What Is Crypto and How Do I Invest In It?

What Is Crypto and How Do I Invest In It?

Bitcoin. Blockchain. Ethereum. Dogecoin. NFTs. Bear and bull markets. Everyone seems to be talking about cryptocurrencies now. Everyone and their cat owns a ‘coin,’ are HODLing and warning against FOMO.

Between July 2020 and June 2021, cryptocurrency adoption in Africa increased by 1,200%, making it the fastest-growing region globally.

It’s easy to feel like you’re missing out on an entire revolution, but what does all of it mean? Why is an intangible asset now valued at more than $50,000?

What is a cryptocurrency, and how does it work? More importantly, how can you buy into the almost $3 trillion crypto market? Questions, questions, questions. But we’ve got answers.

This article will take a deep dive into the world of cryptocurrency. We’ll look at what cryptocurrencies are, how to invest in them, the benefits of investing, and the risks that crypto investors face. By the time you finish reading, you’ll have gone from crypto rookie to crypto veteran.

Let’s begin.

What are Cryptocurrencies?

Cryptocurrencies are digital currencies you can use as a means of payment for goods or services and they can also operate as a store of value.

Central governments don’t back cryptocurrencies. Instead, these currencies rely on robust cryptographic encryption for security. Cryptocurrencies exist as digital tokens or coins and users store them in digital wallets. Currently, there are over 14,000 different cryptocurrencies, with more being added every day, according to CoinMarketCap.

Cryptocurrencies are generally decentralized, meaning no government or single entity is in charge, so users have absolute control over their funds. 

Transactions do not require the use of a bank or financial institution. Instead, transactions are verified using a technology known as Blockchain. All cryptocurrency transactions are recorded and validated on a blockchain, which is a permanent decentralized public ledger. All users of the network can see the digital entries of all crypto transactions in this public ledger.

Bitcoin is the first, largest, and most well-known cryptocurrency. When Bitcoin was first launched, the goal was to create a peer-to-peer electronic money system. A currency that governments can’t regulate. One that doesn't require banks or any other financial institutions to operate. 

But here’s the thing with currencies: they need an entity that determines and regulates their value. A $100 bill is a paper receipt that everyone agrees is worth that amount. Because cryptocurrencies are decentralized, there is no unanimous way to determine their value. 

Speculation usually fuels and tanks crypto asset prices, which is why the crypto market can be wildly volatile. For example, Bitcoin traded at $34,000 in January 2021 but has since jumped to about $56,000 as of writing.

Although these price jumps can be risky and result in terrible losses, they also present an investment opportunity. Crypto investors see cryptocurrencies as the currency of the future and are rushing to purchase them before they become more valuable. Some cryptocurrencies are immune to the market's unpredictability. 

For example, the value of USDC is stable because it pegs to the value of the US Dollar.

Next up, let’s look at how to start investing in cryptocurrency. 

How to Start Investing in Cryptocurrencies

Although cryptocurrency is a risky market, there are worthwhile payoffs for investors ready to make the jump. If you’re one of those, here’s how to get started with investing in crypto:

1. Have an investment plan and strategy

Cryptocurrency investing is not a get-rich-quick scheme. Instead of winging it, it's critical to enter the crypto market with a solid strategy. 

To begin, determine your risk appetite. Is it conservative, moderate, or aggressive? The amount you can afford to invest in crypto and the coins you buy will determine your risk appetite.

It's also crucial to figure out how much you want to invest and your investment goals and objectives. Make a clear vision of what you want to achieve to chart a course to build the portfolio of your dreams. Most importantly, you must decide whether to keep your cryptocurrency on your exchange or in a separate wallet.

Because the crypto market is rife with uncertainty, maintaining a laser-like focus helps you navigate the choppy crypto landscape with ease.

2. Familiarize yourself with some crypto lingo

As a crypto newbie, it’s easy to feel like an outsider at a party because there are so many unfamiliar lingoes. You probably won’t know or understand them all from the jump, but some are essential to navigating the space as a beginner. Such as:

Coin: A coin is a store of the digital value of a cryptocurrency. A coin represents the value of a said cryptocurrency and is native to its blockchain. 

Fiat: Fiat is the legal tender in a particular region. It’s whatever currency you spend as traditional money in your location.

Initial Coin Offering or ICOs: Initial Coin Offerings are means of generating funds for cryptocurrencies by offering them to investors. They are comparable to Initial Public Offerings of traditional stock markets.

Token: A crypto token is a digital currency token or a cryptocurrency denomination. It represents a tradable asset or utility stored on its blockchain and can be used for investment or economic purposes by the holder. Just like paper money reflects the value of fiat currency, tokens reflect the value of cryptocurrency.

