How to invest in cryptocurrency for beginners
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Before you start reading, I will reiterate what I always say in crypto investment posts. Wherever you can please enable 2FA and back up your 2fa code. This will make all your accounts much more secure. 2FA via an app is much better than using SMS – phone numbers can easily be spoofed.
There are a lot of things that you need to get your head around in order to safely invest in blockchain. This post, cryptocurrency for beginners, will provide all the important information you need to make sure you are investing safely and in projects you truly believe in.
It is important to understand that the cryptocurrency market is currently extremely volatile and unregulated. Regulations are impending, however.
When you are entering this space you need to understand the possible volatility. You can lose money in the short term. You could lose money in the long term. This is something you need to understand. It is always said ‘Don’t invest more than you can afford to lose’ – for crypto this is very true. Perhaps the most important point in cryptocurrency for beginners. The future growth of the market is so uncertain and therefore so is the increase in prices. If you aren’t comfortable with the risk of losing the money, don’t invest it.
Market cap must be understood when explaining cryptocurrency for beginners. This is to avoid the thought that all coins could reach the price of Bitcoin. They can’t. This is due to market cap.
Market cap is the total value of all of the distributed coins. So, at the time of writing this, for NANO the market cap is:
$7.75 (Price per coin) x 133,248,289 (The total amount of NANO circulating) = $1,033,007,362 USD.
Cryptocurrencies have different circulating and max supplies. A larger supply makes the market cap larger too. This matters because market cap better represents the valuation of the coin than price (but not the total amount of money invested). So, one coin can ‘cost’ $3 but the market cap can be the same as a coin that cost $300, just based on the difference in supplies.
The reason this is important to understand is that it prevents investments base solely off the price of the coin. It is thought that a lot of the interest in XRP at the start of 2018 was partially due to the thought that the coin could reach the price of Bitcoin. However, with the max supply of XRP being over 4700 times larger than the max supply of Bitcoin, this cannot happen. So please understand the concept of market cap before investing. If a coin has a lower market cap it is seen as having a larger room for growth. Very important in cryptocurrency for beginners.
So, market cap is important to understand when investing because it shows the potential realistic growth of a coin. The price is not so relevant.
Market cap is often misunderstood by people that know this though, not just people read cryptocurrency for beginners guides – long time investors still have this misconception. This is because it is thought that a market cap represents the amount of money that is invested. However, this is not true. It represents the total valuation of all the coins in circulation at the current price. There is a distinction here – as not all coins have been bought at the current price, nor could they all be sold at the current price. Only a portion of the coins have been sold to increase the price to its current amount. The reason this matters is because it helps to show the power of a few investors falsely increasing the price of a coin.
What is blockchain?
Blockchain is a digital decentralised public ledger which logs transactions in chronological order. The appeal of it is that when a transaction is made between two parties it is recorded on the blockchain immutably. This means it cannot be altered. The decentalised nature of blockchain is the reason it cannot be altered – the data is stored and verified across a network of computers globally. There is no centralised entry point which prevents tampering.
How to buy
FIAT currency is legal tender backed by the government that issued it
There are lots of different ways to change your FIAT currency into cryptocurrency. There are easier ways than others to invest in cryptocurrency for beginners. If you want some of the most popular coins such as BTC, ETH and LTC you can purchase these directly with FIAT very easily.
For most coins you will have to purchase a major cryptocurrency (ETH, BTC) from a FIAT on-ramp (a place that accepts FIAT for major cryptocurrencies) and then transfer it to an exchange. You can then use the exchange to change your major cryptocurrency into the coin you want. This will incur small fees – the fee of sending crypto to the exchange, the exchange fees for using the exchange, and also withdrawing. Less popular or newly released coins will also most likely not be available on larger reputable exchanges – so additional due diligence is required in these situations.
I would recommend purchasing in small amounts the first time to ensure you master the process of buying, exchanging and storing before investing more. Top tip for investing in cryptocurrency for beginners.
