If you’ve been thinking about venturing into the world of cryptocurrencies but don’t know where to start, then this cryptocurrency investment guide should help you get started. Contrary to what you may have heard or think about cryptocurrency investing, it is just another asset class, not much unlike investing in stocks, bonds or options.
But as a crypto investing beginner, you will have to put in some time to learn the basics. Once you have a good foundation, then you will surely become more comfortable in the space and gain more confidence. In this article, we will provide some cryptocurrency investing tips and advice that should prove useful along your journey.
To say that the cryptocurrency market has seen a huge surge in interest would be an understatement. It all stated in 2009, when the first cryptocurrency, Bitcoin, was introduced. It wasn’t until about 4 years later in 2013 that it started to gain recognition. The Bitcoin price surge started in 2017 as more and more investors began to flow into the market.
Fast forward to mid 2018, and though the market cap for Bitcoin and other cryptocurrencies have fallen dramatically from their highs, the interest in them has not waned. In fact, as of now there are close to 1600 altcoins available in the marketplace.
There are many people that are adamant that cryptocurrencies are a phase, and will not last. Others argue the other end of the spectrum, believing that this is the new era of trade and that cryptos are here to stay and will eventually replace fiat currency. No one knows for sure what the answer is, but most likely the future of cryptocurrencies lyes someone in between these two extreme viewpoints.
Many individuals that invested early in cryptocurrencies have seen their net worth rise dramatically. There is still potentially alot of upside in the cryptocurrency market, but it will not be without some downside volatility. Investors interested in allocating some of their funds to the cryptocurrency market should be keenly aware of the risks involved and buckle in for the ride.
To understand how cryptocurrencies work, you must understand the underlying technology behind it. Blockchain is the technology that enables cryptos such as Bitcoin. Essentially, a blockchain is a digital ledger that is publicly available which is responsible for tracking and recording transactions. There is a network of nodes communicating internally that oversees this entire process.
A practical example should help you understand this better. Let’s say that Joe has purchased a mountain bike from David using Bitcoin. When Joe initiated payment using Bitcoin, his request was sent through the blockchain which verified that Joe had the necessary Bitcoin to transfer to David. When this verification was complete, the public ledger was updated to reflect a reduction in the number for coins in Joe’s Bitcoin address while simultaneous adding that corresponding amount to David’s bitcoin address.
Although our example above involved using blockchain for the transfer of a cryptocurrency for commercial purposes, there are many other use cases for Blockchain. In fact, any type of information which has storage capacity can be powered by Blockchain technology. A simple way to think about this is that Cryptocurrencies cannot operate without Blockchain, whereas Blockchain can exist without Cryptocurrencies.
Major Cryptocurrency Investment Opportunities
When some investors think about cryptocurrency investing and trading, the first thing that typically pops into their head is Bitcoin. In fact, many people interchange the word cryptocurrency and Bitcoin, believing it to be the same thing.
Those that are a little better versed in this area know that Bitcoin is just one type of cryptocurrency. It is in fact the first to come on the scene and the one with the largest market cap, but again it is only one of many. The other 6 major cryptocurrency investing options that investors should know about is Ethereum, Ripple, Litecoin, Bitcoin Cash, EOS, and Cardano. We will discuss some characteristics of each now.
Bitcoin – The largest cryptocurrency by a big margin. It currently boasts a 45% share of the total crypto market. Bitcoin has skyrocket in value from about $ 70 in mid 2013 to almost 20,000 in December 2017. Bitcoin has fallen over 65% since then. Many bitcoin analysts feel that the correction is over and a new bull trend should emerge soon.
Ethereum – As the second largest cryptocurrency, it saw an astonishing growth of over 2800% in 2017. One of the biggest selling points for Ethereum is that it offers a very unique solution. Ethereum allows potential developers to build their blockchain projects using the Ethereum platform. As a result, Ethereum enthusiasts believe that this will help propel the price of the crypto in the very future and beyond.
Ripple – The third largest cryptocurrency by market cap. It essentially moved from almost $0 to its high of $2.40 by the end of 2017. As with the other cryptocurrencies the prices have fallen quite a bit. Ripple’s applications go beyond the typical digital currency realm. Its blockchain enables faster, more secure international payment transfers as well. It has partnered with many Tier 1 banks to buildout innovative solutions for the financial industry.
