Guide to start investing in cryptocurrencies
If we had barely heard of cryptocurrencies a decade ago, today, Bitcoin (perhaps the best-known cryptocurrency) already exceeds the GDP of countries like Switzerland.
Worthy of Black Mirror or not?
What is clear is that digitization has been a revolution for the financial and investment world.
Cryptocurrencies are already an essential asset in many investment portfolios. We should all jump on the bandwagon and dedicate part of our savings to acquiring this type of asset.
However, it is not a super easy market to invest in despite what it may seem. That is why we have prepared this guide so that if you have considered start to investing in cryptocurrencies, you know everything there is to know.
Before investing… What are cryptocurrencies?
The first time that cryptocurrencies entered the scene was in 2009; the first was Bitcoin, which was created by a person hidden behind the pseudonym of Satoshi Nakamoto. I have published an article describing a specific P2P payment system, which he named Bitcoin. Later, this same person made public the first version of this software that managed the currency network.
To this day, the identity of Satoshi Nakamoto remains hidden, but we do know that he is one of the 20 wealthiest people in the world.
We can define cryptocurrencies, cryptocurrencies, or crypto assets, as a digital medium of exchange. Although they are not currencies, they are known as cryptocurrencies because they fulfill the same function. Still, they do not exist physically in the digital universe but are stored in a digital wallet.
Cryptocurrencies, cryptocurrencies or crypto assets, are a digital medium of exchange. They fulfill the same function as traditional currencies but in the digital universe. They do not exist physically but are stored in a digital wallet.
Cryptocurrencies have used encryption that guarantees their ownership, the integrity of the transactions and prevents copies from being made. These are decentralized assets since a single service or company does not control them, as with conventional currencies, organized by entities and banks.
Years after the appearance of the first cryptocurrencies, new ones continue to emerge that increase in value, varying depending on each one.
How do cryptocurrencies work?
During the last years, we have seen how there is speculation like that of stock market assets with cryptocurrencies.
But how exactly do they work?
The first thing you should remember is that, as we have said, they are not regulated by any institution, so they do not require any intermediary in the transactions but are governed by blockchain technology. Do you remember when we talked about it earlier in this blog? If you missed it, check out this article. In this way, these decentralized and secure models become influential among strangers who are distrusted.
So, the main difference between the functioning of cryptocurrencies and that of traditional currencies is that, while the latter see their value modified according to the interests of the banks, each cryptocurrency has its algorithm.
In other words, the algorithm itself manages the number of new units that are issued each year (for example, in the case of Bitcoin, every four years, the quantity produced is reduced by two).
Currently, cryptocurrencies are not considered a means of payment, so they are not covered by customer protection mechanisms like the Deposit Guarantee Fund or the Investor Guarantee Fund.
What stands out most about the operation of cryptocurrencies is that when you make any transaction, you cannot modify or cancel it. All you can do is “reverse” it by executing the opposite.
As they are digital assets (not physically available), you must acquire a virtual purse or wallet.
To exchange traditional currencies (such as the euro) for cryptocurrencies, there are exchanges, which are companies dedicated exclusively to it.
Advantages and disadvantages of investing in cryptocurrencies
Yes, cryptocurrencies have become a magnet that attracts more and more people, and before deciding, you should take stock of the pros and cons:
Advantages of investing in cryptocurrencies
- They are global currencies – As we have said, these currencies are decentralized and are not regulated by any government organization or financial institution. In this way, you can use them anywhere in the world.
- Transactions are completely secure: its operation makes it impossible to counterfeit or duplicate cryptocurrencies due to its cryptographic techniques.
- Transactions are immediate: especially significant if you have international clients because, with cryptocurrencies, the exchange process can significantly accelerate.
- Allows anonymous transactions – This attracts many people who don’t want to be monitored by the state.
- Defense against inflation: Cryptocurrencies can become instruments to defend against inflation. It has been the case in Venezuela or Argentina, for example.
- Institutionalized market: Although we are still in an early phase, it is increasingly possible to invest professionally in cryptocurrencies.
