Cryptocurrency trading and investing have gotten more mainstream in the past decade. It is estimated that there are hundreds of millions of crypto investors and traders globally. However, with cryptocurrencies being highly complicated, most beginners don’t know where to start. This article will look at how cryptocurrencies work and how to invest in them.
How cryptocurrencies work
Cryptocurrencies like Bitcoin and Litecoin are digital currencies that solve the challenge of centralization that exists in fiat currencies like the US dollar and euro. They use Distributed Ledger Technology (DLT), which stores data using different cryptographic technologies. As such, cryptocurrencies remove the need for a central organization that controls demand and supply.
There are two main types of cryptocurrencies: coins and tokens. Coins are cryptocurrencies that exist in an independent chain like Bitcoin, Ethereum, and Ravencoin. Tokens, on the other hand, are built on top of existing chains like the BNB Chain and Ethereum. They are mostly used for governance purposes and for payments within a network.
Another unique type of crypto is known as a stablecoin, which solves the volatility challenge that exists in the industry. Stablecoins like Tether and USD Coin are backed by a stable reserve asset like the US dollar or the euro.
How to invest in cryptocurrencies
Investing in cryptocurrencies has become easier in the past few years since the number of companies offering the service has grown. In addition to crypto exchanges, mainstream companies like Robinhood, Schwab, and Fidelity have started offering these services. Similarly, payment wallets like PayPal and Skrill have made it possible for people to buy and hold cryptocurrencies.
The first stage of investing in digital currencies is to have a good understanding of what they are and how they work. Fortunately, there are many free and premium materials, like books and videos, that you can use to learn about these coins.
The next stage is finding a good crypto exchange. An exchange is a company that provides a platform where you can find thousands of coins and tokens and then invest in them. There are hundreds of exchanges in the industry today, and you should do some research to find the best. A good exchange should have a good reputation, strong safety standards, and affordable fees.
There are two main types of exchanges that you can use: centralized and decentralized. Those that are centralized are governed by a central authority that establishes all fees and terms of use. Decentralized exchanges are more complicated since they are operated by a decentralized autonomous organization (DAO).
Do your research
The next step when investing in cryptocurrencies is to do your research. There are a number of things to consider in all of this. First, consider the macro environment. In most cases, digital currencies do well in periods of low interest rates.
Second, look at key catalysts that will push the currency higher. Some of the top catalysts that move cryptocurrencies are upgrades and network events. For example, Bitcoin tends to rise towards its merge event.
Finally, allocate some capital to the coin that you are interested in and then store them in a cold wallet. A cold wallet is considered safe since it is not connected to the internet.
Summary
Investing in cryptocurrencies can be a rewarding exercise. For example, people who bought Bitcoin a decade ago have outperformed those who invested in stocks and gold. However, digital currencies are highly volatile.
Therefore, you should use several risk management strategies to avoid big drawdowns. For example, you should avoid using excessive leverage and risking too much capital. This means that you should invest only what you can afford to lose. Also, you should learn how cryptocurrency gains are taxed in your country.
