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Investing in cryptocurrencies is becoming increasingly popular not only among people who are interested in the world of finance. Due to large increases in their prices, but also high inflation or low interest rates, people with little or no investment experience are also interested in the cryptocurrency market.
Investing in cryptocurrencies – what does it involve?
When investing in cryptocurrencies, one should be very careful. This is a new market that is just developing, so it is very easy to get abused. The cryptocurrency market is also very vulnerable to hacking attacks. Many different currencies are created every day, but also many are lost. Investing in cryptocurrencies should be based on investing only the portion of funds that you can actually lose.
A safe solution will certainly be a gradual entry into the cryptocurrency market. It is best not to invest large sums right away. It is worth learning in small steps, learning from the mistakes made.
What is a cryptocurrency?
Cryptocurrencies have stirred up a lot of controversy since their inception. Those to whom investing in cryptocurrencies has brought considerable profits see them as the currency of the future. Skeptics, on the other hand, see them in terms of speculation, as well as financial pyramids.
Cryptocurrencies can be called digital money, as they do not have a physical form, but they can perform a payment function. They have a specific value, so they can be used like virtual money, and can be purchased for specific goods or services. Cryptocurrency, however, is not virtual currency, but only a variation of it. Virtual currencies are also other contractual units that can be exchanged for normal money.
Although cryptocurrencies can be used like money, to more often they are used like investments, instead of payment. Buying as well as selling usually takes place on a cryptocurrency exchange.
The most important cryptocurrencies on the market
The cryptocurrency market is characterized by the fact that there are often many interesting projects that quickly gain popularity and a high price, and then unexpectedly go away. When deciding to invest in cryptocurrencies, you can limit your risk by choosing the most secure ones, namely Bitcoin, Ethereum and Ripple.
Bitcoin is the most popular cryptocurrency in the market. It was introduced in 2009 and decentralized, so it provides complete anonymity. Using it, gives the investor the ability to make quick transactions, make payments in online stores, as well as a high level of security. Investing in bitcoin involves the fact that this cryptocurrency has a limited volume – only 21 million units will be mined. Due to its popularity, it is characterized by huge liquidity.
This is the second – in terms of volume – cryptocurrency in the world. Its supply is constant, and the volume, contrary to Bitcoin, is not defined top-down. However, as with Bitcoin, there is no organization that regulates either the price or supply of this cryptocurrency.
This is the third largest cryptocurrency in terms of capitalization. It is considered by many to be Bitcoin’s biggest competitor – it tops in particular in terms of the speed of transactions. Bank intercontinental transfers usually take up to several days.
With Bitcoin, even on a busy network, it can take as little as 2.5 hours, and as for Ripple, it won’t even exceed a few seconds. However, it is not a decentralized cryptocurrency and cannot be dug up either. There is a fixed volume in circulation, which is 100 billion, most of which is frozen at the moment.
Read also: What is the best currency to make money on?
How and where to buy cryptocurrencies?
There are several ways to buy cryptocurrencies. The most important of these are:
- Cryptocurrency exchanges – this is the most common and safest method, which offers the possibility to buy cryptocurrencies for standard currencies, such as euros, dollars, or to exchange cryptocurrencies with each other, such as bitcoin for ripple. Cryptocurrency exchanges include BitBay, for example, and platforms that are internationally recognized include Coinbase and Binance,
- Bitomat – these are machines that are located in all major cities. In them you can exchange Bitcoin for cash, and vice versa. The whole procedure is very simple and takes only a few minutes. A person who wants to buy currency in a bitomat must first prepare a digital wallet, to which it will be sent,
- Cryptocurrency exchange – this is a fast and simple method for making transactions. It is usually done fully online. With the help of online payment, you can buy the cryptocurrency of your choice. In this case, however, you have to expect that it involves a higher commission than with a cryptocurrency exchange.
How to invest on a cryptocurrency exchange?
