The cryptocurrency market has, in recent months, taken the investment market by storm. As more mainstream investors jump on the cryptocurrency bandwagon, investors must learn about how to invest in the nascent and highly capricious market.
For newbie investors, the journey to success is lined with pitfalls. The following guide is designed to help new cryptocurrency investors navigate the exceedingly mercurial investment market.
Finding the Right Platform
Before investing in the cryptocurrency market, it is important to find a cryptocurrency platform that aligns with your investment strategy. The following is an outline of things to look out for when choosing the right trading platform.
1. Fees
Different cryptocurrency exchanges have different fees. Fees usually vary according to trading pairs, though some offer a flat percentage. Some platforms also charge deposit and withdrawals fees.
For the lowest commissions, platforms such as Binance, Kraken, and Gemini are among the best. They charge between 0.1 and 0.25 percent in trade fees and have a separate, almost similar surcharge rate for withdrawals. Robinhood is also exceptional in this regard because there are no charges on crypto trades at the time of writing.
2. Reliability
When searching for a suitable exchange, reliability is a key factor to consider. Elements to look for include uptime, security, an easy-to-translate charting system, and ease of use. These factors have a significant influence on profitability, especially in day trading. Other factors include ease of making deposits and withdrawals.
There have been cases where investors have had trouble withdrawing funds from crypto platforms, but this usually happens on small, unregulated exchanges. As such, it is important to look for reviews on online trading forums before depositing any money.
The best platforms allow users to deposit and withdraw funds using a diverse range of methods. It is worth noting that some crypto trading platforms do not allow direct fiat withdrawals.
3. Platform Liquidity
You should also consider platform liquidity before signing up. Cryptocurrency platforms with few users usually have liquidity issues.
This is usually due to a lack of counter-parties that are ready to trade. This could lead to lost opportunities, especially when day-trading.
4. Regulation
The other factor to look into when choosing the ideal crypto trading platform is regulation. Some brokers are unregulated. What this means for users is that there are few legal protections against loss of funds or other scams, even if this happens due to staff negligence.
US and EU regulated cryptocurrency exchanges are usually the best in this regard because they are required to abide by strict legal, statutory provisions that protect user assets.
5. Security
Security is another factor to consider when choosing the right cryptocurrency exchange platform. Some exchange platforms are safer than others.
Secure platforms usually have stellar Know Your Customer (KYC) procedures, two-factor authentication security (via SMS or authenticator apps such as Google and Authy), as well as one-way deposit and withdrawal options.
One-way deposit and withdrawal options usually ensure that funds can only be withdrawn to the payment address that initially funded the compromised account in the event of a breach. The account usually belongs to the account holder.
Considering the Best Cryptocurrency to Invest In
Not all digital currencies are the same. Some are more volatile than others. Others are also on a long-term downtrend. As such, it is important to do some research on the best cryptocurrencies to invest in. Bitcoin, for example, is the most mature digital token in the crypto market today, with a market capitalization of over half a trillion dollars at the time of writing.
As the mother of all cryptocurrencies, it is also among the most decentralized. This means that it is more averse to market manipulation. Moreover, its anti-inflation mechanism makes it a favorite among institutional investors.
Delving a bit into this, its pseudonymous creator, Satoshi Nakamoto, built a mining difficulty mechanism into its code to counter inflation. The mechanism reduces rewards by 50 percent after every 210,000 mined blocks. The phenomenon is known as halving.
It protects the cryptocurrency from inflation and inherently increases demand for the coins in circulation due to reduced supply. This is among the main reasons why bitcoin prices climb every few years.
The number of bitcoin tokens is also capped at 21 million. This means that after the maximum number of mined coins is reached, there will likely be a tremendous demand for the remaining coins. This will inherently lead to a price jump.
On the other hand, there are cryptocurrencies that lack an anti-inflation mechanism, and they include coins such a Dogecoin, which was basically built as a ‘joke’ cryptocurrency. Dogecoin was initially developed by software engineers Jackson Palmer and Billy Markus in 2013 and can be obtained via mining. However, unlike Bitcoin, there is no upper cap for the number of mined coins.
Notably, this hasn’t stopped its value from multiplying 115 times over the past year. Popular billionaire investors such as Mark Cuban and Elon Musk have contributed immensely to its popularity and helped propel it to stratospheric heights. This is despite the aforementioned shortcomings.
Storage
For anyone looking to invest in cryptocurrencies, it is important to note that crypto holdings require more precautionary measures than say, stocks. Because cryptocurrencies are decentralized and underpinned by the blockchain, transactions can’t be reversed.
This means that stolen funds are incredibly hard to recover in the event of an account or wallet breach. This is among the primary reasons why hackers prefer targeting online cryptocurrency accounts.
That said, there is a way to safeguard cryptocurrency holdings: using a cryptocurrency wallet. Crypto advocates don't advise leaving cryptocurrency on an exchange as you're not in control of your money. As the saying goes, "not your keys, not your coins." A desktop wallet is a safer option.
The other alternative is to store the coins in a hardware wallet. Popular hardware wallets include Ledger and Trezor.
Hardware wallets are considered to be the safer option because the stored assets can’t be accessed online by hackers. Most hardware wallets also have a PIN feature that locks the funds. However, losing a hardware wallet would lead to the loss of stored assets.
The Cryptocurrency Investment Strategy
Before trading cryptocurrencies, it is best to determine the best investment strategy. There are two ways to invest in cryptocurrencies. The first is short-term trading, and the other is long-term. Short-term trading includes day trading and swing trading. Day trading is considered the riskiest strategy and is in more ways than one similar to gambling.
Long-term trading is, however, has less risk exposure. This is because fewer skills are needed as compared to day trading, which is extremely hard to master.
When choosing the investment strategy, it’s also necessary to consider the amount of risk that you are willing to take on. Some platforms offer margin accounts for investors with an affinity for risk. When using margin accounts, invest can utilize leverage to increase the amount of funds available for investing.
For example, if you have $100 for investing and leverage it by five times, the total amount of money available for trading will be $500. While the potential profit will be multiplied by five, the potential to lose money will also be amplified by five times. Using leverage requires extraordinary skill and experience and is usually the preserve of professional traders.
Some cryptocurrency exchanges such as Binance provide leverage of over 100 times while platforms like Etoro offer no leverage when trading volatile cryptocurrencies such as Bitcoin. While using leverage, it is important to bear in mind that there are associated fees.
Crypto platforms also charge overnight fees for positions held overnight. Overnight costs can add up significantly when using leverage and reduce profitability.
Trading Cryptocurrency Is a Risk
To make sure that you completely understand the risks associated with each crypto investment strategy, it is advised to first use a paper trading account on your preferred trading platform to test out your skills.
Doing this will reveal some of the shortcomings as well as the potential problems that could arise when using the trading platform of your choice. The issues include delayed execution times and unprecedented spread costs, especially during moments of increased price volatility.
Please note that the investment information delivered in this article does not constitute investment advice. Please do your own research before investing (in any form) and never invest more than you can afford to lose.