Cryptocurrency Investments: The Beginners Guide

New to the cryptocurrency market? Still trying to get a grip on the idea of fully digitized money, let alone the perceived complexity of actually acquiring crypto assets? Fear not, for you are not alone. The decentralized nature of cryptocurrencies has drawn its fair share of skeptical attention since the introduction of Bitcoin in 2009, with the likes of investment guru, Warren Buffet, warning people to stay away from Bitcoin.


Before diving into the prospect of getting hands-on with the cryptocurrency market, let’s take a quick look at a few basic yet important bits of information around cryptocurrency investments.

crypto coin investments

What Are Cryptocurrencies?

According to Jan Lansky- a cryptocurrency researcher at The University of Finance and Administration- a cryptocurrency is a system where the following six criteria have been satisfied.

[1] “The system does not require a central authority, distributed achieve consensus on its state.”

[2] “The system keeps an overview of cryptocurrency units and their ownership.”


[3] “The system defines whether new cryptocurrency units can be created. If new cryptocurrency units can be created, the system defines the circumstances of their origin and how to determine the ownership of these new units.”


[4] “Ownership of cryptocurrency units can be proved exclusively cryptographically.”


[5] “The system allows transactions to be performed in which ownership of the cryptographic units is changed. A transaction statement can only be issued by an entity proving the current ownership of these units.”


[6] “If two different instructions for changing the ownership of the same cryptographic units are simultaneously entered, the system performs at most one of them.”


Mr. Lansky and other boldly bullish believers (Joseph Muscat, the prime minister of Malta) have openly hailed Bitcoin and cryptocurrencies at large as “the future of money”.

 

Where It All Began

The cryptocurrency market as we see it today is the result of a snowball effect that was set into motion by a mysterious developer who goes by the alias, Satoshi Nakamoto. In October 2008, Nakamoto published a document titled “Bitcoin: A Peer-to-Peer Electronic Cash System” on metzdowd.com. The Bitcoin network would only go live on the third of January the following year.

Inspired by the democratized nature of the Bitcoin network, other developers began creating and introducing new cryptocurrencies (altcoins), with the aim of improving on what Nakamoto had built. This tokenization of technological innovation evolved into a new corporate funding model now called an ICO (Initial Coin Offering).

 

How To Begin Investing?

Fortunately for individuals who have taken an interest in the possibility of making an investment in this new market, there are these three steps to take.

 

STEP [1] You as an interested investor should at this point be considering a method of acquiring Bitcoin/altcoins that best suits you. Typically, this would mean opening user accounts and getting familiar with reliable crypto exchanges such as Coinbase, Binance, CEX.IO etc., from there you should have access to a wide range of crypto assets.

 

OTC (Over The Counter) trading services are also available for investors looking to make a large transaction. OTC services are typically used by traders and investors as a means of avoiding mainstream exchanges, thus minimizing any impact on a cryptocurrency’s value while making a large transaction. It is estimated that these “off the books” cryptocurrency markets are larger than the more frequently utilized exchange markets.

An OTC transaction is generally carried out in one of the following ways.

  • An investor could purchase cryptocurrency via trusted brokers like itBit and Hivex.com, the benefits include liquidity and the comfort of knowing that funds are being handled by specialized brokers.
  • One could make use of a Bitcoin ATM where applicable. Bitcoin ATMs remove the need for an exchange when converting cash to crypto.
  • An interested individual may also explore the possibility of acquiring Bitcoin via a chatroom like #bitcoin-otc. This is one example of a network that facilitates peer-to-peer crypto trading.

Alternatively, one could also look into the possibility of getting involved in crypto mining. This is possibly a way of getting more deeply involved in this space, as the peer-to-peer “mining” process makes up the backbone of cryptocurrency network.

 

STEP [2] The next step is to choose a digital wallet in which to safely and conveniently store your newly acquired crypto investment. Thanks to the growth of the cryptocurrency market, there are a few kinds of storage wallets available. Here are a few.

Mobile Wallet: These are simply mobile phone applications that can – in most cases – be downloaded and installed from Google Play store and Apple App Store. Mobile wallets are generally seen as being safer cloud-based wallets.