HODL: HODL is an acronym for “Hold on for dear life.” It’s what investors say to each other when market prices tank. It's a way of encouraging themselves to not sell off their assets at a loss because of fear. 

TA or Technical Analysis: Technical analysis is a method of predicting prices by examining historical market data, primarily price and volume.

FOMO or Fear of Missing Out: FOMO is the anxiety that drives crypto investors to buy coins simply because other investors are saying good things about it. This is the kind of speculation that drives (and tanks) market prices.

3. Choosing an exchange to purchase your crypto

To invest in cryptocurrency, you must first purchase it, and the best place to do so is on a cryptocurrency exchange. Exchanges are online marketplaces where users can buy cryptocurrencies with fiat money or a debit card. 

Most exchanges provide you with a digital wallet to store your cryptocurrency as soon as you open an account. Ensure your exchange of choice runs exchange-held or on-chain accounts (like the ones we provide at Chipper). 

Transactions that are recorded and verified on the blockchain are known as on-chain transactions. Exchange-held accounts, on the other hand, happen away from the blockchain network. The exchange serves as the third party that guarantees or verifies the transaction's validity or completion.

Because you can’t change the transaction once the exchange verifies and records the transaction on the blockchain network, on-chain transactions provide more security and transparency. Plus, on-chain accounts allow you to move your coins freely. 

After opening an account, your next step is to fund the account either with a debit card or via bank transfers. Next, place an order for the cryptocurrencies of your choice. On Chipper, this is as simple as searching for the coin you want and entering the amount (in fiat value) you want to purchase. 

The amount of cryptocurrency you get is based on the currency conversion rate at the time of purchase.

4. Manage risk and prepare for volatility

Risk is unavoidable in the crypto market. But you can make some wise decisions towards mitigating risk. First, make sure to set limits on how much you invest in a particular digital currency. Be firm about your limits, even if the market seems to be doing well at the time. 

Also, resist the urge to trade with more money than you can afford to lose. One smart way to pace your investment growth in the crypto market and mitigate risk is to adopt a dollar-cost averaging strategy or a constant dollar plan. With this method, an investor divides the total amount invested across periodic purchases of a target asset. In other words, you make purchases of the asset over an extended period of time regardless of the price at the time of purchase. This reduces the risks associated with trying to time the market and allows an investor to also mitigate the impact of asset volatility on their purchase.

So, if your goal is to own $5,000 in Bitcoin, you could divide that amount into $500 monthly purchases (over ten months). In some months over this ten-month timeframe, the price of Bitcoin will be higher and in other months it'll be lower. However, by purchasing over an extended period of time you'll be able to avoid trying to time the market and it'll also avoid the temptation of 'buying high and selling low'.

5. Diversify your crypto portfolio

With crypto, you don’t want to put your eggs (or coins) in one basket. With new cryptocurrencies developing and doing incredible numbers every day, an investor’s best bet is to have a stake in more than one asset. 

It’s advisable to stick to renowned assets, especially as a new investor. Consider starting with Bitcoin and Eth. These coins are widely held and have significant market shares. So, it’s safe to say they’ll be around for a long time.

Benefits of Investing in Cryptocurrency

Why should you care about cryptocurrency? It seems like a lot of trouble to research and understanding the market takes some work. But the payoffs are worth it. 

Here are some benefits of investing in cryptocurrency:

1. Growing store of value

With the public and the financial sector embracing cryptocurrency, its value is rising. Bitcoin is an example of this trend. It was trading at $3800 a coin in January 2019 and doubled in value the following January, and by January 2021, it was about $30,000 a coin. 

This exponential growth indicates that as cryptocurrency becomes more well-known, its investment value will rise. This is especially plausible as countries such as El Salvador are accepting cryptocurrencies as legal tender. The industry is also gaining institutional support. Amazon, for example, now accepts cryptocurrency as a payment method. Demand for crypto will inevitably increase as adoption grows, resulting in price increases.

2. Inflation resistance

One of the advantages of investing in cryptocurrency is that it is not affected by inflation. Because of its limited use, it is immune to the normal inflationary forces that affect fiat currencies. Bitcoin, for example, has a limited supply of only 6 million coins available to miners, making it resistant to inflation.

This is one of the significant reasons why citizens of countries with struggling economies turn to cryptocurrencies as a hedge.

3. Fewer regulatory hurdles

The absence of a central authority means fewer regulations. Investors don't have to fill a ton of paperwork to buy or sell cryptocurrencies. Opening a crypto account requires little personal information, making the process super convenient.

Still, quicker processes don’t pose security risks with crypto because the blockchain is fully encrypted.

