Over the past few years, the popularity of cryptocurrencies has become so great that the words “bitcoin”, “ether” or “mining” can be heard from people who are very far from the world of cloud technologies. Investors are also actively entering the digital money market, preferring it to traditional stocks, securities, and deposits. How to invest in cryptocurrencies and what projects to choose – we will figure it out in this article.
What a beginner should know before investing in cryptocurrencies
Numerous people are engaged in the topic of cryptocurrencies mainly in terms of investments and the possibility of making “easy money”. But by financing in digital currencies, you can waste much more than in other businesses.
If you are just beginning to look closely at cryptocurrencies as an investment asset, you should know the principal thing about this market:
The course of most cryptocurrencies depends mainly on the demand for bitcoins due to the dominant position of Bitcoin (62% of the market) among other blockchain projects. For example, Ethereum’s capitalization is only 16% of the total market volume, while XRP is 1.5%. In the past, Bitcoin has had an even greater dominance, which only fell below 50% twice – in mid-2017 and early 2018.
Investing in cryptocurrencies comes with a high risk that the investor must consider. Interchange rates on exchanges fluctuate from hundreds to hundreds of percent for various months. For example, from October 2020 to February 2021, the Bitcoin price has risen by over 340%.
To invest money in crypto, you require an investment plan. You need to certainly understand how fast you want to make a profit, how much you are willing to fund, and what asset to use.
The most important rule for a novice investor is to invest exactly as much as you are willing to lose in the event of an investment project failure and to research the cryptocurrency market on your own.
Fundamentals of Investing in Cryptocurrencies
To start investing in a completely unfamiliar market means to waste money. A smart investor always starts by studying the investment market and assets. Fundamental and technical analysis is used to study the virtual money market, as in traditional trading.
Fundamental analysis
The fundamental analysis method is used most often to assess the state of a specific cryptocurrency project by checking it:
- reliability;
- financial capabilities;
- development prospects;
- customers / users.
If you are going to invest in new cryptocurrencies or tokens, about which not too much is known, but have growth potential, you first need to check the following components of the crypto project:
White Paper or project functioning plan. You need to check if there is a technical document for the development of a cryptocurrency, platform, or another asset that is being offered for investment.
Command. Here it is worth paying attention to who is behind this or that project, to analyze the experience of the team and the resources at the disposal of the project. There are times when the whole project is fiction, and the “team” is a non-existent person.
Road map. It is important that the project has a development plan and that it describes what and during what period the developers plan to implement, and what actions to take to increase the value of their cryptocurrency tokens.
Be wary of false information from bots or advertisers on the web. These types of projects promise high returns in the form of dividends, but are often just pyramids and exist for a very short time, bringing profit only to their owners.
When looking for investment opportunities, you will most likely have to choose between two types of assets:
Cryptocurrency. Crypto is a ready-made working project applicable in the digital space. Here it is worth paying attention to what it offers: advanced smart contracts, anonymity in transactions, or other opportunities that promise the development of the project.
Token. Such units of account are not cryptocurrencies but are needed to represent the digital balance in some assets. Tokens are usually issued in two forms:
ICO (Initial Coin Offering) is fundraising similar to crowdfunding in which developers place a specified number of tokens for sale to initial investors.
IEO (Initial Exchange Offer) is a fee similar to an ICO, but tokens are issued on an exchange that validates the project according to its guidelines, which is less risky than an ICO because there is an intermediary here.
When choosing an investment in crypto assets, you should also pay attention to the technical specification of the project, in particular:
Consensus algorithm – transactions can be confirmed in several ways: Proof of Work (PoW), for example, Bitcoin, Proof of Stake (PoS), for example, Cardano.
Inflation – some cryptocurrencies have a predetermined finite amount, for example, the limit for bitcoins is 21 million units, while others can be created indefinitely, like Tether, which has a new pool from time to time.
Before investing money in a specific cryptocurrency, it is worth checking if the project is based on blockchain or DLT technology. For example, Binance Coin was created as an ERC-20 token on the Ethereum platform, but the developers are planning to switch to their blockchain, which means the BNB rate will increase several times soon. Another example is a fork on Ethereum, interest in which will increase because, on the day of the creation of a new project, owners of ETH coins will receive the same amount of new cryptocurrency.