These are the most popular FIAT on-ramps. They all have positives and negatives of using them. It’s really up to you to decide which one you would like to use, so doing a bit of research about each one would be best. Some are better than others depending on where in the world you are from so keep that in mind.
Coinbase is the most well-known and also has an exchange that uses the same log in information called GDAX. GDAX can be used to purchase (with USD) and send BTC and LTC for no fees. This is a good thing to keep in mind for the future, but it may be slightly complicated for a first time user. Coinbase as a platform may be the most friendly for investing in cryptocurrency for beginners.
The exchange you will be using will depend on the coin you would like to purchase.
A general good rule to follow when deciding what exchange to use for a specific coin is to look at the volume traded on the available exchanges on coinmarketcap. This will give a good indication of which ones are most popular in the community and will help you decide which to use. Search for the coin you are interested in and click on the markets tab. You will be able to see the exchanges and their volume, like the picture.
When transferring to an exchange it is important to consider both the available trading pairs on the exchange and the transaction fees when sending currency to the exchange. Some exchanges may also have outrageous withdraw fees so watch out for that. Ethereum and Bitcoin pairs will probably be available for most coins – again this can be checked using coinmarketcap.
In the picture you can see the main trading pair for this coin is ETH, whereas on the previous photo there was a larger variety of trading pairs.
Transfer fees can potentially be reduced by transferring to the exchange using a coin with a lower transaction fee (e.g. LTC instead of BTC) and then exchanging LTC to BTC on the exchange before using BTC to trade for the coin you want. This is just something that may be useful to consider in the future. At the moment transferring ETH is not expensive so I would recommend that.
I am not afraid to recommend Binance as the best exchange to use if the coin you want is on it. They have had substantial growth over the past quarter and have handled it extremely well. They are very transparent and have dealt with a recent hacking attempt brilliantly. This would be a great first exchanges for investing in cryptocurrency for beginners.
Now you have your coins, you better store them properly.
There are so many ways to store your coins. Most of them are safe. If you are not planning on trading in the near future, don’t keep your coins on an exchange. Keep them in a personal wallet. This is because you do not control the private key of coins on an exchange – you pass the responsibility on to a third party. This defeats the point of crypto and also potentially puts your coins at risk. Exchanges have lost coins in the past. Using reputable exchanges provides you nothing to worry about in this regard as long as you withdraw your coins to a safe wallet when you are done.
It is not possible to list all of the wallets you could use because there are so many. However, I can discuss a couple of popular options and tell you how to find the best wallet for your coins.
If you are putting a good amount of money into crypto, consider purchasing a hardware wallet, such as a Ledger Wallet or a Trezor, as these are viewed as the safest way to store your currency.
One way I like to find out which wallet to use is using Reddit. Find the subreddit for your coin and there will be a recommended wallet on there, usually in the sidebar. If it is an ERC-20 token, use the most popular Ethereum wallets.
A lot of tokens are ERC-20 tokens, so they are based on the Ethereum blockchain and can all use the same wallet. There are a couple of popular ones are Myetherwallet and MetaMask.
If you aren’t sure about finding the correct wallet for your currency please contact me and I can make a recommendation.
How to choose where to invest
So once you feel you know how to buy and store effectively you need to decide out of the thousands of options where to invest your hard earned money.
Luckily, a lot of the thousands of options really aren’t any good. The best way to begin is to search around online using forums and social media and try to gain the general consensus of what coins are popular. This is a good place to start but is not a way to blindly invest based on popularity.
You need to understand and believe in the fundamentals of the coin you are investing in. The investment will only pay off if the coin serves a purpose and moves towards adoption on a large scale.
Upfolio is a good website that sums up the top 100 coins in a clear and concise way. It’s probably best to start your investing in crypto in the top 100 as these should be safer investments, if not the top 50 or even 10. You can use this website to further identify coins that you think sound interesting. I would say that the short descriptions often make the coins sound better than they might be, so keep that in mind. It is still a great resource.
