In 2009, Bitcoin was merely a captivating curiosity for millennials and tech enthusiasts. Yet, tech visionaries and futurists predicted a luminous and expansive future for cryptocurrencies, which are now enticing millions as a potential investment. Cryptocurrencies operate on blockchain technology, a decentralized ledger of information recording and dissemination that is not under the jurisdiction of any single institution. These digital assets, often misunderstood and largely unregulated, are generally avoided by most financial institutions.
Limited Supply
For an asset to hold value, it needs to be scarce or at least challenging to acquire. This principle explains why oil is more valuable than dirt and why the government cannot simply print infinite amounts of money for distribution. This concept was also applied in cryptocurrency. If Bitcoin were infinitely available, it would be difficult to argue its worth, which currently stands in the thousands of dollars per Bitcoin.
The total supply of Bitcoin is capped at 21 million. The remaining amount is to be mined, decreasing daily. Some view this as a significant shortcoming in the system’s design, leading to speculations that additional coins may need to be introduced. Not all cryptocurrencies operate like Bitcoin. Yet, most have some form of financial or technological control to restrict their availability or make them difficult to procure.
Diversify
Many individuals associate cryptocurrency investment solely with Bitcoin. However, a portfolio abundant with various forms of crypto can offer increased stability, as it lessens the impact of news-induced volatility on any single coin.
Admittedly, the market is dominated by a few; the top five coins constitute 76% of the total cryptocurrency value. As a result, holding a significant proportion of your crypto assets in Bitcoin to USD conversions or other esteemed digital tokens is logical.
Nevertheless, diversifying your crypto investments increases your odds of selecting a coin that delivers superior performance. Crypto portfolios incorporating a blend of coins with high, medium, and low market capitalizations heighten your prospects of discovering those exceeding expectations.
Diversified portfolios also facilitate rebalancing your crypto investments when they become overly concentrated in a particular coin. Suppose you possess three coins, and you wish for one to represent half of your crypto investments, while the other two each constitute a 25% share.
Safeguard Your Keys
A private key in cryptocurrency is an undisclosed sequence of letters and numbers that enables users to manage their digital assets. It serves as the password that confirms ownership and control over the funds linked with a specific cryptocurrency address. Anyone who gains access to an address’s private keys can control all funds associated with that address. Hence, safeguard private keys and refrain from disclosing them to others.
Cryptocurrency wallets are typically responsible for generating private keys, which are created automatically. It’s worth noting that losing a private key means indefinitely losing access to the associated funds. Therefore, private keys must be kept safe by storing them offline in a cold wallet or through a trustworthy custodial service.
Keeping your cryptocurrency on exchanges is a convenient way to maintain liquidity and ease of exchange. However, this method can increase your risk of losing your funds if the exchange collapses or falls victim to a cyber attack, as they have access to your keys.
Everything Hinges on Timing
Despite the best intentions, most investments in the cryptocurrency world are driven by emotions, which can lead to ill-timed investments and a subsequent loss in value. When a token begins to trend in the market, various factors often work together to push the rally further, enticing naive investors who fall prey to the Fear of Missing Out (FOMO).
Avoid succumbing to FOMO. If you absolutely need to own a particular token, hold off until the peak has been reached and price consolidation has occurred. Alternatively, look for another robust project that’s been trading steadily but holds significant potential, then capitalize on its upward trend and secure profits at the appropriate time. If you’re interested in a project for long-term holding, don’t let fear, uncertainty, or doubt (FUD) deter you from your commitment.
Mitigate Your Risk by Adhering to a Strategy
Cryptocurrency investments carry significant risk due to rapid and unexpected price fluctuations that can distort your responsible trading decisions. Every cryptocurrency investor must establish firm boundaries on their buying and selling decisions to prevent substantial financial losses.
These guidelines will differ for each individual, depending on their investment strategy. For instance, long-term investors might never offload their holdings in their crypto savings account, even during a significant price slump.
On the other hand, short-term traders might find it beneficial to sell whenever a coin’s value decreases by 10% to evade larger future losses.
Nevertheless, novice investors should strictly adhere to their designated (and ideally, small) crypto investment budget and might initially consider trading only a fraction of this amount. This approach ensures they always have a backup fund for further crypto investments if their position is unfavorable. Regardless of your financial objectives, it’s advisable to have a planned exit strategy before initiating any cryptocurrency trade.
Acquaint Yourself with the Sector
Dedicate time to familiarize yourself with the various currencies on offer. Given the extensive array of coins and tokens out there, it’s essential not to limit your focus to just renowned names like Bitcoin or Ether.
Delve into blockchain technology to grasp its role in the cryptocurrency sector. For instance, each blockchain uses a consensus protocol to maintain the ledger’s integrity. However, consensus protocols vary. Proof-of-work protocols, for example, necessitate significant mining arrangements for transaction validation, while proof-of-stake protocols reward those with the most stakes with validation incentives.
Comprehending these varying aspects can significantly affect your investment strategy. You might, for instance, stake your cryptocurrency to earn rewards and grow your portfolio. Conversely, a lack of tight control over the rewards given to validators in proof-of-stake coins could lead to inflation.
Convert Your Cryptocurrency into Cash
Cryptocurrencies live in digital wallets, so you can’t just stockpile Bitcoin from a trading platform and anticipate using it for an extravagant shopping trip at your local retail center. Instead, you’ll need to convert your virtual currency into a format that most businesses and shops accept. However, it’s noteworthy that certain venues do recognize cryptocurrency as a valid form of payment.
Most platforms dealing with digital currency transactions not only allow you to acquire these currencies but also give you an option to exchange them into globally recognized currencies like Canadian dollars or US dollars. You can then move this exchanged money directly into accounts such as PayPal or your bank. After moving your exchanged cryptocurrency funds into your bank account, you can utilize these funds for your usual purchases, just as you would with money earned from your regular job.
Endnote
Cryptocurrency is a thrilling innovation with numerous potential benefits compared to conventional monetary systems. However, it also comes with its share of risks and ambiguities. It’s crucial to consider your options and evaluate your risk acceptance prudently before you immerse yourself in it.