Disadvantages of investing in cryptocurrencies
- Extreme volatility: if you invest in cryptocurrencies, you must be willing to lose more than 80% of your invested money. It is still a high-risk investment.
- Risk of governments limiting them: There are rumors of governments wanting to restrict cryptocurrencies and even eliminate them. So it is a disadvantage to keep an eye on for the future.
- If you lose your Wallet keys, you lose your money: if your Wallet account is hacked or you lose the access key, you will lose all the money you had. Never forget to have a backup of your wallet!
- Payments are irreversible: if you make any mistake when transferring a certain amount of cryptocurrency, you can’t correct it.
- Possible use in illegal activities – This confidentiality and anonymity of transactions makes it possible for us to use cryptocurrencies for practically anything, legal or not.
- It is not a universally accepted payment method: yes, more and more sectors are getting this type of payment, but realistically, there is still a sizeable commercial sector that does not accept them.
How many cryptocurrencies are there?
There is a world beyond the famous Bitcoin. Every week new cryptocurrencies are created, more than 13000! And adding…
On October 22, 2021, the total value of existing cryptocurrencies was over $2.5 trillion.
Suppose you want to consult all the legal cryptocurrencies that exist. In that case, you can consult pages such as World Coin Index or CoinMarketCap, which give you all the information about more than 800 virtual currencies and their corresponding price.
Top 10 cryptocurrencies to invest
1. Bitcoin (BTC)
Bitcoin, the pioneer, is the main cryptocurrency and is probably the most recommended for investing, as it sets a pattern of behavior for the rest of the cryptocurrencies. It is one of the cryptocurrencies with the most future. It has managed to position itself as a leader in the digital market, despite its many ups and downs due to its extreme volatility.
Its market capitalization is around $1.1 trillion.
We could not consider Ethereum a cryptocurrency but rather a platform based on blockchain technology. And that is precisely where its potential lies since this decentralized network allow operations to be fed with the network’s currency: ether.
Ethereum is programmable, so it has many more features. However, it currently has some scalability issues, and transactions are getting more and more expensive. But Ethereum is already working on version 2.0 to make it a more secure and scalable network.
Its market capitalization is around $497.6 million.
3. Binance Coin (BNB)
The Binance token is the largest platform for buying and selling cryptocurrencies (with more than 15 million users!). Through projects related to Blockchain technology that can finance with Binance Coins, developers work to increase the importance of this cryptocurrency.
The peculiarity of this cryptocurrency is that it has a mechanism that prevents its inflation (the burning of BNB). Which consists of reducing the offer until there are only 100 million units of Binance Coin left.
In addition, by having Binance Coins, you have rights over the platform, and you can be part of its decision-making.
Its market capitalization is around $81 billion.
4. Tether (USDT)
Tether is also a stablecoin, which is backed by an equivalent amount of traditional coins. It was born to be that link between official currencies and cryptocurrencies to provide the latter with stability. This one, in particular, is linked to the US dollar with a ratio of 1 to 1 (1 Tether = 1 Dollar).
It is one of the most accepted cryptocurrencies by buying and selling platforms. However, you are not guaranteed to exchange Tethers for “real” money.
Its market capitalization is around $70.1 billion.
5. Cardano (ADA)
Cardano is one of the fastest-growing cryptocurrencies (it multiplied its value by 50 so far in 2021). It differs from other cryptocurrencies because it uses mathematical principles in its consensus mechanism (how network operations are verified to be reliable). With much more scientific rigor, the result of its origin seeks to solve the different problems that other blockchains may present (about security, scalability, etc.).
Its market capitalization is around $66.4 billion.
Solana is one of the top competitors of Ethereum. It is a cryptocurrency, and the blockchain platform that has grown the most has captured the attention of the entire crypto community. Solana was born to make the creation of decentralized applications much more accessible. It has achieved a remarkable improvement in scalability through the Proof of History (PoH) consensus. It consists of a mechanism that orders and verifies the transactions in the blockchain and allows each node to verify the transaction’s validity independently. It means that it takes less time to validate the order of the transactions and thus works faster.
SOL is then often used to make transaction fee payments and interact with smart contracts.