Litecoin – This cryptocurrency skyrocketed from around $4 in early 2017 to a high of almost $360 by the end of that year. Since then, as with all the other major cryptos, the price has been under pressure. The original intent behind Litecoin was to improve upon Bitcoin’s technology. And in that respect, it has succeeded. Litecoin is able to process transactions 5 times as fast as Bitcoin.
Bitcoin Cash – This was segmented from the original Bitcoin and launched in mid 2017. Since then, Bitcoin Cash has become one of the most popular cryptocurrencies to trade. As of now, the amount of Bitcoin and Bitcoin Cash in circulation is about the same. Bitcoin Cash has 8 times the block size compared to the original bitcoin, which translates to increased processing efficiency. The price of BCH skyrocketed from about $500 in the summer of 2017 to over $4,000 by the end of 2017.
EOS – EOS was launched in the summer of 2017. It is most similar to Ethereum and allows developers to build their applications on top of its platform. Its technology is strikingly enhanced allowing capacities of upto 100,000 transactions per second. It is also more versatile from the programming perspective than Ethereum allowing multiple coding languages to be utilized. One notable aspect of the price of EOS is that is has been impacted to a much lesser degree by the 2018 market decline in the overall crypto market.
Cardano – The founder of Cardano, Charles Hoskinson, is also the co-founder of Ethereum. And it too is a direct competitor of Ethereum, as it allows for developers to build their application using its platform. Cardano has many advancements in its technology compared to Ethereum. The price of Cardano rose from the $0.20 mark in mid-October 2017 to over $1.00 in just a few months. Since then, it has fallen sharply along with its other crypto counterparts.
Cryptocurrency Exchange Investing
By now you should be getting a little more familiar with cryptocurrencies. So, the next obvious question investors face is how and where do I go to purchase a particular digital currency? Typically, you would buy and sell your cryptocurrency through organized cryptocurrency exchanges. This is the most common method for trading and investing in cryptocurrencies online. There are a host of different exchanges out there that you can use. You will have to consider what features are most important to you when deciding on a crypto investing platform. Some considerations will include the cryptocurrencies offered, liquidity, spread, fees, and platform user friendliness.
To help you get started, I have created a list of 9 reputable cryptocurrency exchanges that you might want to consider.
Coinbase – One of the most popular and widely used platforms for buying and trading digital currencies. It has an excellent reputation and the stored currency is guaranteed through Coinbase insurance.
Kraken – Based on Euro volume it is the largest Bitcoin exchange in the world. They offer leveraged margin trading accounts for more experienced investors and traders. In addition, they provide many different digital currency options beyond Bitcoin, Ethereum, and Ripple.
Poloniex – They are a leading cryptocurrency exchange founded in 2014. They offer extensive trading tools on their platform for more active traders and investors. In addition, they offer a volume based pricing platform which is more attractive for active traders.
Bitstamp – One of the oldest exchanges around, Bitstamp has been in existence since 2011. Bitstamp is well known for its platform security features, including a fully backed cold storage service. Their initial deposit fees, however, tend to be a bit higher than many other crypto exchanges.
Bitsquare – A decentralized peer based exchange that enables clients to trade bitcoins using paper currency or cryptos. Those that want the highest level of privacy find Bitsquare fits their needs quite nicely.
Gemini – A US based Bitcoin exchange that is licensed and regulated. They must comply with very strict compliance measures and maintain the highest standards. Depositors’ funds are held at an FDIC insured bank and the digital currencies are housed in cold storage. They currently service clients in the US, Hong Kong, Singapore, Canada, and the United Kingdom.
Binance – A Malta based cryptocurrency exchange known for its low fee structure and deep liquidity. In fact, they have the most volume traded compared to nearly all other cryptocurrency exchanges. They charge about .05 % on a per trade basis.
There are a multitude of coins that you can purchase, including Bitcoin, Litecoin, and Ethereum. In addition, when you purchase any of these three mentioned coins, you have the ability to convert those holdings into many other altcoins. Binance also has an excellent cryptocurrency investing app that is worth looking into.
CoinMama – One of the larger bitcoin exchanges that allow purchases via a credit card. Their daily and monthly limit for purchases via credit card are much higher than other competitor exchanges. You can acquire upto $5,000 of coins per day or upto $20,000 per month with CoinMama.
