Cryptocurrencies change a lot, but that change can create opportunities for profit if you are looking to trade these digital currencies. Cryptos like Bitcoin and Ethereum have risen tremendously since their debut – but they’ve also experienced a lot of turbulence along the way. Experienced traders have been delving into cryptocurrencies for years, but how do you get started if you’re new to the crypto market?
Here’s how to start investing in cryptocurrency and what serious risks you should be aware of.
5 steps to investing in cryptocurrency
First of all, if you want to invest in crypto, you need to organize all your money. That means having an emergency fund in place, a manageable debt level and most importantly a diversified investment. Your crypto investment can be another part of your portfolio, which helps increase your total return, hopefully.
Pay attention to these five things as you start investing in cryptocurrencies.
1. Know what you’re getting into
As you would with any investment, understand exactly what you are investing in. If you’re buying stocks, it’s important to read annual reports and other SEC filings to thoroughly research the companies. Plan to do the same with any crypto currency, since there are thousands of them, they all work differently and new ones are created every day. You need to understand investment terms for every trade.
In the case of most cryptocurrencies, there is nothing backing them at all, not a solid asset or a currency of the underlying thing. That is the case with Bitcoin, for example, where investors rely only on the person paying more for the asset than they paid for it. In other words, unlike stocks, where the company can start its profit and bring you back that way, many crypto assets will depend on the market being more optimistic and highly for profit.
Some of the most popular coins include Bitcoin, Ethereum, Solana, Dogecoin and Tether (a stablecoin). So, before investing, understand the potential upside and downside. If your investment is not backed up by an asset or investment, it may be worthless.
2. Remember that the past is past
A mistake that many new investors make is to focus on the past and exclude the future. Yes, Bitcoin used to cost pennies, but now it’s worth more. The main question, however, is “Will the growth continue in the future, even if not at that meteoric level?”
Investors look to the future, not the past. What will make future returns? Investors buying cryptocurrency today want tomorrow’s profits, not yesterday’s.
3. Check the change
The price of cryptocurrencies is as volatile as an asset can get. They can quickly fall apart in seconds with nothing more than rumors that eventually prove to be baseless. That can be good for sophisticated traders who can make quick trades or who have a strong understanding of market fundamentals, how the market is going and where it will go. For new traders who don’t have these skills – or the advanced algorithms that guide these trades – it’s a minefield.
Volatility is a game for high-powered Wall Street traders, each of whom tries to out-pocket other investors. A new investor can easily be crushed by volatility.
That’s because change makes customers nervous, especially beginners, who are nervous. Meanwhile, other customers can come in and buy at a lower price. In short, volatility can help sophisticated traders “buy low and sell high” while inexperienced investors “buy high and sell low.”
4. Manage your risk
If you’re trading any asset on a short-term basis, you need to manage your risk, and that can be especially true with volatile assets like cryptocurrency. Therefore, as a new customer, you need to understand how best to manage risk and develop a system that helps you reduce losses. And the process can vary from individual to individual:
– Risk management for the long-term investor may not sell, regardless of the price. A long-term perspective allows the investor to be involved in the situation.
– Risk management for a short-term trader, however, may set strict rules for when to sell, such as when the investment falls 10%. The seller follows the rules carefully so that a relatively small discount does not turn into a disappointing loss later.
New customers should consider setting aside some trading capital and use only a portion of it, at least at first. If the situation is against them, they will still have money saved to trade later. The most important thing is that you can’t trade if you don’t have any money. So keeping money in a safe place means you will always have the bank to support your business.
It is important to manage risk, but that will come at an emotional cost. Selling a losing position is painful, but doing so can help you avoid worse losses later.
5. Don’t invest more than you can afford to lose
Finally, it is important that you avoid investing your money in illiquid assets. If you can’t lose it – all of it – you can’t invest it in a risky asset like cryptocurrency, or other speculative assets, for that matter.
Whether it’s a down payment on a house or an important purchase, the money you need over the next few years should be kept in a savings account so it’s there when you need it. But if you are looking for a good return, the best option is to pay high interest rates. You will earn (or save) any interest you pay on the loan. You can’t miss there.
Finally, don’t forget the security of any exchange or broker you use. You may own those assets legally, but someone still has to protect them, and their protection should be strictly enforced. If they do not feel that their cryptocurrency is well protected, some consumers choose to invest in crypto wallets to keep their coins online so that hackers or others cannot access them.
Remember that investing in cryptocurrency can be part of a larger investment strategy, but should not be your only one.
