When you invest in cryptocurrencies, you’re taking a risk. Whether it’s Bitcoin, Ethereum or another cryptocurrency, it’s not backed by any hard assets or cash flow, and as such it is considered an extremely volatile investment option. However, you can learn to make informed decisions and avoid common pitfalls by doing your research and consulting with more experienced investors before you invest in crypto.
Many of the same rules and best practices that you would follow when investing in stocks or mutual funds apply to crypto as well. The first step is to find a reliable exchange platform. There are hundreds to choose from, so do your research to see which ones offer the coins you’re interested in trading, what fees they charge, how secure their systems are and what kind of educational resources they have.
Once you’ve found an exchange you like, deposit your fiat currency to start trading. Most platforms will allow you to do this with your bank account, and some even accept credit cards. Most also support some form of digital wallet, which is where you store your cryptocurrency. There are many types of wallets, ranging from simple apps to sophisticated software that’s designed for security. Again, do your research before choosing a wallet to ensure it meets your needs.
The blockchain is the database that cryptocurrencies use to record and verify transactions. Originally, this system was used to track Bitcoin transactions, but it’s now being used in a wide range of other applications. For example, it’s being tested to see if it can help with food safety by recording and quickly identifying the source of outbreaks of E. coli, salmonella and listeria.
If you’re new to crypto, it can be helpful to follow the activity of “whales,” which are individuals or institutions that buy or sell large amounts of a particular cryptocurrency. Their behavior can set market trends, and following their moves can help you predict future behavior and make wise investments.
Crypto markets are global, and a problem in one country can have widespread implications for prices in other countries. In addition, regulatory changes or crackdowns can impact the market in unpredictable ways.
Many cryptocurrencies are unregulated, which means there are few protections for investors if something goes wrong with their holdings. This includes management risks, programming risks and the risk of market manipulation, where influential people or companies act unethically to push prices up or down.
Some cryptocurrencies are considered securities, which means they’re subject to the same regulations as stocks and mutual funds. This includes having to report gains and losses, and in some cases it’s necessary to verify your identity before you can trade. This can add a layer of complexity and cost to crypto trading, so it’s important to understand the rules and requirements before you begin. And, as always, you should diversify your portfolio to mitigate the risks of a single investment going bust.
