When trading cryptocurrencies, novice investors often make a multitude of mistakes, especially when buying their first digital asset. Crypto traders frequently invest in lesser-known coins. Besides, beginners sometimes even resort to taking bank loans or selling property due to a lack of funds.
Such actions almost always entail a total loss of money. After suffering losses, traders often become disillusioned with cryptocurrencies and, naturally, never return to them. But this is a missed opportunity.
The realm of crypto trading is not as merciless as it seems at first glance. With a smart approach to investing and adherence to certain rules, the likelihood of successful outcomes increases significantly.
In this article, we will discuss what cryptocurrency is, the pros and cons of investing in it, how to start investing, how to behave in the market of this industry, and examine some common mistakes made by beginner crypto investors.
By considering our advice when planning your actions, you can avoid financial losses and sensibly choose a digital asset for investment that is highly likely to yield good returns.
What is cryptocurrency?
Cryptocurrency is a virtual asset not issued by any central bank or financial regulator. It exists solely in digital space, lacking any physical form. The issuance and accounting of cryptocurrency are realized through a decentralized system of algorithms.
Cryptocurrency can be created by companies, organizations, or even private individuals. It is based on blockchain technology, which involves encryption and data storage. These data are distributed across numerous computers united in one network.
Blockchain is a kind of database containing all transactions made with cryptocurrency. Cryptocurrency is used for accumulating funds and investing, but it is not a medium of exchange.
Today, there are over 10,000 digital coins worldwide. The most popular among them are Bitcoin, Ether, Tether, Ripple, Litecoin, and Dogecoin.
Where does cryptocurrency's value come from?
Cryptocurrency is a highly volatile asset, and its price is influenced by various factors, including:
- transactions with cryptocurrency by large investors (buying/selling) and their statements about the crypto world;
- statements from regulatory authorities about cryptocurrencies;
- changes in the infrastructure through which cryptocurrency trading is realized;
- changes in the market for devices used for mining.
The digital currency's price primarily depends on the current situation in the crypto market and the prevailing trend, which reflects the community's sentiment. It can be a bullish, sideways, or bearish trend.
An uptrend means that most problems become insignificant, unable to cause fluctuations in the price. Conversely, a downtrend suggests that any market issue can significantly shake the asset's price.
The cryptocurrency market quotes can react to everything - macroeconomic factors, technical news about technology improvements, reports of blockchain system hacks, various rumors, and Elon Musk's statements about Dogecoin.
Advantages and disadvantages of cryptocurrencies as investment assets
Investing in cryptocurrency has its undeniable advantages and disadvantages. It would be incorrect to focus solely on the positive aspects of investing in digital coins while ignoring the negative side.
Two indisputable advantages of virtual money are its open-source code and anonymity. Due to the open-source code, anyone can become part of the digital system and start mining virtual coins. Anonymity is a feature of cryptocurrencies, unlike traditional electronic money. Transactions with regular money can be easily traced by banks and governments, gathering information about their owners. However, if you own a cryptocurrency wallet, no one can access your personal data. The only information available is the wallet number and limited data on the account balance.
Another significant advantage of digital currencies is their decentralization. Cryptocurrency is an independent monetary unit, free from government influence. No one can regulate its issuance or control its movement in accounts.
The next advantage is scarcity. Cryptocurrency is issued in a very limited volume, making it immune to inflation.
Lastly, cryptocurrency is a very secure monetary medium. It's impossible to hack or counterfeit because it has robust protection against external and internal interference.
Now let's move on to the disadvantages. The most significant is the lack of guarantees. With cryptocurrency, nobody is responsible for the safety of your funds. You alone are responsible.
In the world of crypto assets, there are no regulatory mechanisms. Essentially, anything can happen to your money - theft or system failure, but proving anything or recovering your funds is highly unlikely.
Another serious drawback of cryptocurrency is its volatility. Digital currency is extremely unpredictable, with its price determined by current demand, which can change due to events in all societal spheres.
This is why virtual currencies experience nonstop price fluctuations, sometimes reaching astonishing highs or lows. For example, consider the sharp spike in Bitcoin or the rapid fall of Cardano.
Additionally, there's a significant risk that cryptocurrencies could be banned in some countries. Many states have already imposed severe restrictions on the use of such virtual money.
