Although the press coverage of cryptocurrency prices has diminished somewhat since the fever pitch of December 2017, digital currencies are on a lot of investors’ radars. Opinions differ on whether the current craze of cryptocurrency is just a bubble or whether now is the time to invest. With such widely different viewpoints, many are asking whether you can make a profit investing in cryptocurrency or not. In short, the potential is still there. However, it’s by no means a straightforward or quick process that should be undertaken lightly.
In this article we’ll take a look at what you need to consider when it comes to investing in cryptocurrencies such as Bitcoin. We must make it clear that, like many investments, there are no guarantees. This is particularly true of the often volatile digital currency market. Don’t invest money that you can’t afford to lose. Despite the temptation, don’t get sucked in by the promise of getting rich quick.
Disclaimer before continuing: We are not a financial institution: All we are providing is educational material: Do not take this information as professional investment advice.
What are Cryptocurrencies?
In short, cryptocurrencies are digital currencies, or electronic money. They’re often decentralized, meaning they are not controlled (or regulated) by any government or financial institution. Perhaps the most notable cryptocurrency at the moment is Bitcoin, a blockchain-based currency that started the trend. Blockchain technology ensures that Bitcoin is secure and cannot be duplicated; users carry out transactions on a peer-to-peer basis. This means that when a transaction is made, its details are verified and recorded on the Blockchain, a publicly distributed ledger. Although there are other technologies that power other cryptocurrencies, Blockchain technology is seen as the standard for the time being.
Digital currencies such as Bitcoin and Ethereum can be mined. This is a process where users contribute the processing power of their computer to solve complex algorithms. In turn, they are rewarded with currency. As the technology has developed, it’s no longer feasible for the average PC user to mine for cryptocurrencies. With this in mind, many turn to investing and trading instead.
Before Investing in Cryptocurrencies
Taking your first steps into the world of digital currency trading can be daunting. There are a lot of options, many websites and exchanges, and a lot of information. Below are some of the aspects you should consider before you begin investing or trading in cryptocurrencies:
Research, Research, Research
Bitcoin was the first cryptocurrency, launching back in 2009. At the time of writing, there are 1,690 cryptocurrencies in existence. That’s a lot to choose from, and a sign of how fast the technology and the market have grown in a short span of time. One of the most important pieces of advice we can give surrounding investing in cryptocurrencies is to thoroughly research your potential investments. Try to seek out reputable news outlets and read the whitepapers of the coins you plan on purchasing.
Many coins are created in order for the founders to make a quick buck. Those that are reputable will outline what they hope to achieve with the technology, as well as how the currency could potentially grow. Try to avoid heeding the advice of anonymous commenters on forums who may be claiming that an unknown coin is going to be the next Bitcoin. It most likely isn’t. One of the latest developments has seen a shift towards a more informed way of investing; companies such as CoinFi and Cindicator promise a more data-driven approach.
Bitcoins or Altcoins?
The Bitcoin gold rush of late 2017 saw prices skyrocket, reaching an all-time high of $20,089 per coin. However, at the time of writing, 59% of that value has been lost. Many investors still swear by the currency however, and there have been numerous spikes and dips in price, even in the tumultuous start to 2018. It remains the number one coin in terms of market capitalization; a figure determined by multiplying the price of one coin by the circulating supply.
You may have heard of other cryptocurrencies aside from Bitcoin. These are affectionately known as altcoins, alternative coins, and there are certainly some interesting ones available. Ethereum is the currency with the second largest market cap, with Ripple/XRP third, and Bitcoin Cash (different from Bitcoin) being fourth. One notable observation is that most altcoins are tied heavily to the price of Bitcoin. If Bitcoin falls, so does the rest of the market. This may or may not be a bad thing, and many investors have a portfolio made up of multiple coins.
Consider a Stop-loss Strategy
On many an internet forum or subreddit you can find users who will proudly ‘hodl’ (a misspelling of hold that has gained meme-like popularity) through thick and thin. Long-term investors are still likely to be profitable by holding their assets, but could have cashed out to huge gains when markets peaked. Without knowing how the markets are going to perform, you could end up holding onto an asset that is doomed to fail.
A stop-loss strategy can help you minimize losses should the market falter. A stop-loss is the level of loss you can incur where the trade will get closed. We’ve already stressed the importance of only investing money that you can realistically afford to lose, but this strategy can help minimize any damage. However, it’s worth noting that the market can be manipulated by ‘whales’, holders of large sums of cryptocurrency. They can force prices down, leading to some investors selling off, while the whales buy back in at the new lower price.
To Hold or to Day Trade?
If you’re serious about investing in cryptocurrencies, you’ve hopefully researched your desired coins, as well as some exchanges where you can purchase them. You’ll notice that there are exchanges where you can day trade to try and make a profit. It’s an extremely tempting prospect, rolling with the cut and thrust of a developing market to stay ahead of the game. In reality, it’s much harder than it seems. The market is so volatile and so unpredictable that you could find yourself vastly ahead one evening and vastly behind the following morning. Cryptocurrency exchanges run 24/7, and investors in China and South Korea, as well as Europe, can shape the price and the landscape.
Long-term investments have worked out well anecdotally for many people. Early adopters of Bitcoin could have made their fortunes by simply purchasing at the right time and holding on until the peak price. There can be no guarantees that this level of growth will ever be seen again in cryptocurrencies. However there are certainly some exciting coins and technologies out there that will grow over a long period of time.
Should You Invest in Cryptocurrencies?
Hopefully we’ve demonstrated some of the possible benefits as well the risks and pitfalls that await the uneducated investor. As we mentioned in the introduction, there is still the potential to make a lot of money from investing in cryptocurrencies. However, there are no guarantees of that. If you are well-informed, don’t risk large sums of money, and invest in a technology or currency that you feel will succeed, it can be an enjoyable and rewarding experience.
The internet and news channels are full of articles that will spread fear, uncertainty, and doubt about digital assets. There are also those who will drive people to make unwise purchases based on the fear of missing out. Try to keep level-headed and rely on trustworthy news sources and always take a data-driven approach to your investing.