How to Invest in Cryptocurrencies

Daniel Penzing
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Understand What Cryptocurrency Is and How It Works

In simplest terms, cryptocurrency is a system of digital cash that is transferred from one user to another via the Internet. There is no physical coin and no centralized bank processing and storing these transactions. Instead, there are open source computer networks and complex codes that keep track of the transactions without any human intervention.

Cryptocurrency relies on the blockchain, which is a continuous record of transactions. Via the blockchain, all transactions made are accessible to any member of the network. Cryptocurrency is based on cryptography (the science of codes that are difficult to decipher) and not on storage of money.

To create a new cryptocurrency, some developers will release a whitepaper on their project. Every detail of the project and the financial aspects of the new currency will be spelled out in detail in the whitepaper. A certain amount of money has to be raised to develop the project, and developers will create an initial number of coins that are mined on the crypto network.

You can purchase cryptocurrency using dollars, bitcoins, or another type of cryptocurrency. The cryptocurrencies are sold during an ICO (which stands for Initial Coin Offering) and you can access your coins immediately. There are a few types of cryptocurrency coins that you might want to take a look at.

Bitcoin is the first and most prevalent digital currency. You can buy or earn them by providing goods or services to a Bitcoin miner.

Allocate Only a Small Percentage of Your Portfolio to Cryptocurrencies

With the hype surrounding cryptocurrencies, it’s tempting to allocate a large percentage of your portfolio towards digital currencies. However, this is generally unwise. One of the main reasons is that cryptocurrencies are extremely volatile. The price of a coin can swing 30% in a single day. Because of this huge volatility, it’s a bad idea to invest large amounts of money. If you lose a portion of your portfolio, it can go a long way towards erasing all the gains you’ve made over the years.

If you want to invest a small portion of your portfolio in currencies, that’s just fine. Just make sure you understand this isn’t a safe investment and that you are prepared to take huge risks with your money.

If you are going to invest in cryptocurrencies, make sure your portfolio is balanced. If you’re relying too heavily on cryptocurrency to provide gains … you could be in a lot of trouble when the bubble bursts.

Choose Your Cryptocurrency

Before you start purchasing cryptocurrencies, you must decide which currency is best for you. There are plenty of options out there. Some rely on blockchain, while others use a different technology. Some currencies are based on privacy, while others are open source.

The reason you choose a currency should be based on a few factors:

What technologies do they use? How private are they? The use cases of each currency are almost as varied as the number of different currencies available. You must clearly understand how each of the technologies works, how Byzantine fault tolerance works and the pros and cons of each technology. There are plenty of resources online that you can use to research the options. What problem are they solving? Of course, the goal of any currency is to solve a problem. It can be used transfer value across a border or even for gaming and entertainment. Some currencies are fighting censorship and freedom of speech, while others are attempting to solve the problem of trust in the financial system. Don’t invest in currencies that are solving a problem you don’t understand fully. What is their track record?

All of the above factor into the direction of the market. Some cryptocurrencies solve more problems and are more popular than others. All of them are different in their own way.

Finally, you should decide how much you want to buy of each currency.

Choose the Platform Where You'll Buy Your Cryptocurrencies

There are currently numerous cryptocurrency exchanges where you can purchase different digital currencies. Popular platforms are GDAX, Gemini, Bitfinex, Bitstamp and Poloniex. They all offer easy ways to purchase BTC or Ether with regular fiat currency. Once you have your BTC or Ether, you can transfer it to various cryptocurrency wallets on your mobile phone or desktop.

Apart from cryptocurrency exchanges, you can also buy cryptos directly on wallet platforms. Coinbase and Xapo are good examples of such platforms. On these platforms, you don’t buy coins from the exchange, but directly from the company.

There are also over-the-counter exchanges where, instead of making trades on an order book, you can negotiate directly with another person to buy or sell Bitcoins to or from them. Apart from Bitcoin, some sites also offer alternative cryptocurrencies, like Ethereum.

Storing Cryptocurrency

Storing cryptocurrency is not all that simple because it will need to be stored in a digital wallet somewhere online. Doing this will protect the currency from the threat of identity theft or hackers, but it can also leave the currency vulnerable to theft or copying by third parties.

You may also wish to have your cryptocurrency stored in an offline wallet to help prevent your currency from being stolen if your computer is infected with malware. This is by far the safest way to store your cryptocurrency, but it can make it more inconvenient to use.

When choosing a wallet, think about what you’re using it for and who will have access to that wallet. A cryptocurrency bank account is a good place to store cryptocurrency if you’re exchanging it for other cryptocurrencies or fiat currency, but it’s not recommended if you plan on using the currency for purchases. Bank accounts are also easy to access and take less time to open, but they can cost you more than other types of wallets.

An online wallet is accessible by anyone with access to your account and typically does not charge you for the service.

Types of Cryptocurrency Wallets

In order to buy and invest in cryptocurrencies, you need a digital wallet. A cryptocurrency is a medium of exchange like normal currencies such as USD, but designed for the purpose of exchanging digital information through a process made possible by certain principles of cryptography.

It’s important you know how to store your digital assets, or you risk them being stolen or lost.

Be Ready for a Wild Ride!

While the recent interest in cryptocurrencies has increased their popularity, it’s always been a bit of an unknown for the uninitiated. Essentially, cryptocurrencies are electronic assets that are designed to work as a medium of exchange. The main difference between cryptocurrencies and standard currencies is that cryptocurrencies aren’t printed or controlled by any government or other central authority. They also use cryptographic technology to keep transactions secure.

You can learn about them in a variety of ways, but one of the best places to start is with one of the many cryptocurrency podcasts. These are publically available on the internet, and you can use them to learn more about the currency, the technology, why it exists, and all of the intricacies that come with it.

While cryptocurrencies were originally designed to function as a currency or a form of investment, many of today’s users view them more like a commodity. It’s an incredibly volatile investment, and you have to be comfortable with a little downside risk. However, you should also understand that you could potentially see enormous returns on your investment if you

Time it right.