Online Wallet: These are the aforementioned cloud-based wallets. These wallets, like most other cloud services, have a lot to offer in terms of practicality and convenience. However, they in most instances require some extra security related layering as cloud-based services have historically been more susceptible to security breaches.


Desktop Wallet:
Like mobile wallets, desktop wallets are another popular choice among crypto investors as they are also considered to be safer than online wallets. An interested investor gets their hands on one of these by downloading and installing the wallet onto a PC or laptop. Desktop wallets carry a risk of loss if your device is damaged or infected by a virus.


Hardware Wallet:
A hardware wallet is considered to be one of the safest ways of storing your crypto investment. These wallets typically manifest in the form of a USB drive. Conveniently, a user is able to transact in cryptocurrency by simply connecting a hardware wallet to an internet enabled device and authorizing the said transaction. These wallets are also viewed as being the most expensive way to store crypto.


Paper Wallet:
A Paper wallet is a printed physical copy of a user’s generated public and private key. Considered the safest storage method by far, the name paper wallet may in some instances refer to a physical piece of paper. Funds can be sent to and received through these wallets by simply scanning a QR code to initiate a transaction.

 

STEP [3] The third step is to choose a means/method of cashing out on your cryptocurrency investments, should the desire or need to do so arise. For those who would have taken the risk of investing in lesser-known altcoins, the task now would be converting whatever crypto asset you hold in one of the more mainstream cryptocurrencies such as Bitcoin, Ethereum or Litecoin.

The difficulty of this process may differ dramatically from region to region, this is due to the differing financial regulations from country to country. Where applicable, the best way to offload crypto for cash is on regulated exchanges that offer support for fiat deposits and transactions such as Coinbase or Kraken.

There are less direct methods of investing in the cryptocurrency market. For example, one’s investment capital could get indirect exposure to crypto by investing in NASDAQ AMD or Nvidia stocks. Alternatively, one could also get into the much talked about Bitcoin futures markets.

As is the case with all other investments, the risk of losing your capital is very real. There are countless stories about bad investing and outright fraudulent start-ups in the cryptocurrency market.

Cryptocurrency Investment Risks

The cryptocurrency market offers ample opportunity to make astronomical gains from investing, however, digital assets are a new market altogether. Despite being recognized in a number of territories as an actual asset class, investing in cryptocurrencies, due to novelty, is still considered a high-risk activity. The most common risk factors currently impacting the market are;

Cryptocurrency Market Volatility


Digital assets are an emerging asset class. As such, the cryptocurrency market, though currently experiencing a frenzied rate of innovation, still carries are lot of uncertainty. Stemming mostly from global governments’ slow and, at times, ambivalent response to cryptocurrencies, market volatility denotes a rather skittish investor sentiment.

Though institutional heavyweights like Nasdaq and Intercontinental Exchange have announced intentions to make forays into cryptocurrencies and could potentially help bolster investor confidence and curtail run-away crypto price fluctuations, regularity clarity from the higher -ups would likely offer investors a clearer picture regarding the cryptocurrency market’s future.

Rumors

Because the cryptocurrency market currently enjoys virtually no regulatory oversight, the rumor mill plays a significant role in some investor’s decision-making process. Regulatory, Institutional, and Regional moves have, in the past, affected the market and have triggered a buying frenzy or caused investors to relinquish their positions.

In The past, regulatory moves from Chinese authorities had the largest impact on bitcoin’s price. In 2017 China’s crackdown on crypto exchanges and Initial Coin Offering fundraising activities saw the top cryptocurrency by  market capitalization shed over 30% of its value and drop to about $3,350 from a previous high of more than $5,000. Other regions have since swallowed the Asian nation’s control over the cryptocurrency market as evidenced by the country’s civil court recently ruling that Bitcoin is property protected by law.

Consistent reading on current industry developments is the most effective way of making informed decisions.

Security

Reports of cryptocurrency exchanges and wallets being compromised by hackers are commonplace in the cryptocurrency market. Hackers have been known to exploit weaknesses in exchanges wallets and at times, the very platform digital assets are built on; such as the Parity hack which took place in mid-2017.

