Investing in Cryptocurrency: A Beginner’s Guide
Updated: Nov 29, 2021
Cryptocurrency is a digital medium of exchange that is decentralized and can also be defined as a collection of binary data. It uses an online ledger with strong cryptography to prevent counterfeiting. However, cryptocurrency is not to be confused with virtual currency.
In this UNICHED article, we will talk about the types of cryptocurrency, the risks and legalities of cryptocurrency, and some best practices to adopt before investing in cryptocurrency.
Let’s get straight into it.
Types of cryptocurrency
Before going onto cryptocurrency investment sites and investing in cryptocurrency, it is advisable to know the types of cryptocurrency.
Broadly, cryptocurrencies can be put into two boxes: coins and tokens. Coins are meant to be used as regular currency whereas tokens are programmable assets that can be used as a medium of exchange between parties that find it valuable.
Below we have listed the top 5 types of cryptocurrencies based on their valuation. The information below is to brief you regarding each of the types of cryptocurrency mentioned and is not enough to guide your investing strategies.
Bitcoin came into existence in 2009 and is capped against 21 million. Presently 18.8 million bitcoins are in circulation. Transactions involving bitcoins are a time-consuming process referred to as proof-of-work. Bitcoin miners use powerful computers to verify these transactions in the blockchain to validate and secure each bitcoin and the network simultaneously producing more.
As of 14th November 2021, one Bitcoin is valued at $64k.
Created by the Ethereum foundation, it has an unlimited supply but is capped by an annual maximum of 18 million ETH. The functionalities of Ether extend further than just a cryptocurrency. Ethereum is programmable and therefore can be used for lots of digital assets, for financial services, applications, and even Bitcoin.
Ethereum is not referred to as a type of cryptocurrency, per se, it is a technology.
Founded in 2015 by the co-founder of Ethereum, Charles Hoskinson, Cardano is a public blockchain platform that can facilitate P2P transactions through its internal type of cryptocurrency Ada.
Initially built on the Ethereum blockchain, BNB can be used for payments, online travels, entertainment, etc. BNB was created with a max cap of 200 million but every quarter Binance buys back and burns some of it to drive its demand.
As of 14th November 2021, one BNB is equivalent to a little over $645.
Solana is a public blockchain platform and its cryptocurrency is called SOL. Launched recently, it is considered to have the potential to be a long-term rival of Ethereum by Bloomberg. SOL is also considerably faster than Ethereum.
As of 14th November 2021, one SOL is equivalent to $238.
Risks with investing in cryptocurrency
Investing in cryptocurrency might be a great financial step for your personal well-being but it is important to understand the risks you will be exposing yourself to. We have summarized the biggest ones that you must be wary of.
It is new: One of the reasons crypto-investors are attracted to buying cryptocurrency is because of its novelty. This is the same reason it is dangerous. Most types of cryptocurrency are fairly new and it is difficult to project the long-term impact of the same on the economy. A lot of theoretical information is available but it is difficult to predict it.
Volatility: It is intangible, and uninsured by any authority. Cryptocurrency exists in the 24h free stock market and even though it sounds like a feature from the utopian perspective, it is quite risky. Often it results in sharp turns in either direction and this unpredictability makes investing in cryptocurrency difficult. There is also no confirmation that it will be the currency of the future.
Frauds and scams: It’s decentralized and separation from authority opens new doors for criminals and scammers to dupe cryptocurrency owners. Furthermore, the legal recourse for fraud victims is different and more difficult than the fraud victims of other financial scams.
Even though most of the above points are valid in any kind of financial investment, it is very critical if you are thinking of buying cryptocurrency. The legal challenges also make investing in cryptocurrency more difficult for the average Joe.
No matter what or where you invest, the legal aspect of it matters the most. It sheds some light on “what might happen if things go bad”, something every investor should know.
Interpretation of cryptocurrency: In the US, cryptocurrency is defined as property and will be taxed as such even though in some countries it is interpreted as a currency.
Decentralized status: Since cryptocurrency is unattached to any jurisdiction or institution, its value is ascribed by its creators/owners. Due to this the interpretation of transactions involving cryptocurrency varies.
Evolving legal status: Before buying cryptocurrency it must be understood that the laws surrounding it are changing. For instance, the companies that only use cryptocurrency as a means of exchange may not even need to register themselves. It might change the way we look at corporations altogether
Even though investing in cryptocurrency comes with its fair share of risks, it goes without saying that it is a great opportunity. Buying cryptocurrency could be the investment that will help you eventually quit your job or start your business. In closing, we have some tips for you:
Learn the best investment option for you. Not everyone needs to invest in everything.
Research. Read. Ask questions. Hire an expert if you have to.
Diversify your investment efforts. Do not put all of your eggs in one basket.
Learn when to quit. Throwing money to save a drowning ship is a bad idea.
NOTE: Please read legal documents regarding cryptocurrency before investing in it. This article is a beginner's guide and doesn't contain all the information about it.