Other ways to invest in cryptocurrency
While investing directly in cryptocurrency is popular, consumers have other ways to get into the crypto game, some more than others. These include:
-Crypto futures: Futures are another way to run on price changes in Bitcoin, futures allow you to use the power of leverage to generate large returns (or losses). The future is a fast-moving market and makes volatile movements in crypto even worse.
—Bitcoin or Ethereum ETFs: In 2024, the Securities and Exchange Commission approved several exchange-traded funds investing directly in Bitcoin and Ethereum. Spot Bitcoin and Ethereum ETFs are available through many online brokers that offer traditional securities such as stocks and bonds. Therefore, these ETFs can be an easy way to buy crypto from financial products.
—Crypto exchange or stock broker: Buying stocks and companies that are ready to benefit from the rise of cryptocurrency regardless of the winner can be an interesting option, too. And that’s the power in an exchange like Coinbase or a broker like Robinhood, which makes a lot of its money in crypto trading.
—Blockchain ETFs: Blockchain ETFs allow you to invest in companies that can benefit from the emergence of blockchain technology. The leading blockchain ETFs give you exposure to some of the most publicly traded companies in the space. But it’s important to note that these companies often do more than crypto-related transactions, which means that your exposure to cryptocurrency is diluted, reducing your leverage.
Each of these methods varies in riskiness and exposure to cryptocurrency, so you need to understand exactly what you are buying and whether it suits your needs.
Cryptocurrency investment FAQs
How much money should I start investing in cryptocurrency?
In theory it only takes a few dollars to invest in cryptocurrency. Many crypto exchanges, for example, have minimum trades that may be $5 or $10. Other crypto trading tools may have lower minimums.
However, it is important to understand that some trading platforms will take a large chunk of your money as money if you trade small amounts of cryptocurrency. So it’s important to look for a broker or exchange that lowers your costs. In fact, many so-called “free traders” put a fee – called advertising – on the price you pay for your cryptocurrency.
How does blockchain work?
Cryptocurrency is based on blockchain technology. Blockchain is a type of database that records and stores every entry into it. The best way to think of blockchain is as a receipt of transactions running. When a blockchain database powers a cryptocurrency, it records and tracks transactions with the currency, tracking the movement of money and who owns it.
Most crypto blockchain databases use decentralized computer networks. That is, many computers do not work in the database, checking and checking the transactions to ensure that they are correct. If there is a discrepancy, the network computer will resolve it.
How do you make cryptocurrency?
Some cryptocurrencies reward those who analyze transactions in the blockchain database in a process called mining. For example, Bitcoin miners solve complex mathematical problems as part of the verification process. If they are successful, the miners receive a reward of Bitcoins.
To mine Bitcoins, miners need powerful processing units that consume a lot of energy. Many miners build large chambers full of such mines to extract these rewards. As of October 2024, running the Bitcoin system burns as big every year as the country of Poland.
How do I invest in Bitcoin?
If you want to invest in Bitcoin, you have a variety of ways to do it, and you can work with many companies, including:
— Crypto exchanges: Exchanges have some of the largest selection of cryptocurrencies, and they are often competitive in price. The top players include Coinbase, Kraken and Binance, but there are many others.
— Traditional brokers: Many traditional brokers also allow you to trade Bitcoin in addition to stocks and other financial assets, although they have a limited selection of other cryptocurrencies. Some of the top online brokers for beginners allow users to trade crypto, including Interactive Brokers and Robinhood.
– Financial instruments: Many financial instruments allow you to trade Bitcoin and a few other cryptos. The most popular players here include Robinhood and Webull as well as payment apps like PayPal, Venmo and Cash App.
If you are looking to buy Bitcoin, pay close attention to the fees you pay. Here are some other points to look out for when buying Bitcoin.
What are altcoins?
Altcoin is an alternative to Bitcoin. Years ago, consumers would use the term without fear. Since Bitcoin is the largest and most popular cryptocurrency, everything else is explained in relation to it. Therefore, everything that is not Bitcoin is included in the category called altcoins.
Although Bitcoin remains the largest cryptocurrency by market capitalization for a long time, it is no longer the only game in town. Other altcoins such as Ethereum and Solana have grown in popularity, making the altcoin issue a little less clear. Now, with a reported 15,000 or more cryptocurrencies in existence, it makes more sense than ever to define the industry as “Bitcoin and everything else.”
Under the ground
Cryptocurrency is a very dangerous area of ​​the market, and many smart investors have decided to invest their money elsewhere. For beginners who want to start trading crypto, however, the best advice is to start small and only use money you can afford to lose.
Brian Baker of Bankrate contributed to this report update.
Visit Bankrate online at bankrate.com.
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