4. Good liquidity

Liquidity refers to how quickly you can convert an asset into cash, and cryptocurrencies are liquid. Unlike stocks, which require regulatory filings and other procedures, you simply use an exchange to convert your cryptocurrency.

5. Cryptocurrency markets are always available

The exchange market is available at any time because the cryptocurrency market is decentralized. You can conduct transactions and trades on exchanges all over the world at any time.

Drawbacks To Keep in Mind When Investing in Cryptocurrency

Every investment has its drawbacks, and the same goes for cryptocurrencies. Some of the notable issues with investing in cryptocurrencies are:

1. Volatility

Volatility is one of the most common criticisms levelled at cryptocurrency. To be considered money, something must be a good store of value. And the value of cryptocurrencies fluctuates wildly. It is prone to reacting to simple external factors such as a negative news article or the threat of government retaliation. This turbulence can result in a high turnover rate and losses.

2. Cybertheft and crypto scams

Because it relies on the internet and growing popularity, cryptocurrency is a tempting target for hackers. Because the market is unregulated and essentially anonymous, cryptocurrency theft is a common occurrence. Sophisticated cyberattacks frequently target exchanges and cryptocurrency wallets. When you lose your cryptocurrency in this manner, they are usually unrecoverable because they aren't insured.

3. Unregulated and fraudulent exchanges

Where there is no law, there is no crime. The lack of regulatory bodies means users are at the mercy of exchanges. This has led to a rise in cryptocurrency exchanges with dubious and predatory practices. 

Some exchanges have lax trading rules and charge exorbitant trading fees with stiff commissions. Others set up with the sole aim of stealing users’ funds. Deregulation is fundamental to cryptocurrency, so this problem isn’t going away anytime soon.

However, at Chipper Cash, your payment information and personal data are encrypted to protect you against unauthorized activities and provide a secure platform for sending and receiving funds.

4. Limited real world use

Although cryptocurrency is gaining in popularity, its practical application is still limited. There are a limited number of locations that accept payment for goods and services. For the time being, the most common way to use cryptocurrency is to trade it before converting it to fiat money.

Frequently Asked Questions About Investing in Cryptocurrency

Do I need a lot of money to invest in cryptocurrency?

You do not need a lot of money to invest in cryptocurrency, as most cryptocurrencies are very divisible. You can buy a fraction of a Bitcoin rather than a whole coin. For first-time investors, it is advisable to start with small sums that you won’t regret losing.

Which is the best cryptocurrency to invest in?

There are over 14,000 and counting different cryptocurrencies, and that number will likely continue to rise. Top crypto experts suggest the best route for new investors is to stick to the popular cryptocurrencies with proven track records. Bitcoin, Ethereum, and Binance Coin are notable ones. 

When can I trade crypto? 

The cryptocurrency market is worldwide, meaning you can trade your cryptocurrency 24 hours a day, seven days a week. 

What is the difference between mining and trading crypto?

Mining is the process of verifying block transactions in the blockchain network, with miners receiving rewards for each successful verification. This entails using computer systems to solve complex numeric puzzles and requires expensive hardware. 

On the other hand, traders invest in cryptocurrency and trade it against fiat currency or other cryptocurrencies. 

The mining hardware and the cryptocurrency you mine determine your profitability as a miner. Mining has low rewards, but you also lose less. The reward for a successful trade is high, but the risk of losing money is also high.

Crypto or stocks?

Stocks are a portion of a publicly-traded company that an individual owns. And if the company performs well the investors’ profit. You can sell the stock shares you purchased and profit if the price has increased since you bought them. 

Cryptocurrencies are tradable digital currencies, and you can make a profit from a price increase as well. 

Compared to the cryptocurrency market, the stock market is more stable, but it is more susceptible to market forces. Both assets have risks, but they can be excellent long-term diversifiers for your portfolio if thoroughly researched.

Get Started With Crypto on Chipper Today

Money is evolving, just like every other tool humans have devised to bring order to their daily lives. 

Humankind has consistently improved ways of creating, distributing, and storing fiscal value, from barter trade to gold bars and paper money. Cryptocurrencies are a revolution for a system that money users have now deemed unsatisfactory for the times we live in. 

These currencies aim to solve three major problems of fiscal transactions: slow transaction processing time, excessive charges, and funds centralization.

New investors in cryptocurrencies need to understand that they are investing in a precarious and unregulated market. 

After doing your research, the next most important thing for your peace of mind is choosing a crypto investment platform that’s secure and trustworthy. We at Chipper fit the bill (even though we don’t like to toot our own horn).

Sign up on Chipper today, and get started with investing in crypto with a few clicks.