As of 2021, 1 in 10 people invests in cryptocurrency.
Gone are the days when crypto was only reserved for the tech-savvy. They’re now so mainstream, they could be a part of your grandparent’s portfolio.
But because they’re so popular, a lot of people invest without understanding them. This can get you into a financial pickle if you make the wrong crypto choices.
It doesn’t have to be this way though! Keep reading for our guide on what to know before you become a crypto investor.
1. There’s a Limit on Supply
To make an asset valuable there needs to be a scarcity or it needs to be difficult to get hold of. That’s why there is more value to oil than there is dirt. This is also one massive reason why governments can’t keep printing as much money as they want.
So, to make it a success, the inventors of crypto had to recreate this in the digital world. If you could get your hands on unlimited numbers of Bitcoin, it wouldn’t justify the value of $1,000 for a single coin.
To solve this issue, creators set the supply of Bitcoin to 21 million. Each day, this figure goes down as people continue to mine it. Whether this figure was enough is something that’s a hot topic of debate. Many experts speculate that more Bitcoins will need to come out for this system to work.
Again, we use Bitcoin as an example, but they don’t all work the same. Most though have a financial or mechanical limit to them. This either limits the stock available to invest in or makes the coins hard to get.
2. Blockchain Technology Is the Base
If you’re looking into crypto, likely, you’ve already heard of blockchain technology. It’s one thing to have heard a term, but could you explain it to someone else with no knowledge? For a lot of budding cryptocurrency investors, the answer is no.
At its most basic, blockchain technology forms the infrastructure that supports crypto. Bitcoin investor options and other cryptos aren’t centralized because of it. This means they’re an alternative to the centralized financial institutions you’re used to.
With crypto, there aren’t any middlemen at the bank securing your savings accounts. Blockchain instead makes a public digital ledger of sells and buys that’s anonymous. They’re made up of blocks in a chain, which is where it gets its name from.
With complex cryptographic incentives and protocols, it’s the users keeping the infrastructure going. At the same time, they’re not sacrificing efficiency, security, and anonymity. At least that’s the theory behind the technology in place.
If you think that sounds vague, you’re right. This is because blockchain performs in a different way for each crypto. For example, with Bitcoin, users “mine” new blocks. They search for the correct cryptographic combination to verify a sale.
This helps to form the blockchain and provides the rewards of Bitcoin for those mining it. On the flip side, a lot of other cryptos are using a staking system. This is where users place assets down to verify sales. In return, they might get some of the transaction fees.
3. You Can Break Them Down Smaller
If you’re following crypto and bitcoin investing news then you’ll see them valued at a lot of money. At least in U.S dollar terms. Even when Bitcoin saw a huge value drop in 2019 it didn’t dip below $3,000.
This isn’t exactly practical if you want to buy a coffee or use it to sort your groceries out. It’s also not good for a crypto currency investor who wants fractional stock, not a whole bitcoin. It’s not all lost for the bitcoin investor though, or any crypto investor.
It’s possible to split Bitcoin down into units. Think of it like U.S dollars breaking down into cents or British pounds into pennies. The smallest unit is a Satoshi (named after Satoshi Nakamoto – the founder).
A Satoshi is worth 0.00000001 of a Bitcoin. Other units include the millibitcoin (0.001 of a bitcoin) and a microbitcoin (0.000001 of a Bitcoin). Similar systems are in place for other cryptos too. So, despite the soaring price gains, you’re not locked out of buying smaller amounts.
4. They’re Anonymous to Use
When you pay money into a traditional account, the financial institute knows who you are. This isn’t the case when you invest in cryptocurrencies.
Say you buy some Ether using a reputable exchange. The way it works is you need to transfer that currency into a digital wallet where you store your crypto. The company hosting this wallet doesn’t know who you are.
Instead, you’ll use two 16-digit passwords (private key and public key). The private key confirms the trade, the public one makes sure they’re sending it to the right person.
In an age where our personal data is easy to get for governments and big businesses, privacy is key. Anonymity is becoming more and more important to the general public, and this is a huge perk of crypto.
5. Mass Adoption Is Still Way Off
Mass adoption is where people are not only investing in crypto on a large scale but using it daily. Think of how we use our current money systems like dollars. At mass adoption, you’ll get your birthday money from Grandpa in Dogecoins or similar.
With crypto at the top of the news columns so often, it can seem like mass adoption is right around the corner. The excitement only increases when you see companies like Tesla looking to accept Bitcoin.
While interest continues to grow, the likelihood of mass adoption is still a long way off. For example, Elon Musk stated Bitcoin needed to be more eco-friendly. This was why they stopped accepting it back in 2021 and what it will take to accept it again.
6. Diversifying Your Portfolio Is a Must
The usual personal finance principles still apply to crypto. They might use blockchain technology, but it doesn’t mean you can stack all your funds into one coin. You need to diversify if you want to succeed and build wealth.
