It’s become somewhat of a cliche phrase to say, “understand the industry before starting a business.” It’s simple to say; anyone can do it, but nothing simple about actually going through with it.
This, of course, goes for investing your hard-earned money into this world of magical money we so far know as cryptocurrencies.
Beware, also, of those who promise you the world, because any investment with the word “guaranteed” is almost always the riskiest investment you can make. If a guaranteed investment did exist, we’d all be quadrillionaires already, but still poor. That said, understanding where your risk is, and the greatest you stand to lose, will grant you the best chance of making it worthwhile.
Here are the basics of cryptocurrency investing, explained in human language.
What is Cryptocurrency?
By definition, cryptocurrencies are a form of digital money that is decentralised and built on blockchain technology.
It's a community system that enables anyone to send and receive payments from just about anywhere.
The caveat? Internet.
These transactions are digital entries to an online database representing specific transactions instead of actual (physical) cash carried around and exchanged in the real world. This technology used to securely store and share data is known as the blockchain. And by secure, it means it cannot be changed later, tampered with, or amended in any way, shape, or form.
Advantages and Disadvantages of Cryptocurrency
Easy transaction with minimal fees
The transaction process for cryptocurrency is relatively transparent and trouble-free — for instance, no lots of paperwork, lesser brokerage fees and commissions.
Basically, it removes the need for a middleman to complete the transaction.
The transactions would be explicit and one-to-one, and audit trails would be simpler to implement, removing the ambiguity about who would pay who. Along with it, the trouble of going through an intermediary bank, clearing firm, and whatnot before your funds reach your account (wallet).
Because of that, and evidently, cryptocurrency users are, in a sense, liberated from those pesky fees that can rack up to the hundreds. When using cryptocurrencies, the fees come in the form of what is called a “gas fee”. It varies differently depending on a wide variety of factors. It is a topic on its own with more technical terms, but it’s worth noting that it is not entirely free.
The transaction you make with the recipient will be one-of-a-kind.
Every deal can lead to a term negotiation, as all the information is exchanged using a push method. In simple terms, you have complete control over who you want to share the information with. If you want your financial information kept entirely private, it’s up to you; if you want to share it with one person, it will only allow that specific person to see it.
Imagine having bought 7,002 Bitcoins many years ago, before the word Bitcoin even hit social media platforms. Then, imagine losing all of it.
Because you can’t remember your password.
This is the story of Stefan Thomas, the man who lost over $256 million.
Digital wallets are something new to our society. So, needless to say, they haven’t evolved to withstand the billions of things that could go wrong. And to add, the permutations of these billion things.
They’re especially vulnerable to being thieved from insecure websites, cyber-attacks, and of course, the good ol’ friend of ours, online scams.
Lack of regulations:
Thankfully for us, average Joes, there have been loads of chatter around regulating the usage of these coins. Of course, we’d like those regulations to protect us in the ideal world. But for now, owing to it being so new, these regulations are still in development.
With hope, it stays “two steps forward, one step back.”
Case in point, when you get attacked by those malicious hackers or get scammed, there is no one to save you. No banker or company in the world is going to call you and ask if you want to file an investigation.
And for investing in these cryptocurrencies, you’re on your own as well. That means, there might be market manipulation, pump and dump schemes, and possibly even something labelled as a “rug pull”, seen on the recent Squid coin.
The volatility of cryptocurrency:
Investors hate it, traders love it, and others have a love-hate relationship with volatility.
Today, you might be paying 0.0001 Bitcoin for a cup of coffee. Tomorrow, you might be paying 0.0005 for that same cup.
From an investing perspective, today, you might be up to $1,000 on your Bitcoin position, but tomorrow, you can be down $1,000 and have no idea whether it will recover some time later.
This especially needs attention if you’re using margin to trade or invest in these assets. Because at any point, it can drop upwards of 10% in a day and you will be forced to liquidate your position, forcing you to take the loss whether you fancy it or not.
How does crypto derive its value?
Supply and demand.
Price goes up whenever there is more demand; the price goes down whenever there is more supply.
Types of Crypto
Bitcoin is not the only cryptocurrency in the market; numerous cryptocurrencies were created after Bitcoin, collectively coined Altcoins. Pun intended.
Besides serving as a payment method or transmitting value across the decentralised network, Altcoins can also be used as a value token for different purposes.
- Mining-based: Like Bitcoin, they are produced via the process of mining. Litecoin is an example of a mining-based currency.
- Security token: A cryptocurrency is a digital or liquid asset representing a share of ownership in a physical acquisition. Security tokens are the blockchain equivalent of claims and are stored on a distributed ledger. They may express an interest in Internet Protocol (IP), an automobile or property, among other things.
- Utility token: It is sold as a way of fundraising for the start-up. They are a digital token of cryptocurrency issued to support the development of the cryptocurrency. Subsequently, the token will be used to buy an item or service given by the cryptocurrency's issuer.
- Stablecoins: Digital currencies are backed by reserve assets like fiat currency or industrial metals. As a result, their valuations have mainly remained steady.
Examples of Altcoins
- Filecoin: Filecoin is a communal, open-source cryptocurrency and digital payment system, a blockchain-based unified digital storage and data retrieval solution.
- Ethereum (ETH): The first Bitcoin alternative on the list is a decentralised software platform that allows smart contracts and decentralised applications (dapps) to be written and operated without the need for third-party downtime, deception, control, or intervention.
- Litecoin (LTC): A fork of Bitcoin. A peer-to-peer cryptocurrency based on the source code of Bitcoin that launched in 2011 (one of the first cryptocurrencies that follow the footstep of Bitcoin). Although Litecoin is similar to Bitcoin in many aspects, it has a quicker block creation rate and a faster confirmation time for transactions.