what you can afford to lose. Cryptocurrency is becoming a part of more investment portfolios but individuals should be wise. You can also diversity among the various altcoins within the cryptocurrency world.
Cryptocurrency Investing Tips
How does the average person decide how much or even if they should invest in coin? Right now cryptocurrency is experiencing a boom in value and interest. There is no way to determine if this trend will continue. It is possible that like the dot com boom or the housing boom the cryptocurrency bubble will burst. Here is what should you consider before turning your fiat assets into cryptocurrency:
How much do you trust the development team?
The reasons anyone invests is so they can gain wealth or at the very least preserve their capital. You are putting a lot of faith in a coin’s development team to do that for you. Do you trust them? It’s important to check on the past record of the founders. Have they been involved with scams? How much experience do they have? The reality is, anyone with coding skills can create their own cryptocurrency.
Does the coin you are looking at have a long term goal?
Have you read the coin’s white paper? This document gives the details about the coin’s code and explains what makes this coin unique. It will also reveal with limitations it has and what the future plans for that coin are. It will read like a university paper and you should find answers to all your questions. The best ones have been updated and changed many times to reflect that the dev team is constantly improving on their technology.
Will this coin have a value in the real world?
Coins should have a real value in the physical world or they seem like a get rich quick scam. Eventually this digital currency will need to be used in a way that is not virtual. Simply supply and demand will not make it viable in the future.
What is the ICO’s marketed plan?
Many ICOs have great websites and look viable on the surface. What is important is that they are more than an online storefront. Do they have a documented plan that can deliver? What is their backup in case of problems?
Know your own investment plans
Some investment strategies work well for short time investing. Others reflect a long-term relationship. What is that you expect to gain from each of your coins. Will you want to flip coins to make short term gains? Do you know what your exit plan is? It is good to give yourself a timeline and exit value to your coins. Then you will know when it’s time sell before it hurts.
Short term or day trading with cryptocurrency
Cryptocurrencies are easy to use for day traders. It is easy to send and receive. It is convenient. It easy cross the borders of fiat currencies and it has no restrictions. Sounds like a perfect short term trading medium.
Short term trading takes advantage of what is going in the market to make money instantly. There are a few ways to take advantage of incoming news to benefit your portfolio. Put this to work for you by staying on top of the cryptocurrency news, studying trends, setting your limits and being patient.
- Mining – Mining works by setting up a computer program to search for released coins. It involves a cost of electricity to keep the monitoring going 24/7. Investors like it as a passive investment vehicle.
- Staking – Staking takes less effort than Mining. It is like earning interest on the coins you hold in your wallet. It is related to time. Your network rewards you for holding onto coins.
- Arbitraging – Arbitraging seems very simple on the surface. It is basically purchasing coin on one exchange and selling it at a higher price on another exchange. You benefit from the temporary difference in cost. Sounds simple. Just be careful. Fees can eat away at your profit and prices can change while you are in the middle of a transaction.
Cryptocurrency may or may not be the future of financial currencies but for now some investors are increasing the value of their portfolios by buying, trading and selling on the virtual market.the risks are real but the benefits can be too. It is important to educate yourself on any financial moves you make. Stay on top of the latest news so you will not find yourself investing when the market is going down. Protect yourself from scams and hackers but only using reputable exchanges and wallets. Invest only what you can afford to lose. Experiment with the technology to see what works best for you. Right now cryptocurrency is mostly used as an investment tool and not a daily commerce device. No one knows if one day we will be buying cars and groceries with this monetary system. Will the bubble burst? Only time will tell.