That means only using a small amount of your wealth for crypto investment. On top of this, you should spread that across a few types of currency.
Have 1 or 2 big names for stability and then dip into 3 or 4 small/medium name currencies that are up and coming. If you’re looking for something new, why not look into the 5G stock market instead of a new coin.
7. There’s Volatility in Digital Assets
As we’ve seen, we’re far off of mass adoption for crypto and volatility plays a big part in this. Using Bitcoin as an example, on average it can fluctuate by 2.67% a day. And these fluctuations are worse on the weekends.
For many budding investors, that’s too much risk to take on. Imagine going to buy a new iPhone and realizing the price has increased in the time it took to walk to the store!
This is why the advice is to only invest a small amount of your wealth in crypto. This should be an amount that you can afford to lose. On top of this, it’s another reason why we advise you to split that investment across coins.
If you go through a reputable exchange that allows quality content, most let you set a stop-loss order. This lets you predefine the amount of money you’re willing to lose. While it’s not removing all the risk, it does make it more palatable.
8. It Can Be a Costly Investment
The common concept is that crypto is an alternative to traditional currencies. Because of this, it’s easy for people to assume that the costs will be lower. There is hope for the future in this regard, but right now this isn’t the case.
Right now it’s more expensive to buy and sell on a crypto exchange. If you use the New York stock exchange, for example, to buy an asset it won’t cost you as much in fees.
Why is this the case, you might ask? Well, the fees charged get distributed to the users who are maintaining the exchange. Because of this mechanism, incentives need to be available. This often comes in the form of getting a part of the transaction fees.
9. There Are Different Types of Crypto
Digital assets is a pretty accurate category to give to cryptocurrencies, so it’s a fair label. But we can get even more specific! There are 4 main types of crypto which are:
By this point, you should know that cryptocurrencies are digital currencies. They’re made using cryptographic protocols (digital codes).
The most well-known example of this is Bitcoin, of course. It wasn’t the first cryptocurrency though, but it was the first to get decentralized.
Another example is Litecoin which is based on Bitcoin’s source code. What makes it unique is it aims to be more efficient with cheaper transactions.
Altcoins are cryptocurrencies that came about to be an alternative to Bitcoin. Litecoin and ETH work with Bitcoin but try to solve some of its problems.
Altcoins seek to Bitcoin it completely. An example of altcoins is Stellar. Its purpose allows a network of financial systems to send and trade in all sorts of currencies. But you can’t have altcoins without using forks.
Forks change existing crypto protocols to make room for a specific altcoin. Bitcoins Cash, for example, is a fork of Bitcoin. It enables more trades per block. As a result, this speeds up the usually slow transaction speed of Bitcoin.
Tokens are the general term for the assets created on crypto platforms. But they perform specific functions that aren’t always being a currency.
Most crypto platforms will use both tokens and currencies. Ethereum, for example, uses its currency, ETH which it uses for transactions. ERC-20 is its token which it uses for smart contracts.
10. Different Currencies Have Different Use Cases
As we’ve stated, digital assets is a more accurate term but currency is more popular. Bitcoin first got its fame as an alternative to cash. The image it gave was people buying pizza with it, which is still in most of our minds.
The reality is most of these “coins” weren’t made to have the primary function of currency. After all, crypto is as much about the tech as it is finance, if not more so.
For example, Ethereum wants to make a platform for applications using smart contracts. Its native coin ETH is there to fuel and help ease this along. You can trade it, hold it in a wallet and use it for sales but this wasn’t its primary function.
Another example is EOS. It’s a smart contract platform that helps decentralized apps match with non-blockchain ones. Other cryptocurrencies will have use cases in entertainment or gambling.
But as developing a crypto trading strategy become so popular there is another use case to look at. There is room to argue that their primary function now is as a speculative asset.
11. You Can Store Crypto in Different Ways
We’ve already mentioned that you can use a digital wallet but there is more than one option here. You can hold your cryptocurrency in a hot wallet or a cold one (or both!).
Hot wallets are on the internet which gives you access anywhere at any time. For example, the exchange Coinbase uses its own cloud wallet to give users access.
In contrast, cold wallets store the crypto offline on specific hardware like a USB. The downside of this is if you lose your USB, you can’t access your investment or your account.
The trade-off seems to be choosing security and convenience. When deciding on your wallet type, think about where you would store a USB to keep it safe. Or think about how often you need access to the wallet.
Start Your Crypto Investor Journey Today
The media has ramped up the excitement on crypto but you need to give becoming a crypto investor a lot of thought. This isn’t the next quick and easy way to make millions.
You’ll need a solid crypto investment strategy and invest only what you’re prepared to lose. Crypto investment works best when it slots into an already strong, diverse portfolio.
If you found this article useful, check out our other blog posts for more investment tips and tricks.
Review 11 Factors to Consider Before Becoming a Crypto Investor.