How to Invest in Cryptocurrency

See also: Understanding Investing

Are you wondering how to get a piece of the Bitcoin boom?

You’re not alone. A bevy of media attention and dramatic market activity for tokens like Bitcoin and Ethereum has many prospective investors excited. The problem is that very few people are confident enough in their knowledge of cryptocurrencies to invest in them soundly.

Conflicting messages from too many self-proclaimed “experts” have paralyzed many would-be investors and prevented them from acting on their interest in this global financial phenomenon.

Let’s get one thing straight: we can’t tell you exactly what cryptos to stake your savings on, or when exactly to buy and sell them. What we can—and will—do is provide valuable information on how cryptocurrency works so that you can gain a deeper understanding of how its value changes. At that point, you’ll be able to invest in the cryptos of your choice the same way you invest in any other asset: with educated guesses and cautious optimism.

Blockchain Explained

Crypto Basics: Blockchain Explained

To understand cryptocurrency, you have to understand blockchain. Blockchain is the technology that makes cryptocurrencies secure and anonymous. Basically, blockchain provides a digital record of transactions, and stores copies on multiple devices across a global network whenever the record is updated. As such, transactions that rely on blockchain are practically immune to fraud—they can always be verified multiple times over.

Prior to blockchain, most digital records were stored in a single server bank. If you could hack into the servers where those records were kept, you could change them. However, because blockchain’s copies are stored on anonymous devices all over the world, it would be extremely difficult to hack them all. In fact, just identifying the devices you needed to access would be a herculean task.

Understanding Crypto Volatility

Blockchain also allows cryptocurrency transactions to be anonymous. You can’t always see who is buying, selling, or using a given token.

Cryptos like Bitcoin are only partially anonymous—they require a registered Bitcoin address, but this address does not have to be connected to a legal name or physical location. Bitcoins are stored in digital wallets, which can be accessed by anyone with the required code. Many other cryptocurrencies adopt this model, and certain tokens even offer complete anonymity for users. If you're thinking about buying cryptocurrency, the easiest way to do that is through a crypto exchange.

While anonymity offered by various cryptos has certain advantages for businesses and their customers who use tokens to conduct transactions, it also poses a risk to investors. It has become quite common for scam artists to conduct “pump and dump” schemes, where many people will coordinate to invest in a cryptocurrency at the same time. In cases where the user base for a given crypto is relatively small, these coordinated buys artificially inflate its value by large margins. When their efforts attract eager new investors, the originals sell their assets—causing the value of the token to plummet and leaving the new buyers deeply in the red.

Cryptocurrency Volatility

Lessons for Investors

If the information given above is scaring you away from investing in cryptos, consider the following: many people have made considerable amounts of money by investing in Bitcoin, Ethereum, and other tokens.

In the last five years alone, the market cap on cryptocurrencies has risen by more than 10,000 percent—an unprecedented leap in the history of investing. Knowing that cryptos are volatile isn’t supposed to stop you from investing in them; it’s supposed to prevent you from mistaking a sudden spike in the market for a sure thing. Instead of pouring your money into every new token that experiences a bump, look for tokens with a long history of appreciating in value.

That said, it is possible to enjoy extremely high returns from purchasing ICOs, or Initial Coin Offerings. ICOs are new tokens, which are normally offered to investors in the company that produces them. Many of these tokens experience huge short-term growth immediately after they are listed on an exchange—however, they also have the most potential for volatility, due to their small user base. Bear in mind that ICOs also have a high rate of failure, just like the startups that create them. Investing in ICOs is a high-risk investment that offers the potential for massive rewards, but investors should be extremely careful about doing so.

It is also worth considering that ICOs may be subject to heavy regulation in the near future. In countries like the UK, it is already notoriously difficult to start a crypto asset company, and many other nations are following suit. Well over 30 global regulators have taken a hardline stance on ICOs, citing their unpredictability as a significant liability for investors who are typically unaware of the risks they are taking.

Larger tokens like Bitcoin may have a higher barrier to entry, but they have also proven their staying power. Yes, it’s possible that sudden government regulation of the industry could cause complications for Bitcoin’s growth, but it’s also true that investing in Bitcoin is easier than ever before. Secure online services that allow you to convert money back and forth between conventional currencies and various cryptos are beginning to pop up, and merchants are beginning to accept Bitcoin as payment for goods and services. If these enterprises cause Bitcoin to replace conventional money (or even to function as a viable alternative, like credit cards), then early adopters of cryptos stand to make a killing.

Bitcoin Exchange

Investing in cryptocurrencies can be shockingly lucrative, but the potential pitfalls should cause investors to tread carefully.

Cryptocurrency is never going to be a low-maintenance investment—you’ll have to stay updated on industry regulations, watch the market carefully for fleeting opportunities, and be constantly on the lookout for signs of foul play. You’ll also have to exercise caution when it comes to choosing the cryptos you bet on. Will you risk it all for a huge payout by investing in ICOs, or jump on the bandwagon of a more established crypto and hope it stays ahead of the pack?

You should also consider the timeframe over which you want to invest. The expected outcome times can be quite different: in investing, the outcome time ranges from medium to long term, while in maverick trading, it ranges from the short to medium term.

No one can tell you exactly what to do with your money, but you can make smarter investment choices by learning about the assets you want to purchase. Watch cryptos carefully over the coming year—big things could be on the horizon.

About the Author

Nick Rojas combines 20 years of experience working with and consulting for small to medium business and a passion for journalism to help readers grow. He writes about technology, marketing, and social media for the aspiring entrepreneur.