Another risk not to be overlooked is the likelihood of losses. The access "key" to electronic money is a special password that must not be forgotten or lost. If you lose this password, the funds in your account become permanently inaccessible.
Lastly, mining cryptocurrency is losing its relevance due to the increasing difficulty of forming blocks. The costs of purchasing mining equipment and electricity expenses may simply not pay off. This problem became more apparent with the introduction of ASIC devices to the market.
Where to start and how to avoid typical mistakes
Investing in cryptocurrency always begins with creating a specific investment cryptocurrency plan. This is a crucial and universal condition for any novice investor, regardless of the market they plan to invest in, be it stocks, bonds, precious metals, currency, or digital coins.
Every investor should start their investment journey with a clear action plan. It’s important not to be lazy and detail every minor aspect, from selecting a digital asset to selling it.
Almost all beginners in the crypto market, find out about Bitcoin (or other cryptocurrencies) and its high profitability and immediately start planning to invest all their savings into it. Novice crypto traders naively believe they can sell this expensive and popular crypto asset for double or even triple its price after some time.
However, in reality, such a strategy is almost always unprofitable. Cryptocurrency is the most unpredictable and volatile asset in the global market. Investing in it should only be done after careful consideration of the current situation in the crypto industry, news background, and studying reliable analytical materials.
Yes, successful deals based on the strategy mentioned above do happen, but they are more exceptions to the rule or occasional cases at the very beginning of trading.
If we talk about the long-term perspective, consistently using such a strategy is simply unwise, as all initial investments and any previous profit will definitely turn into losses.
Therefore, if you are buying a cryptocurrency asset for the first time, it’s essential to create a detailed action plan. This plan should include the following points:
- Decide on the specific amount of your initial investment.
- Determine the period during which you will hold the purchased cryptocurrency without selling.
- Set a profit percentage at which you will be ready to sell the cryptocurrency.
- Assess how risky your investment is and how much risk you are willing to take.
By thoroughly analyzing these aspects, you can significantly increase your chances of profiting from your investments.Начало формы
The next step is to define an investment cryptocurrency strategy.
When investing in cryptocurrencies, there are two main strategies to consider:
- trading and
- long-term investment.
Trading involves high returns but also carries significant risks. It requires a substantial amount of time and a deep understanding of the digital asset world. If you want to trade, you'll need to spend almost all day in front of a computer monitor, keeping track of charts and constantly monitoring news. It's crucial to identify major events in the crypto world and make timely short-term trades, setting buy or sell orders for the chosen asset. Therefore, if you are a new and uncertain crypto investor with an unstable psyche, this type of earning is definitely not suitable for you.
On the other hand, long-term investment in cryptocurrencies is the least time-consuming and safest type of earning. Here, you won’t need to monitor charts and crypto world situations around the clock. All you need to do is buy a digital asset once, store it in your secure trading account, and wait around 3 to 6 months (or even more) until your investment yields a certain profit.
Initially, you need to evaluate the project's viability and its long-term prospects. You should predict approximately how much of your investment could increase over a given period. In other words, you only need to put in the effort at the initial stage; no further actions will be required from you. Essentially, during the subsequent long-term period, you can do nothing while your capital continues to grow gradually.
This strategy is ideal for those who decide to invest in cryptocurrency for the first time but do not yet have sufficient knowledge about the world of digital coins.
Another tip - never invest in obscure digital currencies. You can often find advertisements for blockchain projects that are not yet well-known in the crypto world, and therefore their cost is quite low. These digital coins are usually sold at a significant discount. However, let's be frank; such investments are not worth your attention, as most of these cryptocurrencies are scams.
Obscure and cheap digital assets are likely doomed projects that will soon be weeded out of the digital market competition. Today, there are over 1,800 cryptocurrencies in the crypto world, actively bought and sold by traders every day. More blockchain projects appear daily, each with its uniqueness. However, the long-term prospects of such assets are typically zero.
Focus only on currencies that already have their own audience of fans and investors. The total capitalization of more or less popular crypto assets should be at least $500 million. Reliable cryptocurrencies are likely to continue developing, increasing their value and attracting more and more new investors.