Cryptocurrency exchanges are a good way to invest in cryptocurrencies directly. To do this, you need to:
- Choose a cryptocurrency exchange. It is best to use a well-known and reputable exchange that offers a wide range of currencies,
- Create an account on a cryptocurrency exchange – to register, you need to provide your personal information, as well as verify your identity,
- Deposit money – the investor’s account must be credited with another currency before he can purchase any cryptocurrency,
- Choose a specific cryptocurrency – it is up to the investor to decide whether he wants to deposit funds in one or several different currencies,
- Place a purchase order – the investor can then place and complete an order to purchase one or more cryptocurrencies, following the exchange’s instructions,
- Store the purchased cryptocurrencies in a digital wallet – the wallet can be a cryptocurrency exchange or an independent provider.
Invest in cryptocurrencies through CFDs
Such a solution is the purchase of CFDs on cryptocurrencies, which investment platforms offer. CFDs are contracts for difference that represent a bet between an investor and a broker. CFDs are based on the prices of the underlying asset, such as the valuation of Coca-Cola stock, copper, oil, wheat, etc. When trading CFDs, one does not physically purchase Bitcoin, but only speculates on its future price. The main advantages of CFDs on cryptocurrencies are:
- No need to worry about storing cryptocurrencies or losing private access keys, without which the trader will not receive his money,
- Commissions are lower than when exchanging real currencies,
- You can also play on dips, which gives you the chance to make money on cryptocurrencies, regardless of the conditions, prevailing in the entire cryptocurrency market,
- An investor can use leverage, which will increase his earnings. However, be careful, as leverage is also associated with the possibility of a very large loss.
What affects the prices of cryptocurrencies?
Compared to traditional financial markets, investing in cryptocurrencies is characterized by high volatility. This is caused by a number of factors, such as:
- The price of Bitcoin – this is due to the fact that the vast majority of cryptocurrencies follow the valuation of Bitcoin, which is a kind of barometer of the entire market. Also, any sharp movements on its chart, will have a very similar effect on other cryptocurrencies,
- Situation in traditional markets – cryptocurrencies are very often correlated in some way with other assets. Such a situation may arise, when the stock market will gain significantly, and digital assets will come under strong pressure from sellers,
- Growing adaptation of cryptocurrencies in everyday life – sometimes cryptocurrency projects, are implemented by other entities, including banks, and then used for practical purposes, and this very often increases their market valuation,
- Regulation – in the early days, investing in cryptocurrencies was basically not regulated in any way. However, over time, digital assets have become the focus of central banks and regulators. Prior to the introduction of new regulations, there are usually sharp price movements.
Therefore, it’s important to keep up to date with all news that may affect cryptocurrencies.
Having already known how to buy cryptocurrencies, it is useful to know how to store them. It is not advisable to keep the digital currencies you buy in your own account on a cryptocurrency exchange. A much better solution is to buy digital currencies on what exchange, and then transfer them to an external wallet, which can take 2 forms:
- Virtual wallet – set up on a mobile app that has been designed for this purpose, such as the Coins app,
- Physical wallet – this is physical hardware that resembles an external drive. It stores the investor’s data on cryptocurrencies. This type of drive can be kept safely in a safe. When the investor wants to sell the cryptocurrencies that are encoded on it, all he needs to do is plug it into a computer or use a QR code and the right machine, which is used to withdraw funds.
Making money with cryptocurrencies – minning
Most cryptocurrencies share how they can be bought or mined. Many people have no idea how cryptocurrencies are mined, and the process is relatively simple.
Putting it briefly – there are groups of people who find themselves solving calculations with their devices, and by solving a question that requires these calculations, they can obtain Bitcoin. This is done with the help of an algorithm that combines a draw with a greater chance of winning as the contribution to solving the problem increases.
Since individuals contribute through computation, the chances of winning bitcoin increase as the number of devices made available increases, as well as their computing power. There is also a luck factor, as with standard investments. Of course, you can make predictions and interpretations, but this borders on gambling, as you can lose a lot.
You may also read: Forex investments
How to choose a cryptocurrency worth investing in?
