Although cryptocurrency investing is a contentious topic, it’s important to understand about this new, unpredictable asset class. Even if you’ve never invested in cryptocurrency or completely understand how it operates, chances are you’ve heard of it. Although these digital assets have been present for some time, in the last few years they have gained popularity.
You’re not the only one who doesn’t fully understand what a cryptocurrency is or how the market operates. We’ll examine the cryptocurrency market in this tutorial, noting its parallels and discrepancies with conventional equities and other assets.
What Is Cryptocurrency?
A digital money known as cryptocurrency is supported by a blockchain and is recorded and verified through a network. In 2009, a year after the start of the Great Recession, Jeff Owens, co-founder of Layer1 blockchain Haven1, clarified, it was first formed.
“Trust in the established financial system was shattered by the financial crisis. According to Owens, Bitcoin was initially intended to be a peer-to-peer payment system that did away with the need for middlemen like banks.
Cryptocurrency, in contrast to fiat currency (like the US dollar or the euro), is decentralized and runs entirely independently of banks. This suggests that cryptocurrencies might replace fiat money.
According to David Kemmerer, CEO of CoinLedger, a cryptocurrency tax software startup, “crypto works by one person directly paying another person digitally via blockchain, a public ledger, without the facilitation by banks or governments.”
Coins and bills are physical objects; cryptocurrencies are not. However, supply and demand determine how much value it gets from its users. The monetary policies of the majority of cryptocurrencies are rigorous and often limit the amount of new tokens that can be generated or have a fixed number that may be created. This keeps their value intact.
According to Owens, cryptocurrencies have developed from a decentralized payments network to a respectable alternative investment vehicle since their founding.
How Does the Cryptocurrency Market Work?
Cryptocurrency can be invested in similarly to stocks or bonds, despite being a currency. It is also seen as a digital asset. You can purchase bitcoin at any moment, store it in a cryptocurrency wallet, or use an exchange to convert it into fiat money. Currently, the value of the entire cryptocurrency industry is estimated to be $1.7 trillion.
MyChargeBack blockchain industry analyst Elijah Jackson compares the functioning of cryptocurrencies as an investment and a store of wealth to a video game.
He said, “When you play a videogame at an arcade, you earn points and get tickets or tokens that you can exchange for actual rewards when you leave.
Similar to other assets like stocks, you can profitably sell your bitcoin if its value rises and you may then buy it back.
Pros and Cons of Investing in Cryptocurrency
Bitcoin is a desirable investment because to its decentralized structure and huge return potential. Its fixed monetary policies restrict supply, even eliminate it, which raises demand and generates large profits.
“With cryptocurrency, volatility is the name of the game,” Jackson stated. It’s great to be a high-risk, high-reward investor because the potential yields on investments might be enormously higher than those on traditional assets.
Furthermore, as cryptocurrencies run on decentralized networks, they are uncontrolled by a single central authority or government. Those investors who desire independence from established financial systems might find that feature appealing.
However, the possibility of larger yields carries a far bigger risk. Scams and fraud are more likely to occur in this area since there is no regulation. According to reports, consumers lost up to $1.8 billion in 2023 as a result of different thefts and frauds.
Everything can disappear from your grasp in an instant. Prices fluctuate. In addition, a lot of cryptocurrency initiatives are frauds or respectable websites managed by careless individuals, Jackson pointed out. Additionally, there are weaknesses that give rise to phishing attempts, airdrop frauds, rug pull scams, and hacking. In essence, the possibility of extremely large returns is the benefit. Everything else is the drawback.
Popular Cryptocurrencies
popular kind of cryptocurrency utilized as a store of value is fiat.
One of the first cryptocurrencies to be formed and one of the most well-known now is Bitcoin. It is holding about half of the market capitalization of all cryptocurrencies.
Without a doubt, the most well-liked and prosperous cryptocurrency is Bitcoin. In terms of market capitalization, it leads the cryptocurrency industry and none of the others even come a bright future ahead of it.” close,” Kemmerer said. “Ethereum is the second most popular; it is also very successful and has,
In the last few years, the number of new cryptocurrencies has increased dramatically, and thousands of them are now accessible for trade. According to Owens, this includes memecoins, or cryptocurrencies called after fictional characters real people, or animals, like Dogecoin and Shiba Inu, which are tokens with a dog theme Cryptocurrencies come in a wide variety, each with their own uses and advantages. The most
Even while some of these memecoins see large price rises in a short amount of time, they are frequently more erratic and vulnerable to fraud than other cryptocurrencies.