Another critical point - never start investing large sums; prefer small investments. Start investing with the smallest amount of money. The odds are that you still don’t understand the digital world well, so you have a very high chance of losing all your investments. Gradually increase your investments after you realize the various concepts of the crypto world, study market behavior in detail, and intuitively feel the impact of various factors on exchange rates.
Which digital assets to pick
When selecting the appropriate asset for investment, the first step is to assess the current market quotes of cryptocurrencies and their reliability. It's easy to get caught in difficult situations with unreliable or even fishy assets, and there are plenty of these in the crypto world. Most often, they are operated by companies resembling Ponzi schemes. Among the time-tested cryptocurrencies, the following stand out:
- Ethereum (or Ether) has shown more than stable development since its inception. You can independently generate blockchain applications when conducting financial operations with this currency. Ethereum lacks intermediary companies, significantly reducing the risk of theft of your invested funds. You can also create casinos and betting offices. Analysts predict that Ether could rise in value by tenfold in the future.
- Bitcoin is the most popular cryptocurrency and one of the most liquid in the digital world. Over its existence, investors in this asset have been able to earn more than 120% annual returns. Bitcoin is attractive for long-term investments of over 5 years. Investing in Bitcoin today is quite simple – through a special wallet that provides access to one of the trading platforms.
- Monero has the main advantage over other cryptocurrencies – the anonymity of users and all transactions conducted with it. However, this also poses a major drawback - due to its anonymity and the inability to track transactions by law enforcement, it is very popular on the black market.
- Factom is a digital coin operating on blockchain, ensuring the safety of all data.
- Counterparty is a financial platform running on blockchain technology. The cryptocurrency of this platform is XCP. Transactions here are carried out using special Bitcoin addresses.
- Siacoin is a completely anonymous platform with a very user-friendly interface.
- Lisk is a potential competitor to Ethereum, also having very good prospects for future growth.
- Ripple is considered the ideal cryptocurrency for venture operations, as the fees for payments with it are very low.
About investment cryptocurrency process
Investing in cryptocurrency involves several options. A traditional method of purchasing digital currency is through an electronic wallet, accessible only to the rightful owner. Fraudsters cannot hack your access, even if the service somehow shares your data.
Cryptocurrency transactions can also be conducted on specialized exchanges, where you can have several wallets that allow you to freely carry out trading operations. However, you should bear in mind that wallets on exchanges are frequently hacked, so it's not advisable to store significant amounts of money in them.
There are exchanges where you can purchase Bitcoins or other cryptocurrencies for Russian rubles from other users. These types of services usually offer favorable exchange rates. Such transactions are relatively easy to perform if you have a card from Sberbank or any other bank. The process typically involves the following steps:
- You select a seller who has a certain amount of Bitcoins blocked in their account.
- You are then given the card number to which the asset transfer is to be made.
- Once the payment is completed, the seller confirms receipt of your funds, and the assets appear in your account.
Another form of cryptocurrency investment is mining. This involves generating new coins by solving specific tasks in the blockchain, leading to the creation of new transaction blocks and the issuance of virtual coins.
Affiliate programs are another investment method. Through these, you can earn cryptocurrency by collaborating with a crypto exchange, virtual money exchanger, cloud mining service, or ICO project. The platform pays you for attracting new investors. This payment can be a fixed amount or depend on the size of the new participants' transactions.
DeFi (Decentralized Finance) is yet another investment cryptocurrency type. It refers to financial instruments in the form of services and applications built on blockchain. DeFi offers traders services using cryptocurrency assets. For example, an investor can lend virtual coins at high interest rates.
Investing in cryptocurrency also includes participation in affiliate programs. These are suitable for investors who enjoy delving into blockchain projects and testing beta versions of DeFi applications.
Conclusion
Since cryptocurrency is highly volatile, investing in such assets carries very high risks of total loss of funds. However, investing in these financial instruments can yield substantial profits in successful cases.
When investing in such risky assets, it's crucial to accept the possibility of losing funds, even the entire invested capital. It's important to be psychologically prepared for this. However, this risk is sometimes justified by the potential for significant profit in the foreseeable future.
To minimize significant losses, it's advisable to invest small amounts of money initially. It's also essential to avoid mistakes in choosing the right financial instrument, not to be tempted by obscure projects, and to focus exclusively on popular, and thus proven assets.
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