Cryptocurrency is based on blockchain technology, a chain of registration and distribution of information that is not controlled by any single institution. Instead, it functions as a record of digital transactions that are not controlled by central banks.
While cryptocurrencies have existed since 2009, Bitcoin is an outstanding example at the moment. After launching, cryptocurrency prices have been up and down. This is a natural trait of digital currencies: higher volatility and thus, a more risky investment. Now, we have more than 6,000 cryptocurrencies on the market. Bitcoin is currently the most popular cryptocurrency, attracting the most interest and investment dollars.
Despite fluctuating valuations, since December of 2020, a new wave of investing in cryptocurrencies appeared with many positive signs. Bitcoin jumped up significantly and was followed by ETH and XRP. However, it will be strange if not mention Dogecoin which has increased in value by 12,00% in the last few months and is the “hottest” cryptocurrency right now with of course higher volatility and risk.
People have invested in Bitcoin turning into millionaires, let me give you an example: Charlie Shrem being among the youngest millionaires from Bitcoin. Charlie Shrem began his career as a co-owner of EVR, a popular Manhattan gastropub. By the way, this establishment was one of the first to accept Bitcoin payments. Shrem initially purchased Bitcoins for $3–4. When it reached $20, he bought a few thousand more. And I guess you know the result. Besides, also plenty of people “losses” because of investing in other cryptocurrencies.
Then, what do we need to do? how should we invest? Here are three tips you might find useful before investing in any cryptocurrencies as a beginner:
- Allocated only a small percentage of your portfolio to Cryptocurrencies
In any case, cryptocurrency should account for a very small portion of your overall portfolio. It is entirely up to you how much you pay. However, investing more than 10%, or even 5%, should be avoided. Understand that cryptocurrency is not an investment like a stock. It does not pay interest or dividends, similar to gold and silver investments. To the point that cryptocurrency will be a good investment, its price must rise significantly — and remain there for an extended period of time.
2. Choose your Cryptocurrency wisely
Do not choose your cryptocurrency based on “noise” and “hype”. A wise crypto investor will not make decisions based on hype and noise, because it is extremely risky. If you want to make money investing in cryptocurrency, you must take calculated risks and seek advice from the right people. It’s not a good idea to base your decision on what the crowd thinks about a coin. The price could drop like a stone unexpectedly, leading to a huge loss.
Aside from its superficial value, a cryptocurrency will usually serve a purpose, and this makes it more valuable. For instance, Bitcoin was created as a way for people to send money over the internet. This, among other reasons, has allowed Bitcoin to become “hot” over time
3. Invest what you are willing to lose
There are numerous other low volatility investment opportunities available. If you’re a risk-taker, though, spend just what you are prepared to lose in case things go wrong. Most importantly, there is no rule about investing the same amount. Just because Sharon invested $4,000, does not mean that you must do the same. If you want to risk more than Sharon, that is your choice. If you want to risk less, that is also your choice. What matters is that you stay within your budget. That is all you’re willing to give up.
“Many digital currencies have distinct use cases, and you should understand the value proposition of a potential investment before committing capital,” Grayscale Investments - CEO Michael Sonnenshein said in an email.
*** Personal perspective
I believe cryptocurrencies can be a good way to invest. However, we need to truly understand how they work, and there is no real rush to do this. If you rush to invest in cryptocurrencies while you still do not understand this market, you could lose a lot of money. People are eager to see others’ success and then earn their money from investing in cryptocurrencies. At the same time, they know that do not want to invest immediately without spending the time to investigate, learn, and understand the market. This explains why some people succeed in cryptocurrency investing, and some fail. In short, I could say it is because of a lack of knowledge, patience of investment.
As Rick Falkvinge said: “Bitcoin will do to the banks that email did to the postal industry”.
People believe that cryptocurrencies could replace real money in the future. It is a possibility to replace paper money, but it can only happen when cryptocurrencies have very, very low volatility, meaning they are “stable coins”. Then, maybe real money could be replaced.
I would love to know your thoughts on this! Have you invested in cryptocurrencies? What was your experience?