With last year’s spike in Bitcoin value, a lot of investors wanted to learn more, and possibly jump on the growing trend, but many of them still don’t understand how the blockchain actually works.
Cryptocurrencies are an asset just like any other, making them akin to stocks and bonds that you can buy on stock trading sites, with the difference being that their value is stored in an online ledger of sorts, often referred to as a blockchain.
We’ll go over how cryptocurrencies work, what they are, and what makes them so valuable, as well as the numerous strategies you can employ when investing in this fairly new asset class on the market.
This may also help you figure out whether you’re willing to include them in your investment portfolio, and if you do, how much of it you should dedicate to cryptocurrencies.
Follow our step-by-step guide to crypto and begin your journey into the world of digital assets.
What are cryptocurrencies?
Much like regular money, cryptocurrencies each have their own purchasing power, and while some are yet to become legal tender, more popular ones like Bitcoin and Ethereum have become widely accepted.
However, mining cryptocurrencies, especially the bigger ones, isn’t exactly as easy as it was back in the day, and recently it’s become more profitable to invest in a certain currency with the goal of financial return.
It’s still a risky business though, as crypto has quickly become known for its volatility, which doesn’t make long-term investments in the asset any less viable, although there is still a lot at stake.
Despite it being extremely popular, crypto is yet to be adopted as a standard form of payment, and its status as an asset has been up for contention numerous times, but with technological advancements, it may eventually become part of our everyday lives.
How’s it different from other currencies?
The main difference that separates crypto from other currencies on the market is that it’s decentralized, which means that it’s not issued by any central authority like the government.
While this is a highly important feature in the asset’s design, it’s also what caused it to be used for a variety of illegal practices, as the payments are difficult to track, and anyone can procure it simply by trading in its dollar value.
The blockchain stores records of all transactions and those are distributed across an entire network of computers, each connected to the blockchain, meaning that virtually anyone can gain access to cryptocurrencies, so long as they have an internet connection.
Despite this, the transactions are secure, transparent, and most importantly, lightning fast, meaning that there’s no waiting time between your payment and the currency being stored in your crypto wallet.
It’s important to note that your wallet’s password should be protected at all costs, and there are even several websites to make it so only you have access to it, usually via one-time-access keys, which are available through other devices such as smartphones and computers.
The cryptocurrencies out there
As of January 2023, there are over 20k different cryptocurrencies available for mining and purchase, and it’s up to you to choose the most profitable one.
Bitcoin was one of the first successful currencies on the market, and even then, it took years for it to take off.
As for the rest, they’re commonly known as altcoins, which is an abbreviation for alternative coins, to signal that they’re different from the leading currency on the market.
Even though Bitcoin is the most valuable one, several others have risen to be up-and-running competitors to it, including Ethereum, Tether, USDC, Cardano, Dogecoin, and many more.
While some on this list don’t hold nearly as much value as Bitcoin does, they’ve got a huge following, and with it, the near-infinite potential for growth and being a good storage of value if you invest in them at the right time.
Due to the market dictating a currency’s value, save for the few that are tied to real-world currencies, such as the USDC, it’s hard to predict which of them, and when, will go up or down in price, and every investment comes with a significant amount of risk.
However, crypto has proven resilient time and time again, and even if your investment does fall through, there’s absolutely nothing stopping it from bouncing back to its original, or even a greater value with enough time.
How to invest?
Market experts recommend allocating no more than 5% of your portfolio to cryptocurrencies, mainly due to the asset’s high volatility, and if you limit your overall exposure to it, you can also reduce the amount of risk you’re facing.
Normally, in line with standard investing rules, you should never invest more than what you’re prepared to lose, but it’s always nice to include even a small amount of crypto, just for diversification purposes.
On top of this, you can also diversify within the crypto section of your portfolio as well, allocating more of it to promising coins that are less susceptible to market crashes, with just a dash of the currencies that you believe have potential.
Despite this holding true, for the most part, at least, even the larger currencies on the market tend to experience huge swings in value from time to time, and you should consider a healthy mix before diving headfirst into something like Bitcoin and Ethereum.
Crypto has jumped onto the market and sent ripples throughout the other asset classes available to investors.
Many are even calling it digital gold due to its incredible potential of being an excellent store of value.
Unfortunately, it’s yet to be fully adopted, and many investors are still unsure whether it’s got what it takes to go head-to-head with other asset classes on the market.
Finally, it’s not exactly an investment for the faint of heart, and if you don’t enjoy having high-risk assets in your portfolio, you may be better off investing in something like an ETF or government bonds, which are assets with significantly less risk compared to the rest.