How To Invest In Cryptocurrency - A Beginner’s Guide

Cryptocurrency” is such a cryptic concept, isn’t it? Many people have difficulty understanding the technology that powers cryptocurrency, let alone how it works as an investment. Over the past decade, the worth of cryptocurrency has skyrocketed beyond many investor’s expectations. We intend to shed light on this concept.

This beginner’s guide will teach you how to invest in cryptocurrency and how crypto works, should you decide it’s right for you.

What Is Cryptocurrency?

In theory, cryptocurrency is a virtual currency that’s held and distributed online. In reality, it’s a digital asset that may gain or lose value in a similar fashion to stocks and bonds.

Whereas a cash currency incorporates paper bills and metal coins, a cryptocurrency uses a virtual “coin,” “token,” or “unit.” You can purchase a coin/token/unit from any company that facilitates cryptocurrency exchanges, and you can trade, buy, or sell with other people who own crypto—not unlike stock trading in corporate America.

What makes cryptocurrency distinct from standard currency (besides the fact there’s no physical cash) is that cryptocurrency is “decentralized.” There’s no central authority that governs the currency.

For example, the Federal Reserve manages the national currency of the United States, influencing prices, interest rates, and the overall supply of money being circulated in the economy. Cryptocurrency has no such oversight.

However, a cryptocurrency is generally maintained by a “system.” The system—which is managed by a cryptocurrency company—tracks all the units of cryptocurrency and their owners. The system will also determine when new crypto units can be created. All right, so that might sound a little bit like the Federal Reserve. But cryptocurrency systems have no central location or server where units are stored. There are no virtual banks.

Bitcoin is by far the largest and most popular cryptocurrency system in the world. In fact, some financial experts define any cryptocurrency that’s not Bitcoin as “altcoin.” That’s a testament to Bitcoin’s dominance.

How Does Cryptocurrency Work?

You might be wondering, “What gives a cryptocurrency unit its value?”

For most assets, the value is determined by market factors. Let’s take the real estate market, for example. What determines the value of a property? A property might be appraised higher if it’s in a desirable location, or if it’s more luxurious, or if it’s in a neighborhood that’s likely to see an increase in home prices.

What about stocks? Stock value is generally determined by the success of the company (or the impending success of the company). Higher profits mean higher dividends, which means higher stock prices.

Cryptocurrency values are also tied to the marketplace, but in a different way. There’s no physical asset that’s affected by the local economy. And the value isn’t tied to corporate profits. The value of a cryptocurrency unit is entirely dependent on whether or not people want to buy cryptocurrency units.

Wait… what??

You read that correctly. The value of cryptocurrency is based on nothing but consumer interest in buying cryptocurrency. If lots of people are buying crypto, then the value will rise. If people stop buying crypto, then the value will fall.

This is a head-scratching concept for both beginning and veteran investors. But it’s not such a crazy idea to high-risk investors who frequently trade in volatile assets. A “volatile asset” is an asset that may experience large and rapid changes in value. Penny stocks are a common (and more “socially acceptable”) type of volatile asset. They often pose too much risk for the average investor, but they can yield extremely high returns to those wolves of Wall Street who carefully study marketplace activity.

In the same vein, cryptocurrency can yield high returns if an investor takes advantage of marketplace surges.

What Do You Need To Invest In Cryptocurrency?

While the idea of cryptocurrency can be daunting to beginner investors, the requirements to get started are minimal. If you want to learn how to invest in cryptocurrency, you only need:

• Personal identification documents
• Bank account information
• Secure internet connection

That’s it! It is possible to purchase cryptocurrency through a stockbroker as well. In this case, most of your personal and financial information will be on file already. Now that you have what you need, let’s start investing.

Tips to Know Before Investing in Cryptocurrency

Here are a couple of important things you should know before investing in cryptocurrency.

Capital Gains Tax: For tax purposes, cryptocurrency is considered an asset, like a stock or property. When you sell crypto and make a profit, you’ll have to pay capital gains tax on what you earned. Keep this in mind when you’re budgeting for the year and planning for taxes.

Short-Term Investing: Because cryptocurrency is a volatile asset, many investors would consider it to be a short-term investment rather than a long-term one. It’s possible that in the future, cryptocurrency may become a stable investment and that long-term holdings will yield significant profit. But that’s a big “if.”

Since cryptocurrency values have been decreasing, you might have a better chance of making a profit by timing the market. That’s incredibly risky, but crypto is high-risk. If you want your money to appreciate over a long period, you’re better off investing in long-term bonds, index funds, or IRAs.

How To Choose The Right Cryptocurrency To Invest In

It’s easy to jump on any bandwagon just because someone said it was a worthy investment. However, it would behoove you to conduct your own research. When you buy cryptocurrency, know that it holds zero intrinsic value. Instead, it represents ownership of a digital asset. It’s price is simply determined by public perception of its value, so you need to believe in the value of the cryptocurrency you choose to invest in. How do you develop these beliefs? By conducting your own research. Put in the work by reading white papers and come to an understanding of which cryptocurrencies may increase in value in the future before making an investment decision.

What Is Blockchain?

You might also be wondering, “What makes cryptocurrency an asset? How can something that has no physical existence be worth any money at all?”

American currency used to be backed by physical assets: first, gold, and then, silver. Every bill or coin would be linked to a unit of gold or silver so that it had a physical value of sorts. Nowadays, the American currency is not backed up by anything, but every bill and coin has a value that the federal government assigns. You can technically print your own dollars at home, but they’re not worth anything unless the government says they are. (Pro-tip: Don’t print your own dollars at home and try to use them—this is a crime called “counterfeiting.”)

Here’s the main problem that cryptocurrency aims to solve: how can something on the internet have individual value? A $1 bill has value because it has been printed and assigned value by the federal government. Nobody can duplicate it. It’s yours.

Digital assets are more complicated. Take a digital photo, for instance. A digital photo is made from computer code. Let’s say that you emailed a digital photo to your friend. Your computer copies the code and transfers it to your friend over the internet. Now a single piece of code exists on both your computer and your friend’s computer. You’ve duplicated the code, so it can’t have any individual worth. And who owns the digital photo—you or your friend? It’s unclear.