Cryptocurrencies are still a matter of dispute. While some people try to stay away from them due to multiple risks involved, others are focused on numerous opportunities for profit they bring. Whether we like it or not, crypto has affected the market significantly. Additionally, it has changed our vision of how financial assets should work.
However, blockchain technology is a relatively new phenomenon that hasn’t been tested properly yet. Therefore, people who want to trade digital assets should fully understand what they are dealing with before coming into play.
If you want to invest in crypto but don’t know where to start, this guide can help you make an informed decision. Let’s talk about how to invest in cryptocurrency for beginners and find ways to get extra cash to buy crypto.
What Is Cryptocurrency?
Many people think that cryptocurrency doesn’t differ much from other digital currencies. However, it’s not completely true. Crypto is much more than just an alternative payment method. It’s also a digital asset that can gain and lose its value under specific conditions. Thus, it combines features of both stocks and bonds and regular digital currencies.
Cryptocurrency has no physical cash backing. A digital currency consists of virtual coins that are called tokens or units. You can purchase cryptocurrency from any company that specializes in crypto exchanges. After buying crypto, you can trade it with other people via specialized platforms. From this point of view, it works similarly to regular stock trading.
The main thing that makes crypto different from other standard or virtual currencies is its decentralization. Crypto assets can be safely obtained, sold or traded without any central authority involved in the process. This means that all the procedures are running bypassing a government or traditional financial institutions.
However, there’s a system that handles cryptocurrency. Although the system has no central location or virtual banks, it works a bit similar to the Federal Reserve. For example, it determines the right time to create a new cryptocurrency and tracks all tokens and their owners.
What Gives Cryptocurrency Its Value?
As we’ve already mentioned, crypto is not backed by any standard currency. But here’s another interesting fact. Cryptocurrency is also not tied to the marketplace in the way most other assets do. Suppose that you have an asset in the form of a house. Its location, facilities, and the real estate market fluctuations will always impact its cost. When it comes to stocks, a company’s success is the key factor that determines their value. And none of this works for cryptocurrency. So if it’s not market conditions or company’s success, what’s then?
The answer can be a bit mind-blowing. Crypto’s value is typically determined by whether or not people’s want to buy it. Simply put, its value is based on nothing but popular demand. Although it seems to be a crazy idea to invest in such unstable and unpredictable assets, crypto is still a high-yield option for high-risk investors.
Why Do People Invest in Cryptocurrencies?
The main reason why people invest in crypto is their itch for financial gain. Cryptocurrency investing is considered potentially profitable as people believe in its ongoing rise. The more people invest in crypto, the higher the returns can be.
Suppose that cryptocurrency will firmly enter our lives in the coming years. As a result, its value will increase, allowing investors to sell currencies at higher prices than those they have paid for them. Profit!
Is It Risky to Invest in the Cryptocurrency Market?
Yes, to some extent. Crypto investing is considered risky due to the crypto market volatility. The main risk is that you can’t predict when it may go wrong. As crypto is not backed by any physical asset, it’s hard to say how it will behave in the future. Therefore, cryptocurrency investing should be approached cautiously.
What Do You Need to Start Investing in Cryptocurrency?
It’s pretty easy to start crypto investing. There are just a few things you need to have:
- A valid ID, passport, or other proof of identity;
- An active checking or bank account;
- A secure and stable Internet connection.
Note: Technically, there are no age restrictions to use crypto. However, most financial apps and popular crypto exchange services, such as Binance or Coinbase, accept members strictly over 18 years old.
Also, there are a few more things you need to keep in mind before you get started:
- Cryptocurrency holdings are not insured by the Federal Deposit Insurance Corporation (FDIC). Thus, if your crypto exchange becomes bankrupt, you may never get your virtual currency back.
- Crypto trading is risky. This is because you can’t always predict the drop of cryptocurrencies. Thus, you need to be prepared for potential financial losses.
- Crypto gain is taxable. Since 2014, crypto investors have been obliged to pay capital gains tax. Also, people who mine crypto are subject to self-employment taxes.
Ways to Get Funds to Buy Cryptocurrency
If you need extra money for a crypto purchase, consider the following financing options.
Build Savings
Using savings is one of the greatest ways to buy cryptocurrencies. Start with creating a budget and determine how much money you can set aside each month. Then, stick to your plan and build a nest egg that can be used toward buying cryptocurrency.
Find a Side Gig
If your income is not enough to cover both your regular needs and savings goals, consider finding a side gig and using this extra income to invest in crypto. It may be anything, from freelancing and babysitting to becoming an Uber driver. Choose the option that meets your skills.
Get a Loan to Invest in Crypto
Getting a loan is another option that may work for people with a stable source of income. Unlike crypto loans (learn more about what is a crypto loan), which requires you to pledge your crypto holdings to get the money, personal loans work otherwise. They allow you to access amounts of up to $100,000 for your crypto investment goals, provided that your income is high enough. The repayment is made in affordable monthly installments within up to 60 months. Thus, you can get a lump sum to invest and then repay the funds over time.
However, if you have bad credit, your options may be limited. Most lenders that accept bad credit borrowers allow them to borrow $900 or less. However, even this amount can be enough to get started. Just make sure you can manage your debt and pay on time.