LocalBitcoins – A peer to peer crypto exchange. It’s a platform that allows you to trade directly with other individuals in major metropolitan cities around the globe. You would setup an account with them and they maintain a rating system for those that have used to the platform.
Risks and Rewards of Cryptocurrency Investing
One of the biggest attractions of the cryptocurrency investing game, is the ability to make outsized gains in a relatively short period of time. This is what draws most investors to the asset class. For many investors, a small to moderate allocation percentage to cryptocurrencies would likely be a sound decision, and could help bolster the overall performance of their portfolio. That’s the upside.
The downside is that this asset class as a whole is still relatively new and highly unstable. So, the prudent investor should be aware of the risks present when investing in cryptocurrencies, and limit their risk exposure to a level that they are comfortable with.
Let’s take a look at some of the risks and challenges Cryptocurrencies face:
Liquidity Concerns – Liquidity is king when it comes to trading any financial instrument. Essentially, liquidity is defined as the ease and efficiency at which you can buy or sell an asset with minimal slippage. Unfortunately, since cryptocurrencies are an emerging asset class, it does not have a great deal of liquidity.
You may be able to buy and sell it in normal market conditions in a relative frictionless manner, but the risk is greatly heightened during more turbulent times or events. It is during these times that it may be very hard to unwind one’s holdings as desired in an efficient manner.
Uncertain Regulatory Landscape – There is a good deal of regulatory risk when it comes to investing in cryptocurrencies. To curve fraud, manipulation, hysteria or panic in these coins, government agencies can and will likely intervene and take steps to put regulatory restraints on this asset class. This can have a dramatic impact on the price of many cryptocurrencies.
Valuation Challenges – When you buy a stock in a company, there are many fundamental factors that you can gather and study to evaluate the “fair” price of the stock. There is no such level of transparency in cryptocurrency investment analysis, which makes it much more difficult to arrive at a “fair” price.
We have seen hysteria drive prices up to excessive levels, and panic drive prices back down in these assets. Cryptocurrencies tend to be driven up and down by human emotions rather than valuations.
Correlation Risk – It is important to consider correlation when investing in different asset classes, or instruments within the same asset class. For example, in the stock market, if you invest in Apple, Facebook, and Google, then you may perceive that you are diversified since you are investing in three different companies. But in fact, all three of these companies are within the same sector and are highly correlated.
The same goes for cryptocurrencies. Most crypto coins are highly correlated. As such you should not fall into the trap of thinking that by spreading out your investment over many different coins, that this will somehow provide you a reasonable amount of diversification. This type of cryptocurrency investment diversification would not be considered a true level of asset diversification because of the high correlation factor among the various coins.
No discussion of investing would be complete without touching on the topic of portfolio allocation. Let’s say that you have decided to invest in cryptocurrencies, have done your necessary due diligence, and are ready to commit your hard-earned capital in the market. How much should you invest?
The answer to that is not so cut and dry. Each investor will have to decide on the amount that they would like to allocate to crypto investments given their age, risk profile, financial situation, and emotional makeup. That may not be the answer you wanted to hear, but it is the reality of it.
But having said that, and generally speaking, if you are an aggressive investor, you may consider upto 20% of your portfolio in cryptos and 80% in traditional assets. If, on the other hand, you consider yourself a conservative risk averse investor, then maybe a 5-10% allocation may fit your needs.
The most important thing to keep in mind is that investing in cryptocurrencies is by its very nature a risky speculative bet, so you should only commit funds that you are willing to part with, as that might very well happen. It is always better to be prepared first than sorry later. So, sure you very well may make a small or large fortune in your crypto investments, but you must be willing to assume the risks as well for that luxury.
This article was aimed at providing you with some cryptocurrency investing basics. After reading this article, some of you may decide that you want to research further the investment opportunities available in the cryptocurrency market. Others of you may decide that this asset class does not align with your personal financial goals. Whatever you decide makes sense for you, you should do it with an open mind and consider both the potential rewards and risks involved.
What I believe that you should not do is to steer away from investing in cryptos because you find that it is too difficult to understand or fear that the learning curve is too steep. That would be doing disservice to yourself and your intellect. Go forth and do the necessary research, and then make a decision based on that. By doing so, you will walk away more satisfied with your decision, whatever that may be.