Understanding Cryptocurrency as an Investment

If you are wondering what all the fuss is about concerning cryptocurrency, you are not alone. Many people are debating whether these digital tokens are really worth their time as a potential investment. They are also probably wondering how some of the people who invested in the coins early got so rich from it.

Cryptocurrency also scares people away because of the technological aspect of it, and they also are concerned about some stories about criminals using the coins. Yet people who haven't done their research run the risk of missing out on an investment that can really be helpful to them. They also don't realize that the coins, even though they have risen in value in the past, still have the potential to go even higher in the future.

While some people are concerned about the uses of cryptocurrency in society, some just want to know if it is something that they can include in their portfolio. The coins possess both positives and negatives when it comes to investment. It's all about timing and choosing the right coins, along with developing some effective strategies, to help you develop your investment in cryptocurrency.

Explaining Cryptocurrency

Before you should even consider investing in cryptocurrency, it's important that you have at least a basic understanding of what it is. Essentially, cryptocurrency is a form of digital currency that allows people to make transactions without the need of a third party. When you think of all the people that you have pay in your life to help you complete simple tasks, such as banks, credit card companies, lawyers, and more, you can see how this might come in handy.

Many people use cryptocurrencies to purchase things or pay and receive payment within the digital realm. Small and big businesses alike have also started to develop initiatives based around cryptocurrencies of all kinds. But perhaps the facet of life for which it is used most right now is as an investment vehicle, which makes it relatively unique among currencies.

How Cryptocurrency Works as an Investment

People may not realize it, but you can invest in any type of currency. That is the whole basis of the foreign exchange market, as different currencies from around the world rise and fall against each other incrementally. The big difference in cryptocurrency values is that they rise and fall much more rapidly and over a wider range of prices.

In fact, cryptocurrency, as an investment, most resembles stocks. You can get paid in cryptocurrency one day and think that the value is stable at level. But the next day, it could rise in price, giving you a sudden windfall. Or others could sell the coins on a high level, forcing down the demand and causing a price drop, which would lower the value of the payment that you received.

Those sudden price moves are part of the reason why cryptocurrency has not yet been adopted on a widespread basis as a payment system. But savvy investors understand that the potential of a big rise in the price of cryptocurrency as an asset can make it great for a portfolio. Some even think that they can invest only in cryptocurrency, so convinced are they that the coins will one day come to dominate the realm of personal finance.

Bitcoin as the Most Popular Cryptocurrency

If you've heard of cryptocurrency, it's likely that you've heard of Bitcoin. The digital coins are the most popular form of crypto in the world, so much so that many people think that Bitcoin and cryptocurrency are one and the same. At times over the past few years, Bitcoin's market share, which is determined by the number of coins multiplied by their value, has risen over fifty percent of the entire cryptocurrency market.

Part of the reason that Bitcoin has such a strong hold on the cryptocurrency market is because it was the first of the digital coins. About a decade ago, it was created by some developers who wanted to simplify the world of personal finance and remove people's dependency on banks and credit card companies. After a relatively slow build, it shot up in prices to the point where the value rose to over $20,000 per coin.

The price of Bitcoin then dropped considerably from that high point as an inevitable backlash set in. Even though it has fallen from that peak, however, it still dwarfs its price from just a few years back. And its potential as a game-changer in finance, coupled with its steady progress towards being legitimized by traditional trading markets, make it possible for the coins to once again surge to their previous heights.

The Altcoins

In the wake of Bitcoin, many other cryptocurrencies began to spring up around the world. These coins used the same technology as Bitcoin - something called the blockchain. Without getting into technological jargon, a blockchain is a way of verifying some action on a decentralized network of computers without the need for a third party.

The beauty of the blockchain is that it can be used for far more applications than just Bitcoin's method of receiving and sending payments. It can be used for gaming, gambling, contracts, supply chain management, record-keeping, and on and on. The companies that build on the blockchain use their own coins as a way for people to invest in their initiatives.

Many of these altcoins have risen to the point that they are becoming well-known in society. Some, like Litecoin and Bitcoin Cash, attempt to do what Bitcoin does, only better. Others, like Ethereum and Ripple, want to stray from that and solve other societal problems. What they all have in common is that they rise in value the more popular they become.

The Basics of Investing in Cryptocurrency

To invest in cryptocurrency, you first should try to obtain a digital wallet. These wallets may be downloaded on your phone, or you can buy them as a piece of hardware. Their main function is to store cryptocurrency so that you can use it when needed to purchase things with it.

