How to Invest in Cryptocurrencies: Step by Step to Get Started Safely
Cryptocurrencies are digital or virtual assets designed to work as mediums of exchange. The first and most popular cryptocurrency, Bitcoin, was created in 2009 with the intention to decentralize the production of money and eliminate the need for banks or financial intermediaries.
However, the extreme volatility witnessed in the cryptocurrency market often deters novice investors. The uncertainty regarding future price movements can generate distrust towards investing in these relatively new digital assets.
Choosing the Right Cryptocurrency
Bitcoin (BTC) is the dominant cryptocurrency, accounting for over 40% of the total crypto market value. Besides Bitcoin, other major cryptocurrencies include Ethereum (ETH), Tether (USDT), USD Coin (USDC), and Binance Coin (BNB).
While Bitcoin is known as “digital gold,” Ethereum provides a platform for developers to build decentralized apps and smart contracts. Meanwhile, stablecoins like USDT and USDC aim to peg their value to fiat currencies.
When deciding which cryptocurrencies to invest in, conduct thorough research on their real-world utility, development activity, and financial fundamentals.
Cryptocurrency Exchanges
Cryptocurrency exchanges are platforms that allow you to buy, sell and trade digital currencies. They can either be centralized, where transactions are facilitated through a middleman, or decentralized (DEXs), which connect buyers and sellers directly via smart contracts.
When selecting an exchange, pay attention to aspects like fees, security practices, payment methods, and country regulations. Some well-known exchanges include Coinbase, Kraken, Gemini, Crypto.com, Binance, and FTX.
Cryptocurrency Wallets
A cryptocurrency wallet stores your private keys and allows you to receive, send, and track your digital assets. Wallets can be categorized into:
Hot Wallets
Online software wallets connected to the internet like web browsers or mobile apps. Convenient for frequent transactions but more susceptible to hacking. Examples: Metamask, Exodus, Jaxx.
Cold Wallets
Offline devices not connected to the internet that provide better security. Transactions need to be manually approved on the device. Examples: Ledger, Trezor, SecuX.
Paper Wallets
Your keys printed or written on a piece of paper stored offline. No specialized hardware needed but can be inconvenient.
In terms of security, paper or cold hardware wallets provide the best protection for long term holdings. Hot wallets complement them well for actively trading smaller amounts.
Investment Strategy
Dollar Cost Averaging
Invest fixed amounts at regular intervals regardless of price. Helps reduce impact of volatility over time.
Hodling
Holding cryptocurrencies long term even during market corrections. Based on the idea that prices could eventually rebound to higher levels.
Taking Profits
Selling portions along the way to recoup initial capital and realize some gains. Helps lock in profits amidst volatile conditions.
In most cases, a combination of these strategies works well. Dollar cost average over several months, hodl a core position for the long term, and sell marginal amounts to take profits if prices spike.
Risks and Challenges
Volatility
Extreme price fluctuations within short periods. Makes investing challenging and stressful for many.
Cyber Attacks
Online exchanges and hot wallets vulnerable. Could result in theft of funds if not careful. Cold storage provides better protection.
Losing Private Keys
Wallets linked to carefully-generated private keys. Losing access essentially means losing your cryptocurrency assets.
While promising as an emerging asset class, cryptocurrencies carry higher levels of risk. Education on the market and caution with investments is strongly advised.
Investing in cryptocurrencies provides exposure to a dynamic, internationally-traded financial asset fueled by incredible tech innovation.
While the volatility can be discomforting for casual investors, embracing a long-term perspective and heeding basic security measures helps mitigate common hazards.
Dollar cost averaging a diversified crypto portfolio, storing the majority offline in cold hardware wallets, taking intermittent profit-taking, and continuously learning, together set the stage for prospering through calculated, responsible crypto investing. Over time, perseverance and patience amidst any lingering doubts could potentially yield fortune-altering returns.