Cryptocurrencies are very speculative investments. Investing in cryptocurrencies is not the same as other assets. Unlike other markets, the regulations that apply to cryptocurrencies are uncertain. They offer opportunities to get rich, but it is important to understand their characteristics first. If the assets are growing rapidly, they are also subject to strong declines.
Choosing the right cryptocurrency, to not the same as choosing the right stock. A share of stock is associated with ownership in a company that is profitable, or at least has the potential to be profitable for shareholders (read also: Stocks and bonds or Investing in stocks and bonds and How much money you can make on stocks). Cryptocurrencies, on the other hand, represent ownership in digital assets that have no intrinsic value.
Understanding how a cryptocurrency behaves and calculating its intrinsic value can help you avoid investing at peak times. Supply and demand dictate whether the price of a particular cryptocurrency rises or falls. The price rises when demand increases, while supply is limited. If limited supply is involved, the price goes up. So when evaluating a specific currency, 2 questions must be answered:
- How will supply increase?
- What will cause demand to increase?
Opportunities, and fears, of investing in cryptocurrencies
The future of cryptocurrencies is not known. What are the opportunities, but also the threats, facing this payment method?
Can anyone create a cryptocurrency?
The greatest value in the currency revolution is blockchain. This is the technology by which bitcoin and other cryptocurrencies function. It is widely available and copied, which is why new cryptocurrencies are constantly being created. Some of them vegetate, others fall off in a moment, and still others cling to the forefront. Coins can be issued by corporations, which is currently already happening, such as Ripple.
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The danger that arises from this is that very often only a few people own 50% of the entire cryptocurrency. It could happen that when the exchange rate, thanks to speculators’ purchases, rises several times, investors pull out the deposited funds at a profit, leaving the others in the lurch.
The state can take control of cryptocurrency
To date, no state has yet just created a cryptocurrency. However, the state does not have to create its own cryptocurrency. It can simply buy them from private investors. In this way, on the one hand, cryptocurrencies can prove to be a safe investment, and on the other hand, the effect of creating a state-owned cryptocurrency can be to outlaw the others.
The usefulness of a cryptocurrency depends on its acceptability
There are cryptocurrencies that are fast and cheap. However, the problem is for the creator of a particular one to convince business owners and e-commerce stores. The cryptocurrency, which will be the first to be used as a means of payment on sites such as Amazon and eBay, will probably be one in which people can be paid for their work. The increasing popularity of the cheap and fast cryptocurrency, may cause the value of the other currencies to fall or disappear altogether.
The rise of the cryptocurrency market
The value of the cryptocurrency market will grow as new players enter the market. The entry of cryptocurrencies into the mainstream and the addition of this form of payment in online stores is a huge opportunity for cryptocurrencies. A likely threat will be futures betting on the CME exchange, i.e. the ability to bet on the rise or fall of Bitcoin without buying it. The relatively small market makes it possible for large players to trigger, artificial movements of the cryptocurrency.
Investment in Bitcoin and other cryptocurrencies, and the gift of income
When setting up an account on a cryptocurrency exchange, an investor has a choice between a private account or a company account. A sole proprietorship or a company can invest its funds in cryptocurrencies. The need to pay income tax arises when one exchanges cryptocurrency for fiat currency, and transfers it to his bank account. Income is the difference between what the investor took out of the exchange and the amount invested.
Income from the sale of cryptocurrencies must be included as a source of income and accounted for according to either tax scale. It is worth knowing that if you run a business that involves trading cryptocurrencies, it is possible to be taxed with a 19% flat tax.
Investing in cryptocurrencies – frequently asked questions.
Earning money from cryptocurrencies is an activity that virtually anyone can engage in. Beforehand, however, it is worth learning as much as possible about cryptocurrencies and knowing the most common questions.
Is it more profitable to invest in cryptocurrencies or to save in the traditional way?