Its market capitalization is around $59 billion.
Perhaps Ripple has had a less pronounced growth than the rest of the cryptocurrencies, but it has great potential; according to many experts, it is the successor of Bitcoin. Its technology allows up to 1000 transactions per second.
It was born to connect banks, payment providers, and digital asset exchanges in a faster and more profitable way.
Its market capitalization is around $49.7 billion.
Terra was born to solve the significant volatility of cryptocurrencies; that is how it created a blockchain that promotes electronic commerce through stablecoins. Thus, this blockchain comprises two tokens, Terra USD, the stablecoin itself, and Luna, which ensures the network, governance, and collateralization of the USD.
Its market capitalization is around $41.6 billion.
9. Dogecoin (DOGE)
Dogecoin was created in 2013 as a simple joke alluding to the “doge” meme, the most famous Shiba Inu on the Internet.
And today, it already has 129,000 million coins circulating. It works by making new blocks of coins available for mining every year.
This cryptocurrency has had brutal growth in the last year. Of course, it is subject to extreme volatility, so its value can decrease without warning.
Its market capitalization is around $41.2 billion.
10. Shiba Inu
Many claims that this cryptocurrency was born to unseat Dogecoin. Despite this, it is already considered one of the 50 most capitalized cryptocurrencies, and it has performed very well!
It is a good option when investing in cryptocurrencies because the value of its token is meager, and with only €10, you can buy a good amount and wait for it to rise, and it has very high growth potential.
Its market capitalization is around $36.5 billion.
Methods to invest in cryptocurrencies
If you are a veteran in investment matters, this will sound familiar. Otherwise, pay attention to these 4 methods to invest in cryptocurrencies:
Buy the cryptocurrency
It is perhaps the most recommended method to invest in cryptocurrencies since the investment process is much simpler. However, being essentially digital assets, you must store them properly with all possible precautions. You can buy real cryptocurrencies on platforms like:
- Centralized cryptocurrency exchanges.
- P2P shopping sites.
- Decentralized exchanges.
Once you do, you will have the cryptocurrency in your name, and you will be its legitimate owner.
Here are some of the most popular cryptocurrency platforms:
- coin base
Invest in CFDs
You can also invest in cryptocurrencies through CFD brokers, fully regulated entities that must follow extreme security requirements. It is what makes many investors decide to bet on this method.
When you invest in CFDs, you do not do so in the asset itself but a derivative contract between you and the broker. It makes the investment more secure from hacking or theft. But you must make sure you choose the right broker.
We recommend these:
- Admiral Markets
One of the most relevant events in the history of cryptocurrencies was their institutionalization. Thanks to this, another method to invest in cryptocurrencies is through ETFs (Exchange Traded Funds) that are already being introduced in the market.
These are funds that replicate long-term investments so that, when you buy these ETFs, you are purchasing a package of certain shares that allow you to diversify your investment.
The cryptocurrency market has joined the futures market. Many exchanges offer futures trading, but since it is one of the most complexes in the world, we will not expand, as we do not recommend it if you are starting to invest.
How to invest in cryptocurrencies. 9 keys
And now that you are clear about some of the basic concepts about investing in cryptocurrencies, we will give you some keys that you must take into account before getting down to work.
1. Learn before investing in cryptocurrencies
If you want to succeed in investing in cryptocurrencies, you must prepare for it. As you will have seen throughout this guide, you will have noticed that investing in cryptocurrencies is not the same as investing in traditional financial assets. It has added difficulties.
If you are not familiar, you should learn about blockchain technology, and investing in prior preparation seems to us to be essential advice. You can look at our Digital Transformation Certification, which can cover this technological gap.
And it is that investing without adequate training can lead you to lose everything invested.
In the same way, you must constantly inform of the latest news, not only those related to cryptocurrencies but all those that may have an indirect influence.
2. Don’t invest it all at once
We strongly advise you not to invest suddenly. You should choose a monthly amount that you feel comfortable with. It is an excellent way also to guess the ups and downs of assets. In our opinion, the best option is to invest sustainably over time.
