What You Need to Know Before Investing in Cryptocurrency
More and more people have now come to embrace cryptocurrencies despite the widespread initial suspicion of them than when they first came onto the scene more than a decade ago. This has led to many people considering investing in cryptocurrency in the hope of the handsome returns that they potentially offer. However, some people use these assets as an easy way to settle payments, especially across borders. With the introduction of so many cryptocurrencies, a lot of investors want to dive into the market. They want to get their hands on a slice of the lucrative pie and enjoy the other benefits that come with virtual currencies. However, before investing in cryptocurrency, you need to know some key things before you can make informed decisions.
Understanding cryptocurrency
Cryptocurrency refers to virtual or digital coins—or currency and is based on cryptography for security purposes. They employ blockchain technology and are decentralized. The major difference between cryptocurrency and conventional currencies such as the US dollar, is that crypto is not and cannot be controlled by any central authority. As such, no government can manipulate cryptocurrencies as is the case with fiat currencies.
We can trace the origin of the cryptocurrency concept back to 2009 when an unknown person or group going by the name of Satoshi Nakamoto launched the first-ever digital currency, Bitcoin. After that, other parties have created many other cryptocurrencies, and each of them has unique qualities, has a specific purpose, and uses unique technologies.
Reasons for investing in cryptocurrencies
Below are some of the benefits that you need to know before you consider investing in cryptocurrency
1 Potential for high returns
People invest their wealth in assets that they believe have good potential to give them good returns in the future. The good news is that digital currencies have the potential to yield great returns on the amount invested.
For example, if you were one of the early adopters of Bitcoin, you would have realized massive returns over the years if you held onto them. One thing though, you should bear in mind that past performance does not give any guarantee of future returns and it’s common for cryptocurrencies to show dismal returns.
2 Diversification of investment
We are always told that it is unwise to carry all our figurative eggs in our basket—to avoid losing all of them in case we trip and fall. The same thing applies to investment, as experts encourage people to diversify their portfolios.
You can consider investing in cryptocurrencies among other assets such as stocks and bonds so you can diversify your portfolio. This is because digital currencies usually have a low correlation with stocks, bonds, and other traditional assets. Thus, putting some of your wealth in cryptocurrency can enable you to spread and significantly lower your overall investment risk.
3 Financial freedom due to decentralization
Cryptocurrencies operate on decentralized blockchain technology and are not controlled by any government, central bank, or authority. As such, they offer users a sense of financial freedom. Investing in cryptocurrency can allow you to enjoy a level of autonomy that fiat currencies do not offer. You can check out leading crypto exchanges and invest in virtual currencies like Bitcoin. This way, you can enjoy financial freedom and other perks that come with these assets.
4 Hedge against inflation
The value of conventional currencies is subject to governments’ monetary policies and other external forces. However, some investors look at investing in cryptocurrencies as a good way to hedge against inflation. This is because digital currencies have a finite supply and government policies cannot influence their value.
5 Global reach and accessibility
Investors and crypto enthusiasts can buy, sell, and swap cryptocurrencies across borders seamlessly. These assets are accessible to anyone with an internet connection. Because of their global reach, investing in cryptocurrencies is a smart move for investors seeking international diversification of their portfolios. Also, it easy cross-border transactions without any hurdles.
6 Innovative products
Crypto developers have created many innovative financial products and services within the cryptocurrency ecosystems. Some of these products and services include decentralized finance (DeFi) platforms, yield farming, staking, etc. These services and products can offer investors new investment opportunities and means to earn passive income.
Risks and challenges of investing in cryptocurrencies
Although you can enjoy so many benefits you need to know the risks and challenges that come from investing in cryptocurrency,
1 Regulatory uncertainties
Governments across the globe keep coming up with new regulations and restrictions relating to cryptocurrencies. This uncertainty can make some people shy away from putting their wealth into these assets.
2 Market fluctuations and volatility
One of the biggest risks related to digital assets is that the markets are highly volatile. Also, their prices fluctuate significantly over short durations. As a result, you could suffer heavy losses due to significant price crashes. And on the positive, you can earn great profits due to a price increase.
3 Security risks
Investing in cryptocurrency poses the threat of cybercrimes such as hacking of wallets and exchanges. Also, investors could be scammed by cybercriminals and lose their massive wealth easily.
Tips for safe investing in cryptocurrencies
Having known that cryptocurrency investment carries some risks, you can invest safely in digital assets by considering some tips. Here are some tips to help you invest safely in virtual currencies:
1 Use reputable crypto exchanges and wallets
When buying, selling, or swapping cryptocurrencies, you should only use well-established and highly reputable exchanges, brokers, or peer-to-peer platforms. In addition, ensure you store your cryptocurrency in secure wallets with proper security measures in place. Also, they must have a track record of reliable services.
2 Prioritize the security of your investment
You need to make the security of your cryptocurrency a top priority by taking some measures such as:
- Creating strong passwords
- Activating two-factor authentication for your exchange account and wallet
- Using cold storage to safely store your assets offline
- Being vigilant and picking out any suspicious activities, links, and other potential paths to risk
3 Start small and learn as you go
It would be prudent to start investing with a small amount and gradually increase the investment as you learn the ropes. At the same time, learn the crucial lessons you need from your investment journey and learn from others too.
4 Keep yourself informed and updated
You should continuously seek information to keep yourself abreast with the developments, market trends, and any relevant information about crypto.
Conclusion
Investing in cryptocurrency is a mixed bag of fortunes. It can offer you great rewards but can also be a risky venture. You should first understand the nature of cryptocurrency, weigh up the benefits and risks, and then make informed decisions. Hope you got to know some crucial information before Investing in Cryptocurrency