Is Taking Out Loans to Invest in Cryptocurrency a Good Idea?
Not always. It usually depends on your current financial situation and your ability to repay your debt. Additionally, if you’re going to be a long-term investor, you may not be able to use the cryptocurrency income to repay your existing loan. Of course, investment is a borrowing purpose that makes your loan a good debt. At the same time, you need to have a clear repayment plan before taking out a loan.
How to Start Investing in Cryptocurrency in 7 Steps
Here are 7 major steps that will help you dive into the world of crypto investments.
1. Learn More About What You’re Going to Invest in
There are thousands of digital currencies available, and each of them may have its nuances and background. Thus, you need to analyze the market thoroughly before you get started. Take a look at all the potential pros and cons to make an informed investment decision. Keep in mind that crypto funds are not backed by assets or cash flows, so they always come with unpredictable risks.
Knowledge is power, so learn more about virtual currencies and how they function, seek investment advice from current traders, and approach this risky investment responsibly.
2. Leave Your Previous Experience and Prejudice in The Past
Focus on the future, not the past. As crypto may seem unusual and suspicious, it works, although no one knows how long it will last. Although history is cyclical, and you shouldn’t completely ignore it, bear in mind that cryptocurrency is a relatively new phenomenon. Thus, no one can say for sure how it will behave in the future.
Start from what you have now, and don’t look back. If you buy cryptocurrency today, you expect to get returns in the nearest future, not in the past.
3. Choose a Cryptocurrency Broker or Exchange
The right cryptocurrency exchange or broker is often half a success. Both of them are services that help you buy crypto. However, there are some significant differences between them.
Exchanges are crypto platforms that link people who buy and sell cryptocurrency. They always come with relatively low fees but may have difficult interfaces, confusing new members with multiple trade types and performance charts.
Crypto brokers operate more like third parties. They interact with exchanges for you, making it much easier to manage your crypto investments. Additionally, they offer more user-friendly interfaces and often hold their tokens in crypto wallets for extra security.
However, you need to be careful with brokers. First, they may charge higher fees compared to crypto exchanges. Second, those that claim they are free may sell information about your transactions to large brokerages. Finally, many of them have limits on pulling your crypto holdings out of the platform.
4. Decide on the Cryptocurrency You’re Going to Purchase
According to CoinMarketCap, there are now nearly 23,000 cryptocurrencies. If you’re going to buy crypto, you need to understand which currency can better meet your investment goals. Crypto investors name the following currencies the best for beginners:
- This is the largest cryptocurrency system in the world, with over 10 years of being around and over $128 billion in market capitalization. Bitcoin is supported by every currency exchange and is a great option to start with;
- The main reason why people like Ether is that it eliminates the need to pay a third party due to its focus on direct purchasing applications;
- This currency is a more energy-efficient (and therefore less expensive) alternative to Ether. People usually use it to store private data.
5. Create an Account and Complete a Verification Process
After you choose an exchange, you need to create your investment account on the platform. Once complete, you need to pass verification. By doing this, you can avoid fraud and meet federal regulatory requirements. Additionally, most exchanges set very low limits on the amount that you can buy and sell without verification.
To complete the process, you will need to provide your proof of identity. Some exchanges also ask to provide a selfie in order to ensure you’re the person who matches the provided documents.
6. Don’t Forget About Risk Management
Risk management is an important part of cryptocurrency investing. However, the strategy will differ depending on your investment goals. For example, long-term investing is about not selling crypto regardless of its price, while short-term investment sets strict conditions under which you should sell crypto.
Additionally, risk management provides for setting limits on the trading amount. This way, you will still have money left, even if your current deal fails.
7. Decide on the Way to Store Crypto
Just like with other currencies, you need to have a safe place to store your crypto. There are several storage methods available for virtual currency:
- Exchange-attached crypto wallets. When you make any operation with your crypto, it’s deposited to or debited from the wallet attached to the platform. Many people find this method not safe enough and prefer to move their investments to a more secure place, often with additional fees;
- Hot wallets. Hot wallets are separate internet-connected wallets that store your currency online. They may be a convenient storage method for those who need to have quick access to their currency via an internet-connected device. However, they are also riskier;
- Cold wallets. Cold wallets are the most secure option as they are not connected to the Internet. A typical cold wallet looks like an external device, such as a hard drive or USB. They are secured by keycodes, so if you forget one, you may never be able to access your crypto again.
Extra Tips on Safe Crypto Investment
Here are some tips that will help you with a safe start.
Don’t Invest More Than You Can Afford to Lose
Crypto is a high-risk investment, so you don’t need to put all your money into it. Start small and be realistic about the amount you’re going to invest. What will happen if you lose it all? You never know. While it’s what can really happen to you, be careful.
Realize That There Will Always Be Ups and Downs
No one is safe from failure, especially when it comes to trading crypto. Thus, if you want to become a crypto trader, you need to face this fact. There will always be losses at some point, no matter how hard you try to avoid them. Even if you have a deliberate strategy and try to foresee the unforeseen, the digital currency market can play tricks on you. If you are prepared for temporary setbacks, it will be easier for you to accept them when they happen.