Cryptocurrencies such as Bitcoin (BTC) are rapidly gaining popularity, but some investors may still be trying to determine whether crypto is a good opportunity or a risk they’d rather not take.
Opinions about cryptocurrencies may vary widely, but there’s no denying that crypto assets are in widespread demand from individual and institutional investors alike, and they are becoming more closely correlated with the movements of mainstream indexes.
Bitcoin’s share of the total crypto market is roughly 43%, making it the most well-known and widely owned cryptocurrency, but the crypto universe is vast. More than 17,900 cryptocurrencies are available to trade, with a global crypto market cap of about $1.9 trillion. In 2021 alone, the crypto sector’s market cap grew by 187.5%, according to the World Economic Forum.
The cryptocurrency market reaches beyond the coins that are viewed as digital money to include blockchain investments, such as Ethereum (ETH), Polygon (MATIC) and Cardano (ADA), which provide networks for applications to be built on their platforms.
Bitcoin’s price has dropped about 11% for the year, but some alternative cryptocurrencies have outperformed. For example, the price of smart contract altcoins Solana (SOL) and Terra (LUNA) are up about 660% and 1,600% for the year, respectively.
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With crypto subsectors such as smart contracts, decentralized finance applications and nonfungible tokens on the rise, cryptocurrencies are making themselves indispensable. As more businesses accept cryptocurrencies and the blockchain technologies that facilitate their operation, more investors will be interested in learning the dynamics of the crypto world and investing in it.
Here’s what you need to know about investing in cryptocurrency:
— What is cryptocurrency?
— How to invest in cryptocurrency.
— What to consider before investing in cryptocurrency.
— How to make money with cryptocurrency.
What Is Cryptocurrency?
Cryptocurrency is any digital currency secured by cryptography, or secure communications, that can be used as a peer-to-peer medium of exchange, store of value or investment.
Bitcoin, the first blockchain cryptocurrency, is a form of digital currency invented by an anonymous founder using the pseudonym Satoshi Nakamoto. Cryptos aren’t managed by a bank or public agency. Instead, transactions of cryptocurrency tokens are typically recorded on a public blockchain, comprising digital information stored on a database.
Blockchain technology is used to keep an online ledger of all the transactions, and it provides a data structure for the ledger that is considered secure.
Unlike fiat money, or government-issued currency, that is controlled by central banks, cryptocurrencies do not require banks to verify transactions and are independent of a central banking authority. Each of the thousands of cryptocurrencies has its own security standards and value propositions.
Although cryptocurrency is a newer phenomenon, it has the potential to revolutionize the financial system and how we think about money.
“Cryptocurrency is a new asset class that is at the foundation of the cryptoeconomy, an entirely new set of financial services, commerce and global payments that will be built on top of this new technology,” says Max Branzburg, vice president of product at Coinbase Global Inc. (ticker: COIN), one of the leading crypto exchanges.
James Putra, senior director of product strategy at TradeStation Crypto, says cryptocurrencies are opening retail investors to “a world of global capital, as opposed to what they can access through the U.S. market.”
How to Invest in Cryptocurrency
There are many cryptocurrencies on the market that have different fundamental values. Investors should recognize that a cryptocurrency can be here one day and gone the next, which could leave your investment worthless. That’s why it’s important to have a strategy for investing in cryptocurrencies and to know how to manage your risk.
Beginner crypto investors may want to consider elements such as transaction fees, types of cryptocurrencies available on a platform, available education resources and other features that may align with their interests and goals.
There are many crypto exchanges from which to choose. TradeStation, Coinbase, eToro and Gemini, among others, offer easy, accessible and secure platforms for owning and conducting transactions with cryptocurrencies.
Take into consideration the role cryptocurrency will play in your portfolio. Putra says it’s best to take a balanced approach toward investing in crypto, allocating only about 2% to 5% to the sector in your investment portfolio because its volatility can cause dramatic swings in value.
For investors who want to use cryptocurrency as a way to diversify, Putra says, this asset is still one of the least correlated to stocks and bonds, meaning it remains an effective hedge against those other asset classes.
Investors may also choose cryptocurrency as an inflation hedge. Putra says that since bond yields are not keeping up with inflation, cryptocurrencies can serve as a bond alternative.
“Because of the low interest rates across bonds, there is a reshuffling of capital on a macro level out of bonds and into other assets that are more inflation-protected,” Putra explains. Some cryptocurrencies, such as Bitcoin or Ethereum, can even give your portfolio some stability because the inflation protection they provide balances with their volatility, he says.
What to Consider Before Investing in Cryptocurrency
Investing in cryptocurrencies is highly speculative. Despite stories of investors making millions, entering the market at an inopportune time can result in rapid and extreme losses.
Although the prospect of striking it rich with crypto investing is enticing, it’s important to weigh the potential impact of volatility. An asset that can rise quickly is prone to equally severe drops.
Another risk: Unlike in other markets, the future of cryptocurrency regulation is uncertain. Some countries that so far allow the more-or-less free use of Bitcoin include the U.S., Canada and Australia, to name a few. El Salvador even adopted Bitcoin as a legal tender. But other countries, such as South Korea, are pushing restrictive regulation of cryptocurrency, with China essentially banning it. In the U.S., new legislation targets crypto investments for taxation.
Although cryptocurrencies were conceived of as a unit of exchange, there are only a handful of businesses today that accept crypto as a form of payment. Crypto advocates support its broad economic use, but this adoption could take time because regulators around the world are still critical of the digital asset.
[Read: Bitcoin vs. Ethereum — Which Is a Better Buy?]
How to Make Money With Cryptocurrency
There are several ways investors can increase the value of their assets and secure a profit when investing in cryptocurrency. Just like in the stock market, the way to make money when investing in the crypto market is to buy the cryptocurrency when its value is low and then sell it when its value has increased.
“You can get more out of your money with cryptocurrency than with other traditional assets,” Branzburg says, because of the price swings and opportunities that conventional investments don’t offer.
The first method he points to is staking. Staking lets you earn income with your crypto by participating in the network of the asset. When you stake your crypto, you make the underlying blockchain of that asset more secure and more efficient. In exchange, you get rewarded with more assets from the network, like a yield you would get from a savings account.
Some cryptocurrencies that offer staking rewards include Cardano, Ethereum, Tezos and Algorand.
“You can lend the assets that you have in your portfolio into decentralized finance, or DeFi, protocols to generate yield, as well,” Branzburg says. Accessing DeFi allows users to “tap into a global liquidity pool,” he says. From the decentralized money market, other users are able to borrow your crypto assets, and you garner a yield.
Takeaway
Cryptocurrency is a new and exciting way to think about money. But experts say the first and most important step is to educate yourself about these emerging digital currencies and the technologies they use so that you can understand the risks and rewards.
Calculating the intrinsic value of a publicly traded company might be a bit simpler, but learning about cryptos and how they perform can help you avoid investing at a peak.
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How to Invest in Cryptocurrency originally appeared on usnews.com
Update 03/01/22: This story was published at an earlier date and has been updated with new information.