For many people, investing in cryptocurrencies, has become a form of investing their own savings. Deposits linked to a bank account tend to have low interest rates, so very often people choose virtual exchanges. In addition, cryptocurrencies have proven to be resilient to inflation and economic crisis. These are important arguments for choosing to invest in cryptocurrencies.
Which is the best cryptocurrency to invest in for the future?
The virtual exchange is characterized by the variety of cryptocurrencies available. The most popular and oldest is Bitcoin. It can be assumed that it will maintain its position in the future. The investor has a choice of quite a few less popular and shorter-lived cryptocurrencies, which can also provide a good source of income.
Which investment platform is the best for people with no experience?
An investor can choose from a number of available trading platforms. Being a beginner, it is worthwhile to pay attention that it is:
- Intuitive and easy to use,
- It offered wide access to cryptocurrencies,
- It featured relatively cheap spreads,
- It worked quickly and reliably, as seconds matter in trading. A good trading platform must not delay the investor’s movements, as this will affect the final result of the investment and may generate a loss (read more: Trading platform and Online stock market simulator).
Terminology associated with Bitcoin
When starting to invest in cryptocurrencies, it is useful to learn the key terms that are associated with bitcoin:
- Mining – in the procedure of mining, or digging, almost anyone can use a computer to generate new bitcoins. However, the computer must perform mathematical, complex calculations that are used to validate transactions. Payment for mining is made in bitcoins,
- Blockchain – all bitcoin-related transactions are recorded in a public accounting system, called blockchain. It is visible to all users. It is made up of individual blocks, generated by bitcoin users,
- Node – within the Blockchain network, each computer is referred to as a Node, or node. In turn, each node records the entire Blockchain and will check each transaction. If everything matches, the transactions are forwarded,
- Wallet – earning from cryptocurrencies is, of course, as possible, but they exist only virtually. When buying bitcoins, you need a virtual wallet, or Wallet, to manage them. It allows you to make transfers of cryptocurrency and receive digital money. A transfer in bitcoins, in principle, is no different from a normal transfer from a bank account. Instead of the account number, the money will appear at the recipient’s address, and in this case there is no need for an intermediary in the form of a bank,
- Private Key – during the creation of a wallet, a master key is created, which allows access to the investor’s bitcoins. Such a key is very important and for security it is worth making multiple copies of it, for example, on a USB stick and on paper. Without it, the investor will never get access to his account,
- Altcoins – when it comes to investing in cryptocurrencies, altcoins refers to the many cryptocurrencies that exist alongside bitcoin,
- Trading – trading financial products on an exchange. People who engage in trading are traders, and a transaction made is a trade,
- Leverage – is leverage in the derivatives market. It amplifies the fluctuation of the price, either up or down, by a specific factor, allowing not only very high profits, but also the loss of everything.
Strategies for investing in cryptocurrencies
It is worth noting at the outset that there is no one universal strategy that guarantees success. Every investment has risks, and investors should realize this. However, it is worthwhile to understand the theoretical basics that explain the strategies for buying and selling in a way that could bring profit.
There are many websites and studies on the web that aim to explain the available strategies, as well as customize them. Investing in cryptocurrencies is divided into long-term and short-term approaches. The latter involves buying virtual money and then closely following the daily market movements and rates. The short-term approach is based on a well-known principle – buy cheap and sell more expensive.
When the price of a purchased coin has increased from the rate at which the investor purchased it, it is sold at a higher price. The difference represents the investor’s potential profit. The short-term strategy is a good option for those who have a lot of time to devote to investing almost full-time, as it requires a considerable amount of time.
Those with more patience can opt for long-term investments. These can last six months or even several years. In such a situation, the investor does not have to worry about short-term spikes in quotations occurring before the time his investment ends. He simply believes in the ultimate growth in the long term. In the case of a long-term strategy, the investor does not need to spend a lot of time investing in cryptocurrencies, so it can be a side occupation.
Investing in cryptocurrencies is certainly novel and exciting. However, the most important step before investing is to gain adequate knowledge about cryptocurrencies and the technologies they use. This will help you understand the risks involved and the benefits that come with such investments.