3. Invest for the long term
It is a huge mistake to be constantly thinking in the short term. Amplify your vision of the market if you want to make money with cryptocurrencies. If you start, you will see that there are periods of noise and uncertainty from which you must flee to focus on the rising phases.
4. Do not invest what you are not willing to lose.
Do not invest money that you need in cryptocurrencies, do not lose sight of the fact that they are risky assets, and you could lose them.
5. Create a diversified portfolio
It is highly recommended to create a diversified portfolio that includes cryptocurrencies and other options such as stocks or bonds. In the same way, you can invest most of it in those cryptocurrencies that are more stable (such as Bitcoin or Ethereum) and the rest in cryptocurrencies with more significant potential.
6. Take security measures
You always have to be very aware of the dangers of lack of security, but any precaution is little when there is money involved. Keep in mind that, as we have mentioned, cryptocurrencies do not depend on any institution, and this also means that you are solely responsible for protecting your money. Here are some of the security measures you can take:
- Activate 2FA (two-factor authentication): this option is available in all exchanges. It is the best way to ensure that no one can access your account if your passwords are compromised since they will have to enter the 6-digit code that only you have access to with your phone.
- Protect your passwords: make sure your passwords are strong, long enough, and do not use the same one for all your applications. You can even use a password manager, so you don’t have to memorize them.
- Use wallets for your cryptocurrencies: we will tell you about it at the next point.
7. Use wallets for your cryptocurrencies.
These are cryptocurrency wallets where you will store these assets, from where you send and receive them. Yes, blockchain technology is incredibly secure, but there have been countless hacks since the birth of Bitcoin. So if you keep them safely in your wallet, you will keep your investments safe. We recommend having more than one in case your wallet gets hacked once again.
8. Watch your emotions
When you see that a cryptocurrency begins to increase in price, you are dying to invest in it but avoid doing it this way by all means, as it is likely that when you go to buy the price, it will correct itself, and you will be trapped in losses.
Instead of being guided by your emotions, create an investment plan and follow it.
9. Choose the moment to sell well.
There are two circumstances in which we consider that it is an excellent time to sell:
- When you have another more promising investment in mind
- When the conditions that justified your investment have changed (the leadership of Bitcoin, for example).
In any case, we recommend that you first do an excellent, exhaustive analysis.
Similarly, you should not sell if:
- The value of the investment falls considerably.
- When the value increases in the short term.
5 TOP Wallets for cryptocurrencies
As we have said, storing your cryptocurrencies in a digital wallet is one of the best ways to keep your investments well protected. Well, if you are looking for a good wallet to do it, take a look at these five:
Coinbase is one of the best-known wallets for its recognized security. It is also convenient and easy to use, whether saving your investments or executing different transactions.
The best thing about Coinomi is that it accepts a lot of cryptocurrencies. It consists of open-source software that stores cryptocurrencies on your devices, so you can use it from your Smartphone or your computer.
3. Trust wallet
Trust Wallet is an app that accepts many cryptocurrencies, even though in the beginning, it was only intended for Litecoins, what we like the most about this app because it gives between 5 and 7% interest for specific cryptocurrencies.
Trezor is one of the best physical wallets in the world. It allows access from smartphones, tablets, and computers. They have a security system that generates a 24-word recovery phrase and a security key, and a physical button that you must press when you want to carry out any transaction.
Electrum is a desktop wallet compatible with Windows, Mac, Linux, and Android operating systems. It also supports physical wallets, like Trezor. It is characterized in that it does not download the entire blockchain, so it is pretty light, and it also generates a seed that allows you to restore your funds.
Yes, it is becoming more and more popular to invest in cryptocurrencies, and it seems that there is very little left for it to start affecting all our activities.
And it is that, after all, economic changes have accompanied us throughout our history: gold replaced barter, banknotes replaced gold, and are cryptocurrencies about to unseat traditional currencies?
Because deep down, each type of currency seeks to solve the problems of the previous one. Are cryptocurrencies the solution to unlimited money printing?
Tell us, what do you think is the future of cryptocurrencies? Is it a temporary phenomenon, or will it be the universal payment method? We hear you!
Guide to start investing in cryptocurrencies