The basic rules of investing in cryptocurrencies


Cryptocurrencies are a relatively new and exotic asset, and as such investing in them requires a bit different set of skills than investing in traditional assets. However, most of it comes down to knowing where to buy e-coins, how to store them and how to judge their worth.

Cryptocurrency as an asset

Cryptocurrencies differ from other assets due to their changeability, technological potential and very wide variety of potential coins to choose from.

The matter of changeability is best shown by an example. Within a year, from December 2016 to the end of 2017, Bitcoin went from 750 USD to 10 000 USD, meaning anyone who invested 10 000 USD in December of 2016 would get back a mind-blowing 133 333 USD within exactly 365 days. In reality, the total market cap of cryptocurrencies reached an astounding 500 billion dollars. Of course, the news of a “miraculous investment option” flooded the Internet, making more and more people join the speculation bubble, which finally had to break. When the price of Bitcoin dropped, the prices of other cryptocurrencies also fell, causing a lot of people losses in their investment budget. That’s what changeability means, the ability to generate massive losses, but also great profits.

The technological potential, on the other hand, means that investing in cryptocurrencies is directly tied to overall investing in technological solutions, like startups. By investing in cryptocurrencies you most of all take into consideration the purpose for which it was created. It can be a universal payment method, a way to create applications or smart contracts – and many other things.

The wide variety aspect of cryptocurrencies differentiates cryptocurrencies from traditional assets. There are over 6 000 coins which are not segregated in any set way. In the case of bonds and securities there are also many types, but they are clearly grouped by their potential price. Shares of the biggest companies can be found on the biggest and most famous exchange markets, various local markets sell the shares of local companies, and so on. In the case of cryptocurrencies, these relations disappear and markets offer the currencies they consider popular among investors. It means they are mostly driven by market capitalisation and not actual potential.

A few basic rules of investing

When thinking about independent cryptocurrency trade, every investor has to consider the following before deciding to buy e-coins:

  1. It is important to be aware of the risks. As the prices of cryptocurrencies change much more dynamically than any other asset class, they do not resemble classic investments.
  2. It’s good to pay attention to alt-coins – cryptocurrencies with low market cap.  Up to the end of 2016, Bitcoin was the only cryptocurrency that mattered. But the situation has changed – and now there are many more new, interesting cryptocurrencies. So it is always good to look for the cryptocurrencies with potential, ones which might make it big.
  3. The potential usefulness of chosen cryptocurrencies is also important. The first thing an investor should do is read the official documentation describing the purpose and potential of the chosen e-coin. Such a reading gives the reader two big advantages. First, it enables the reader to deepen their knowledge and understanding of a concrete cryptocurrency. And second, a poorly written document is often a great way to decide whether the cryptocurrency is worth investing in. If even the responsible team cannot describe the true functionality of their token, it’s probably not a good investment.
  4. You should always be on a lookout for scammers. Good cryptocurrencies have a clear technical vision, an active programmer team and a lively, enthusiastic community. Bad coins are see-through, they promote unclear technical advantages without an explanation, and have a community focused on getting rich quick.
  5. Cryptocurrencies are taxed. Nothing is sure in life, except from death and taxes. Cryptocurrencies are no exception. In an investor is profiting off the cryptocurrencies, they will probably have to pay taxes. The exact way the profits are taxed depends on the national tax jurisdiction

Investing… where to start?

It’s no secret that starting your own investment in cryptocurrency can prove quite difficult. The scamming business is booming still. That is also why small business owners and private persons often choose to start off with a training in e-coin investing. This way they are better prepared to overcome the challenges they will face and less likely to be scammed.

But what to do after the training? Experts suggest buying your first cryptocurrency in a trusted online crypto-cantor. There are two kinds of exchanges you can make in a cantor like this: fiat currency to crypto, and crypto to crypto. Cantors send the units to the user’s personal cryptocurrency wallet.

So, first you have to set up an account on the crypto-cantor platform. Then, the user has to have their identity verified – it is enforced by the European Union law. There is, however, a way to buy cryptocurrency in a cryptocurrency cantor without registration bypassing the registration and verification processes.

