Cryptocurrency is a type of digital currency that does not rely on a central authority to verify transactions or create new units. Instead, it uses cryptography to prevent counterfeiting and create a blockchain, which is an immutable chain of data blocks. Founded in 1976, Bankrate has been helping people make smart financial decisions for over four decades. With the existence of 15,000 or more cryptocurrencies, it is no longer possible to define the industry as “Bitcoin and then everything else”.
Bitcoin is nothing more than a form of digital money, and other altcoins such as Ethereum and Solana have grown in popularity. There are many ways to buy cryptocurrency safely, although the most accessible method for beginners is probably a centralized exchange. Centralized exchanges act as a third party that oversees transactions to give customers confidence that they are getting what they pay for. Sophisticated investors such as banks, hedge funds and pension funds believe that cryptocurrency is a good investment if you want to gain direct exposure to the demand for digital currency. Alternatively, you can buy shares in companies with exposure to cryptocurrencies. Before you go ahead and buy some coins or tokens just because someone says it's a good investment, it will be worth doing some research.
First of all, it is important to understand that choosing a good cryptocurrency is not like choosing a good deed. A share represents the ownership of a company that generates profits for its shareholders, or at least has the potential to do so. Owning a cryptocurrency represents ownership of a digital asset with zero intrinsic value. What causes a cryptocurrency to rise or fall in price is simple supply and demand. If there is an increase in demand and a limited increase in supply, the price rises.
If supply is limited, the price rises and vice versa. Therefore, when evaluating a cryptocurrency, the most important questions to be answered are how does supply increase and what will cause demand for the currency to rise. You can answer those questions by reading the white paper published by a cryptocurrency team to attract interest in their project. Consult a project's roadmap and see if anything could lead to an increase in demand. Research the team behind a project and see if they have the skills to execute their vision.
Try to find a community of people who are already investing in cryptocurrency and measure their sentiment. It is also important to consider how much money has come to a cryptocurrency. If the market capitalization is already very high, there may not be much potential growth left. A high price will curb demand and increase supply as early investors seek to get money off the table. Once you've found a cryptocurrency that you think will be a good investment, it's time to start buying. Once you have deposited funds into your fiat currency account, you can place an order to buy your cryptocurrency.
Orders on an exchange work the same way as orders on the stock market. The exchange will match your buy order with someone who places a sell order at the same price and place the trade. Once your trade is complete, the exchange will save your cryptocurrency for you in a custodial wallet. Buying cryptocurrencies is the easy part. As a cryptocurrency investor, you have to be prepared for volatility.
Cryptocurrencies, in general, are more volatile than traditional asset classes such as stocks. Price fluctuations of 10% or more in just a few hours are very common. In addition, you need to consider how much of your portfolio you ultimately want to allocate to a specific cryptocurrency and to the asset class as a whole. With the volatility of cryptocurrencies make sure you give yourself wide bands of acceptable allocations. If your investments fall outside those bands be sure to rebalance. As a beginner cryptocurrency investor you shouldn't try to find a diamond in the rough.
You should get your feet wet with more established cryptocurrencies that have networks built to back them up. This will allow you to familiarize yourself with the mechanics of investing in cryptocurrencies as well as how it fits into your portfolio. Investing in crypto requires you to do your research and be confident enough in your investment decisions.