Now that you have a list of coins that you know are popular and you are interested in it’s time to do proper research. You want to check:
Any good coin will have a great team behind it that are fully transparent. You should be able to see their social profiles and their job history. This will help you make a judgement based on the people behind the project.
Read the project white paper. This will tell you everything you need to know about the project and the plans for it. A white paper should be a very helpful resource and not using overly complicated language to insinuate they are working towards big things when they have nothing to base it on. Make sure you are happy with the white paper and it provides you clarity.
Roadmap & previous deadlines
The team should have a clear development roadmap of what they are working towards. However, ambitious roadmaps are not the only important thing. They should have a clear history of meeting targets in the past as well.
Does the company have partnerships with well-known companies that will be using their blockchain services? If there are good partnerships this could indicate future success – as it implies future adoption. Be sure to find concrete evidence of partnerships as fake ones have been announced in the past. Partnerships don’t guarantee anything but they do provide trust in projects.
Find out the circulating supply and the max supply. If they are different, you need to know how and why the extra tokens will be distributed.
It is also good to know the distribution of the supply. Coins where the developers hold a massive percentage of the tokens are viewed in quite a negative light. Rightly so, because large holders can have a large influence over the market.
Read blog posts and watch reviews to get further understanding – be aware they are probably biased towards the coin. They can provide useful insight but take it with a grain of salt.
Does the project currently have a working product or are they just working towards it? Having a working product is a good sign, but only being in the development stage is not an issue as long as the other parameters look promising. Refer to the roadmap and whether they are hitting targets in this case.
Does the coin have a real world use? Can you see it being adopted? This is important for real world adoption – it needs to actually solve a problem or improve a current service for it to actually serve a purpose and be a good investment. A project may sound good but if you don’t think it’s going to provide value in the real world then don’t invest. You are in control of your money and you should invest in projects you believe will provide value and make a difference.
I always like to see what the community of the coin is like throughout the web in terms of the level of discussion and friendliness, and also their perception of the coin and its development. Community interaction from the development team can be a telling sign. I love transparency from developers about what is happening so this can be something to look out for. Seeing developers that provide frequent updates about progress is great.
This is a list of things you should look for, but it is not exhaustive nor is it a must have list. When it comes down to it, some very promising cryptos don’t have a white paper or a roadmap, for example. In these cases you must do your due-diligence, place emphasis on other parameters such as a working product or great partnerships and developer transparency as these can outweigh the negatives of the missing parameters. It is ultimately up to you to research and see if you believe in the overall project with these things in mind.
When to buy
Don’t buy coins at all-time high, and if you do it should be because the purchase was part of a dollar cost average system. This is when you invest a predetermined amount of money every X amount of days. So maybe you say you will invest $100 every week. This is a popular method with investors in order to reduce the impact of volatility on large purchases.
Buying at all time high because the price is increasing and you want to join the party is fear of missing out – FOMO – and more often than not it will lead to you losing money as fast price increases that cause FOMO almost always take a decline shortly after.
You need to understand that for any money you earn from crypto you must pay tax, bar a few special countries. Make sure you understand what the tax requirements are for your particular country – whether you have to pay when you cash out or if you have to pay regardless of if your money is still in crypto. It is good to know before investing.
Volatility and HODL
Lastly, I want to go back to my original sentiment about the volatility of the market. The cryptocurrency market is a new and exciting entity. No one really knows where it is going to be tomorrow – let alone in a year or two. If you truly believe in the projects you are investing in and don’t know how to trade just HODL. Don’t try to trade, don’t sell when there is a dip. There will be times your portfolio decreases. This is normal. You have to accept this. You shouldn’t have invested more than you can lose anyway. So just buy what you believe in and wait. This is the safest method for investment in this space if you are new.
If you have any other questions please don’t hesitate to contact me.
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