And where to store the cryptocurrencies after they are already bought? The cryptocurrency that is being used on a more regular basis would be kept on a “hot” type cryptocurrency wallet. A “hot” wallet exists on a device that is able to connect to the Internet – i.e. a mobile application or an online account. Transactions are easy to make and manage with the use of hot wallets, but they are also easier to hack.

Keeping cryptocurrency on a device that is completely offline is called a “cold wallet”. They are the best solution for those people, who want the highest level of security. Cold wallets are also best suited for long-term investors, as they don’t need to access their units for months or even years.

Cold wallets are not without their own set of dangers (i.e. physically stealing a pendrive with the crypto), but if the investor will stick to the instructions and take any necessary precautions, the risk will be minimal.

Where to buy and where to store

Once the most popular way to get cryptocurrencies was a cryptocurrency market. But one great downside of markets is the high risk of users being attacked by hackers or scammers. That is why the beginners are encouraged to buy cryptocurrencies without registration in a crypto-cantor. Cryptocurrency cantors function as stationary points of service or online services. Stationary cryptocurrency cantors are often a part of a traditional currency exchange. There you can pay to obtain cryptocurrency, which will then be sent to a specified wallet address. An internet cantor is a much more convenient option, as the whole operation happens online, without the need to leave the house. In general, crypto-cantors are recommended for buying cryptocurrencies in a safe and convenient manner.

As it was mentioned before, wallets are divided into “hot” and “cold” types, but they also have various subtypes. Before buying e-coins it’s important to choose a type that fits our expectations and the way we use the cryptocurrency.

“Hot” type wallets:

  • Desktop: these wallets are downloaded and installed on a PC or laptop. They are only available on the computer it got downloaded on. The wallets for PCs offer one of the highest security levels, but if the computer gets hacked or becomes infected with a virus, there may be a risk of losing all the assets.
  • Online: these wallets operate in the cloud and can be accessed from any device in any place. Although they are easier to access, internet wallets store the keys online and are controlled by a third party, which makes them more prone to hacker attacks and being stolen.
  • Mobile: mobile wallets work as phone app, which makes them easy to use wherever you are, including shops. Mobile wallets are usually smaller and simpler than PC wallets due to the limited space on mobile devices.

“Cold” type wallets:

  • Hardware: hardware wallets store user’s private key on a separate device, like a pendrive. Although hardware wallets include online transactions, the units are stored offline, which makes them more secure.
  • Paper: paper wallets are easy to use and ensure a high level of security. Although the term “paper wallet” can mean a physical copy of a printed private or public key, it may also mean the software responsible for safely generating a pair of keys to print.

My first profit

To profit off of cryptocurrencies, one should use the “buy cheap, sell expensive” approach. Also known as “buy the dips”, this investment technique relies on buying more assets as their price drops and during corrections. The “BTD” strategy calls for analyzing graphs, various short and long term movements and historical trends. Investors can buy “big dips” or “small dips”. The first ones are a situation where the price falls below the average, while the second name describes a situation where a price falls from its previous position. People who use this strategy can sell fast for profit, or keep the cryptocurrency to build a long-term position. To sum it up, the baseline of the strategy is to buy at the lowest possible price.

Buying when the rates are lower than the average historical results: buying assets when their price is dropping is the perfect strategy, but it’s not easy to know how will the price of a cryptocurrency change within the next hour or in a day. But there is another strategy that can be used: buying when the price of a famous cryptocurrency is lower than the average historical projection. There are cryptocurrency websites displaying the “moving average” table, which illustrates the best entry and exit points of the market. You shouldn’t be buying when the price reaches maximum. Aside from that, there is also the matter of selling when there is a sudden spike in price. When it comes to selling e-coins, it’s important to consider finances, risk tolerance, tax consequences and the reason you invested in crypto in the first place.

It’s worth to remember that cryptocurrencies have a lot of potential, both technology-wise and investment-wise, but managing them requires basic skills and knowledge that allows for independent cryptocurrency trade.