The first cryptocurrency Bitcoin came into the financial world in 2009. Since then, the crypto market has been flooded with 25,000 different cryptocurrencies whose collective value is more than 1 trillion. Many investors made a good fortune after investing in these digital coins. However, not every investor is lucky enough to become a crypto millionaire or billionaire. Instances of unlucky crypto investors are out there who found their significant amount of investment disappeared overnight. Making an informed investment decision in these digital currencies requires a few basic knowledge of these virtual coins.
What is Cryptocurrency?
Cryptocurrency is a virtual or digital coin meaning it has no physical existence. Unlike traditional currencies, these currencies are not issued by a central banking system. The transactions of Cryptocurrencies happen by the use of Cryptography making it impossible for counterfeit or double spending. The transactions or issuing of Cryptocurrencies rely on a network that consists of a large number of computers. These digital currencies offer faster and cheaper money transfers and remain unaffected in the event of economic turmoil. The negative side of these currencies is mining them requires huge electricity, their volatile price, and misuse of these currencies by criminals.
Explanation of Blockchain Technology
Blockchain technology is an advanced shared database system where the database is shared by many computers in a network. Database in blockchain technology differs from the traditional databases, and data here is stored in blocks that are linked together by cryptography to form a chain. Altering data in a block requires consensus within the network. Data stored in blockchain technology is immutable or unaltered. Cryptocurrency like Bitcoin uses decentralized blockchain technology which means all users have equal control.
Inherent Risks in Cryptocurrency Investments
Investing in Cryptocurrencies is exciting, and tempting since success stories abound that investors can become millionaires overnight after investing in them. However, no investment is out of risk. Cryptocurrencies are not an exception. Before pouring your money into digital currencies, educate yourself to make an informed investment decision. Here are several key considerations to take into account before investing in Cryptocurrencies
Volatility
The price of Cryptocurrencies fluctuates wildly. These digital currencies are inherently volatile due to several factors including consumer trust, current events, influential figures, 24/7 trading, and governments. Cryptocurrencies are new. They don’t achieve customers’ trust yet. Like traditional currencies, digital currencies are also affected by current events. A tweet about Cryptocurrency from an influential figure may shoot Cryptocurrency prices up or down. Trading in Cryptocurrencies takes place all the time- no weekends, no holidays. Consequently, no one knows when the Crypto market will boom or flatten. And, finally, the fear of government intervention in digital currencies also affects its prices.
Regulatory Uncertainties
Governments’ legislation around digital currencies is always evolving. It differs from country to country. China, for example, banned Cryptocurrency trading altogether. In the case of the USA, legislation regarding digital assets is not clear and is continually changing. Before investing in this market, it is necessary to understand what are the present rules, and what may come in the near future.
Setting Investment Goals
For new investors in the Cryptocurrency market, setting realistic goals is vital. These goals could be long, and short-term as well as clearly defined and measurable.
Defining short-term and long-term investment objectives
If your short-term objective after investing in Cryptocurrencies is making a quick profit, then keep in mind that the Crypto market is extremely volatile. A particular type of digital coin may be suitable for short-term trading, while the same coin may turn bad choice just a day later. Making a profit from short-term investments out of the Crypto market depends on market trends and social signals. Regarding social signals, as stated earlier, a tweet from an important person is enough to increase the price of a particular type of Cryptocurrency.
Crypto is also a viable option for long-term investment. Although digital currency is new, however, it shows significant potential to become a worthy investment over time. The price of the First Cryptocurrency Bitcoin has increased by 12,000% since its inception in 2009. Another Cryptocurrency Ethereum saw its value increase by 92,000% since its launching in 2015. So one thing is certain had you invested in the Cryptocurrency market earlier, you would have become a wealthy person now!
Aligning investment goals with risk tolerance
Like any other investment, starting your investment journey in the turbulent water of Cryptocurrencies requires careful strategic planning, and acknowledging the threshold limit of your risk you can absorb. The threshold limit means the amount of investment you can pour into the Crypto market that will not only let you survive but also thrive. Risk tolerance varies from investor to investor. There are risk-averse investors who prefer investing in well-established coins with less fluctuation Highly ambitious investors, on the other hand, are not uncommon in the Crypto world, who don’t feel risks with new coins, or like to take part in Crypto trading like a gamble. Investment in Cryptocurrency depends on how much wealth you have, your years of experience in investment, and your emotional resilience in the event of a financial loss.
Selecting the Right Cryptocurrency
Researching and analyzing different cryptocurrencies
Selecting a particular Cryptocurrency for investment requires doing a set of homework. This includes but is not limited to studying the white paper, researching the team associated with the currency and its leadership, understanding the technology, and getting to know the community. Apart from this analysis, studying what factors influence the price of that Cryptocurrency will help a potential investor to make an informed investment decision.
Long-Term Perspective and Patience
Cryptocurrencies are a new idea but have great potential to become a worthwhile investment. It means investors need to adopt a long-term investment plan here. However, keeping patience is a real challenge in the volatile market of Cryptocurrencies. A better understanding of cryptocurrency economies may also make you optimistic about the currency.
Cryptocurrencies are not fiat currencies like the US dollar or Euro. Investing here requires a deep understanding of blockchain technology, careful research of different Cryptocurrencies, selecting a prospective currency, and a resilient mindset in the event of an economic loss.