Investment Strategies: Cryptocurrency vs. Stocks
Stocks are a symbol of ownership in a business. A portion of the company is purchased when you buy stock. The value of the company’s stock typically rises when it makes money. An underperforming company’s shares may lose value. Historically, bonds and other conservative assets have been less volatile than stocks.
Selling a stock that has appreciated in value or collecting dividends are two ways to profit from stocks. Exchanges such as the New York Stock Exchange facilitate the buying and selling of stocks.
As you can see, there are some significant variations between investing in stocks and cryptocurrencies, despite their similarities.
Performance
Compared to cryptocurrencies, stocks and stock exchanges have been around for considerably longer—centurys. Furthermore, although they do fluctuate occasionally, equities typically produce returns that are far more stable than those of cryptocurrencies. For instance, since its founding in 1957, the S&P 500, a market index that tracks the stock performance of the biggest American corporations, has generated returns of almost 10% on average.
Stocks are supported by the firm since they are linked to its performance. Since cryptocurrency isn’t backed by a tangible object, it is more prone to abrupt fluctuations in value.
However, the volatility of cryptocurrencies can occasionally work to your advantage, giving you far bigger profits than you would with any other asset. For instance, during the last ten years, Bitcoin has experienced a yearly return of about 50%.
Regulation
Cryptocurrency is subject to far less regulation than stocks. Every stock market is subject to government regulation; the Securities and Exchange Commission (SEC) oversees the U.S. market, for instance.
Businesses that commit fraud or other crimes may be the subject of an investigation, fine, or other action by the SEC. Due to its lack of regulation, the cryptocurrency market is particularly prone to fraud. Additionally, there has been a lot of recent regulatory ambiguity surrounding cryptocurrencies, and the market may be impacted by sudden changes in legality and laws.
Diversification
Finally, a well-rounded investing plan is built on diversification, and stocks greatly facilitate the creation of a balanced portfolio. With equities, it’s much simpler to diversify your investments across nations, businesses, industries, and more.
Despite the wide variety of cryptocurrencies available, diversification is far more difficult to attain. For instance, there aren’t any index funds or mutual funds that provide significant exposure to the whole bitcoin market.
Having said that, equities and cryptocurrencies can have a place in your investment portfolio. Cryptocurrencies are a powerful hedge against inflation and other major economic factors that frequently impact equities. In addition, cryptocurrency frequently symbolizes the expanding fields of innovation and technology, which can help you stay ahead of trends and possibly profit from them.
However, it’s crucial to do your homework and choose investing opportunities that suit your needs and circumstances.
Investing in Cryptocurrency
You can use a few different tactics to get the most out of your bitcoin investments. As with other forms of investment, it’s critical to make sure your cryptocurrency selections fit your time horizon, risk tolerance, and overall financial objectives.
A buy-and-hold strategy, which entails purchasing cryptocurrencies and keeping onto it for a long time while its value fluctuates, is something that novice investors in the space should think about.
In order to optimize profits and mitigate certain risks, more seasoned traders may utilize a variety of tactics, turning to more sophisticated investing possibilities like derivatives, according to Owens.
Reducing Risk While Investing in Cryptocurrency
Prior to investing, as with other asset, it’s crucial to conduct research. Verify that you are aware of the dangers associated with a specific cryptocurrency.
Because cryptocurrencies are unregulated and very volatile, it’s even more important to be sure you’re purchasing a reliable digital asset.
According to Owens, there are ways to lower the risks, such as taking the time to educate yourself on the history and prospects of cryptocurrencies. A cryptocurrency’s entire market capitalization, circulating supply, price history, and other characteristics are listed in a number of online resources. In addition, reputable exchanges should include the cryptocurrency and provide simple ways to pay out in the event that you decide to sell it.
Red signals include “low liquidity, no social media presence, and lack of information,” according to Owens. “The same is true for a cryptocurrency that sees a sharp price spike right after launch and has little historical price data.”
It’s also crucial to do your homework on the exchange you’re utilizing, particularly in light of the bankruptcy and ensuing fraud case of the formerly well-known exchange FTX. Examine a platform’s reputation, investor safeguards, and feedback from other investors.
Bottom Line
Profitable cryptocurrency market investments are possible if you know what you’re entering into. You may invest with greater assurance now that you understand what a cryptocurrency is and how it operates.