Another common way for investors to lose their funds is by investing in a scam ICO. This occurs chiefly because most investors fail to perform sufficient due diligence on a project and pursue a get rich quick approach to investing and end up putting their funds into an unsound project.

 Research and looking for projects that offer solutions to real-world problems will reduce the risk of following the crowd into a dud project. One should also ensure that their funds are moved exchanges to secure wallets regularly to mitigate the risk of crypto assets being stolen in the event of their chosen exchange being compromised.

Regulation

Governments worldwide have begun to make efforts to first, understand cryptocurrencies, and second, develop guidelines for the use, and taxation of cryptocurrencies. Though some governments have outlawed their use and other taking a friendly stance on cryptocurrencies, a number of countries have offered a measured response to the fledgling cryptocurrency market.

Though regulatory bodies like the US’s Securities Exchange Commission, South Korea’s Financial Supervisory Service and various financial overseers across the Europe and Asia are making efforts to regulate cryptocurrencies, their disparate approaches tend to cause confusion that is reflected in crypto price movements. Negative or positive murmurs regarding regulation are usually enough to send a digital asset’s price hurtling towards the moon or plummeting to bearish lows.

Time and increased comprehension of cryptocurrencies by regulators may lead to more decisive regulatory moves, which may in turn, give investors clarity on what they may or may not do, leaving less room for speculation.

Liquidity

Liquidity Risk is essentially the chance that an investor won’t be able to liquidate an investment quickly enough and at a reasonable enough price. Lack of liquidity also opens the market up to the risk of price manipulation, where a ‘whale’ buys a large amount of low market cap cryptocurrency, affecting bid-ask spreads and triggering large price increases.

The cryptocurrency market offers many opportunities for whale activity at the moment, however entry from institutional players and regulatory clarity could potentially see the market grow, liquidity wise. Until such a time, it is advisable that investors buy into coins that enjoy wide adoption and are supported on multiple exchanges despite the upside potential offered by coins that are lower on CoinMarketCap list.

Risk Mitigation

Diversification

Another method cryptocurrency investor’s use to mitigate the risk of losing their shirt is diversification. By Spreading capital across a number of assets mitigates the risk of getting wiped out in the event of an asset doing a nose dive overnight.

Investing in multiple coins also gives investors better gains in the event of the digital assets market experiencing a rally and prices shoot up across the board. Investors who opt to diversify their portfolio tend to enjoy fairly good gains in the long run

Low investment

It is almost, a rule of thumb that any investors dipping a toe in the cryptocurrency market invest 10-20% of their income into cryptocurrencies. Though incidents of new investors re-mortgaging a house has been known to occur, it is wiser to only invest funds that an investor is willing to lose. 

10-20% of one’s income is said to also keep one from becoming emotionally involved and possibly making bad calls as a result.

 

Future Potential of Cryptocurrencies

Though the cryptocurrency market is currently plagued by a lot of risk, interest from mainstream financial heavyweights like JP Morgan in both the distributed ledger technology and cryptocurrencies indicates large upside potential. With only 0.013% of global assets and money in crypto, there are a lot of consumers who go largely ignored by traditional financial institutions whose entry into the cryptocurrency market could potentially increase overall market capitalization.

2017 saw Cboe and CME allowing investors to purchase futures contracts based on bitcoin. The success of that project has them working on expanding their futures offerings to Ethereum and possibly Litecoin. These moves, as reports suggest, only serve as a precursor to the impending institutional wave of investments, which will likely be triggered by the SEC’s approval of a cryptocurrency-based ETF.

ICE as well as NADAQ are reportedly also gearing up to offer direct cryptocurrency trading as well as cryptocurrency based financial products as early as the second quarter of 2019. Though cryptocurrencies are in their design, anti-institution it seems that recognition from financial powerhouses may be instrumental in driving adoption.

Even the ICO crowdfunding vehicle seems likely to experience transformation as blockchain companies seek to be more compliant. Projects like DESICO offer a platform for the trading of EU compliant security tokens while in the US, the SEC has declared that some cryptocurrencies bare the hallmarks of securities and are thus being regarded as such.

For more information about cryptocurrency like bitcoin and other altcoins, visit KryptoGraphe’s blog.

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