Some of the biggest challenges that new investors face are not knowing enough about cryptocurrencies and other forms of digital assets. Either they get too caught up in the crypto hype or know too little and are vulnerable to risk and scams.
Digital currencies have gained popularity in the last couple of years, while it’s been a decade since Bitcoin emerged. Institutional investors like Tesla and MicroStrategy have diverse investment portfolios and a firm hold on the crypto market. However, the market is still risky and volatile for newcomers as they are unaware of potential scams and some hard-known facts about crypto. Therefore, this article will examine six facts you should know as a new cryptocurrency investor.
1. What is cryptocurrency?
Knowing crypto’s basics might be necessary if you’re someone without any background knowledge of cryptocurrency or blockchain. Cryptocurrency is a digital asset backed by blockchain technology and cryptography. Blockchain technology is known for its decentralized nature, which makes crypto-backed transactions secure. Blockchain works as a decentralized ledger on a network of computers in an unknown location. The electronic ledger makes safe and secure digital transactions possible.
Bitcoin, the first digital currency, was launched in 2009, the same year as the Global Financial Crisis. It won’t be wrong to say that cryptocurrency was born out of concern for the rise in the central bank’s autonomy. There was a need for a decentralized network for money, and crypto filled that gap.
2. Know your “why” before investing in crypto
The most important question you will ask yourself other than “who owns the most bitcoin” is why you want to invest in crypto. Every investor, whether new or an expert, has a reason for putting their money into a highly volatile and risky digital asset. Plenty of other investment opportunities are less risky and volatile and might offer a similar rate of return. Ask yourself whether you are interested because investing in crypto is a trend or specific digital currencies intrigue you. Various investors have varying reasons for investing in crypto, but exploring your “why” is crucial for sensibly approaching this matter since it is risky.
3. Types of Cryptocurrencies
There are four types of digital tokens – equity, utility, intrinsic and asset-backed tokens.
Equity Tokens represent stocks of companies or property. Similar to owning shares of traditional stocks, equity tokens are backed by blockchain. Traditional equity stocks are legally binding and on a paper certificate. For instance, you can buy tokenized stocks of Tesla or PayPal through the blockchain.
Utility tokens generate funds for cryptocurrency projects. They have a differentiated purpose like raising funds or giving access to services or products. Unlike equity tokens, you cannot own a utility token.
Intrinsic tokens, also called built-in tokens, are a type of digital currency with a market-determined value. They exist as simple currency and don’t have an underlying asset. Common intrinsic tokens are Bitcoin and Ethereum.
Lastly, asset-backed tokens represent physical assets like gold, art, or paper money. You can claim the asset by exchanging tokens with the issuer.
4. Is the crypto market risky?
If you’re planning to invest in crypto, know it is a highly volatile and risky market. Unlike other investment opportunities, crypto trading is not secure. Sure, the transactions made through cryptocurrencies are secure, but the trading itself is risky, especially if you have no prior knowledge or experience with trading. On top of that, the crypto market is highly speculative and driven by hype and trends. It is likely to get caught up in the hype and make wishy-washy decisions based on dramatic speculations, only to lose all your savings.
Apart from the apparent risks, the crypto arena is full of scammers. Experts pretend to teach their “proven” strategies for investing in certain coins, only to deliberately cause an increase in their value – otherwise called “pump and dump” schemes.
5. Important terms every investor must know.
Here are some important terms to consider before investing in crypto:
- Bitcoin: First and the most valuable digital currency, launched in 2009. Though its value has gained momentum, it has been subject to violent fluctuations.
- Altcoin: Any digital coin other than Bitcoin. Altcoins can be famous like Ethereum or shady ones with minute market value. As a beginner, steer clear of shady digital currencies and focus on the mainstream ones.
- Blockchain: An electronic ledger to keep track of all transactions carried out by cryptocurrencies.
- Coin: A store of value for a digital currency on a specific blockchain network. Some chains have different names for the coin and the network; others don’t, like Bitcoin.
- Cold Storage: A secure way of storing your digital currency offline. Cold wallets are physical devices, like an external hard drive, for storing your cryptocurrencies. Cold storage helps keep your digital currencies safe from theft and cyberattacks.
- Hot Storage: An online wallet for storing your cryptocurrencies. Hot storage is prone to cyberattacks and theft but is more accessible than cold storage.
- Decentralized Finance (DeFi): Financial activities conducted outside the centralized system of a financial institution.
Also, Read – Where to Locate Fresh Crypto Coins To Invest?
6. Timing is important
Once you are familiar with the basics of cryptocurrency, blockchain technology, and the different types of currencies in the market, it’s time to begin investing. Or start looking for investment projects. But don’t be in haste. It would be best to weigh all the pros and cons of investing time in your trade rather than jumping right into the market. The crypto market is highly volatile and fast-paced. If you are not taking calculated risks, you may lose it all before you can get the slightest return on your investment.
Instead of being driven by speculations and market trends, understand the coin or project you are interested in. Cryptocurrencies have specific price patterns, and Bitcoin often paves the way for other currencies. So take your time understanding the varying trends, price movements, and best exit and entry points for a trade to avoid exchange hacks or price manipulation.
One of the biggest hurdles in cryptocurrency investment is giving in to FOMO (fear of missing out) or hype about different projects or currencies. As a new investor, be extra cautious about market volatility and the project you are investing in. Consider why you want to invest in crypto, which currencies or projects you wish to support, and whether you’re ready for this financial decision.