To gather the cryptocurrency, you generally need to find an outlet known as a coin exchange. There are many of these in the market residing on the internet, and they allow you to take so-called fiat money, such as American dollars, and exchange it for cryptocurrency coins. These coins are then stored in your wallet until the time you might need to use them in some way.

As far as how the values of the coins rise and fall, that is simple Economics 101 and the laws of supply and demand. If a lot of people are buying into a coin that you have purchased, it will drive up the demand and the price of the coin in turn. By contrast, people selling off the coins will increase supply, lessen demand, and drive down the prices.

Investment Strategies for Cryptocurrency

Before you proceed with investing in cryptocurrency, you must understand that all investments carry with them some risk. Even though you might be promised the moon from people touting their coins, cryptocurrencies can always decline in value, just as stocks, bonds, or any other investment might. As a result, you should be prepared for this possibility and only invest the money that you can afford to lose.

Cryptocurrency has great potential, and it can be utilized on its own or as part of a portfolio with many other assets. The one thing that you have to be prepared for, at least in the short term, is a lot of volatility. Volatility means that the prices rise and fall, often unpredictably and in very dramatic ways. The good thing is that there are ways to protect against and even use it to your advantage.

The Buy and Hold Strategy

Volatility can be extremely problematic to those people who are thinking of trying to time the cryptocurrency market and make a quick profit before they get out. But for people considering an investment for the long term, the buy and hold strategy is quite effective. It is as simple as it sounds; instead of trading actively with your coins, you simply buy them and put them away for safekeeping.

By doing this, you are removing the worries that volatility might cause. This is a strategy you should take if you really believe that, one day, we will all be using cryptocurrency in our daily lives. If that occurs, the coins will be far more valuable than they are today.

The Diversification Strategy

One of the things that has been noticed about cryptocurrency by investment experts is that it tends to be unpredictable when compared to other assets. For example, it is a general rule that, when the price of stocks goes up, the price of bonds goes down, and vice versa. But there is no general rule when it comes to the price movements of Bitcoin and the other cryptocurrencies, at least not yet.

This makes it an ideal tool for the investment strategy known as diversification. When you diversify your portfolio, you are buying a lot of different types of assets from different sectors of the market. That prevents you from taking a big loss if one or a few of your assets struggle. Since cryptocurrency seems to act on its own accord, it makes it the perfect counterbalance for many of the traditional assets with which most people are familiar.

The Crypto-Only Portfolio Strategy

Many people are so taken by cryptocurrency that they only want to invest in the digital coins and nothing else. Yet there should still be an element of diversification in the portfolio, even if it only contains crypto. The good news is that the realm of cryptocurrency has become so diverse that you can choose several different coins that achieve the balance you need.

For example, you might be able to diversify by buying coins that differ in terms of their market share. You could make sure to include some of the bigger players in the market, such as Bitcoin and the top altcoins, as the stabilizing factors. But then you could also buy some smaller tokens, ones which might not cost as much and have much more room to grow.

Or you can choose coins that operate in different sectors of the market. You can start with the coins that are meant to act solely as digital currency, but then branch out to many different fields. Every day, there are more coins being created that have many different purposes. You can diversify by simply spreading out your investment capital over many of these diverse coins.

Analyzing Cryptocurrency Investments

Just as you might analyze stocks or bonds to see how much potential they have, so too can you analyze cryptocurrency investments. You just have to choose which technique suits you better. Perhaps even a combination of both of the following methods can work for you.

Quantitative Analysis

If you choose this method, you will be focusing on the raw numbers. That means you will be looking at the price charts of the different coins and trying to spot trends. This can be difficult for some of the newer coins because there is less of a sample size. But you should be able to proceed by judging the movements of a specific coin and seeing if they are backed up with ample trading volume, indicating a reliable trend.

Qualitative Analysis

This type of analysis focuses on the underlying instrument behind the coins. It could be a company that issues the coins, or just the piece of technology on which the coins are built. Checking out the white paper, which is a kind of blueprint explaining the goals for a coin and the technology behind it, is a good way to dig deep beneath the surface of a cryptocurrency coin.

Conclusion

As you can tell, investing in cryptocurrency does not require you to have a deep understanding of the technology behind them. A basic understanding of what they are and their future potential, coupled with an examination of how they act as investments, can get you started. And that could be a rewarding investment adventure.

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